Much Ado about Digital Payments; But is it Worth It?

In the financial inclusion discourse, digital payments usually surface due to the penetration of mobile and its importance in granting financial access to the unbanked.

The trends and pace of technology today ensures that a cash-lite society is no longer a wishful dream but rather, a vision that countries are inching towards everyday. However, the shift away from cash towards digital payments is difficult, expensive and sometimes confusing. The infrastructure implications alone are significant — resources for building or enhancing payments infrastructure, the constant security upgrades necessary to ensure system integrity, developing comprehensive financial literacy curricula as well as public sensitisation, to name a few. And at the end of it all, there’s no guarantee of the desired change within the timeframe.

A significant proportion of literature has explored the cashlite journey of different economies. In a previous article, we even highlighted the role agent networks play towards the cashlite movement. So, let’s step back and re-evaluate. Is the call for digital payments a whim or a global good with reaching benefits for the unbanked and other stakeholders?

What are the gains of digital payments for an economy and her citizenry?

1. Digital payments power inclusive financial systems

The emergence of digital money and the ability of financial institutions to digitize their services and deliver them through digital channels and devices has galvanised the quest for more inclusive financial systems and financial inclusion. As the recent World Bank Findex reports, the magnitude of progress modern banking has made between 2011 and 2017 was only possible due to digital financial services.

But the good news doesn’t stop there. Access to a financial (transactional) account and the use of digital transactions/payments are just the beginning of the consumer’s financial journey. Furthermore, active use provides opportunities to other financial services such as credit, insurance etc.

2. Accountability and Social Benefits

An inherent feature of digital money is that it leaves a footprint which can be traced. This is a useful feature for governance as it enables transparency, security and accountability.

In fact, several studies have suggested that digitising person to government payments (P2G), will enable governments curb corruption while increasing transparency and efficiency in payment flows. Same goes for government to person payments (G2P) — digital payments enhances government’s efforts to deliver social benefits to even the poorest of the poor and ensures that recipients receive the right amount. Digital payments leave footprints and are easily traceable since the recipients have to fulfil KYC requirements requirements and all activity is captured in a database. For governments, this ability to trace transactions and payments provides a significant opportunity that can enhance tax collection efforts.

A 2016 report by McKinsey suggests that with improved and consistent adoption of digital financial services in the country’s payment space, no less than $88 billion will be added to Nigeria’s Gross Domestic Product (GDP) by 2025. In 2018, the Lagos state government announced its plans to fully digitise the collection of revenue (taxes, levies and other government payments). Hopefully, other states and the federal government will follow.

3. Gender Equality

The quest for gender equality continues and is seeing positive results through empowering women via access to a financial account (either bank or mobile wallet) especially in developing markets.

For instance, in Niger, the increased privacy and control afforded women by digital financial services gives them more decision making power on how the proceeds from the social cash transfer program is used. As another example, the arrival of mobile money in Kenya made it easier for women in rural areas to request remittances from their husbands who migrated to urban areas for work.

4. A cash-based economy is limiting

These limitations of cash are even more pronounced today as the digital wave spreads across the world.

For one, cash is expensive. It costs money to print, costs money to distribute and is costly to keep secure. Cash is also perishable as it wears out with use, which leads central banks to manage circulation, retrieve and destroy old notes and reprint new notes.. In fact, central banks are excited at the possibilities a digital economy affords. As cash payments are gradually replaced by electronic payments, central banks stand the chance of increasing the ‘seigniorage’ they earn. (Seigniorage refers to the proceeds from creating money).

From the foregoing, it is obvious that digital payments offer significant benefits across the ecosystem. From the customer to the entrepreneur and service provider down the street, to the financial services institution, to the central bank and the national economy as a whole, digital payments benefit everyone! The good news is fintech businesses in Africa are on the rise as the continent is seeing more and more financial service startups launching, while foreign investments in these fintechs are also growing.

However, to harness the full benefits of digital payments, especially in light of our financial inclusion targets which are also part of the countries payments systems vision, then we need to take the bull by the horn. We need a coordinated effort that encompasses closing the gender gap with the Ministry of Women Affairs, fully digitising social investments payments currently managed by the Office of the President, building out the telecommunications and payments infrastructure and the agent networks to provide last mile access especially in rural locations. This vision is beyond one Central Bank and requires the coordination of the entire Government, in collaboration with the private sector, to build a truly inclusive Nigeria.

What other practical benefits does digital payments offer us?