Digital finance to bank the unbanked

Adoption of digital finance could boost economic growth by has much as 6 per cent in Southeast Asia’s emerging market economies, by helping ‘bank the unbanked’ population in the region, according to a new report by Oliver Wyman, the global risk management specialist.

Promoting the use of traditional banking continues to be a challenge in markets such as Cambodia, Indonesia, Myanmar, and the Philippines where the depth of engagement varies with different financial products.

Among the study’s findings, only 18 per cent of adults use a bank account to receive wages or pay utility bills and only 11 per cent borrow from traditional lenders.

While not a new topic - everyone knows that financial inclusion would dramatically boost growth -  just how firms are going to do so is unclear. This is partly because of a lack meaningful data when it comes to figures on particular consumer or business behaviour.

Oliver Wyman makes a compelling argument on the potential of digital finance to play a significant part in closing gaps in financial inclusion in emerging market economies.

But unusually, the study offered up some helpful numbers. The risk manager found that that digital financial solutions could address about 40 per cent of the unmet demand for payment services and 20 per cent of the unmet credit needs in the base of pyramid and micro as well as for small, and medium enterprises.

Further, Oliver Wyman detailed the digital financial solutions that would will have the biggest impact on financial inclusion in five key areas.  

These include: enabling fast, low-cost, and convenient customer identification and verification processes; improving supply-side economics with last mile distribution and servicing enabled by mobile phones and point-of-sale devices and  supporting supply-side business cases with initial push in government-to-person payments and remittance flows.
 

New normal

On top of that the risk specialist has suggested enhancing access to alternative data sources to improve customer profiling, credit risk assessment and fraud detection as well as mobilising micro-saving through lower cost digital origination and servicing channels.

“For this opportunity to be realised, collaboration by different participants in the ecosystem will be critical,” said Duncan Woods, head of Oliver Wyman’s retail & business practice in Asia Pacific.

“Public policy and regulatory guidelines can provide the framework to stimulate the development of digital financial solutions, which we expect will materialise through collaborations between banks, telecommunications and financial technology firms, and non-government organisations, each bringing specific capabilities along each part of the financial value chain.”

While digital finance alone cannot close the gaps in financial inclusion, the effect of leveraging digital technology to bank the unbanked could boost GDP by two per cent to three per cent in markets like Indonesia and the Philippines, and six per cent in Cambodia.

Making the most of this opportunity could also help influence the financial services industry, particularly in smaller markets such as Cambodia and Myanmar, where only a small percentage of the current needs for financial services are met by formal providers.

“Digital finance is the new normal in banking. Financial institutions will have to make this transition and develop distribution models and products for digital finance,” said Manoj Sharma, managing director of MicroSave in Asia, the international financial inclusion consultant which has offices across Asia and Africa.

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