Why digital payments are key to financial inclusion

The world has become a global village! This statement must be familiar to you. But, the top digital trends today have tweaked it a little, and now we can say that the world has become a global digital village. All our daily activities are in some way connected to this digital transformation. Even our day starts with an alarm on our smartphones.

This scenario of digitalization has resulted in extensive cash-ins and cash-outs through online digital payments. The COVID-19 pandemic has also made digital payments an essential alternative to cash payments. And through the latest study by Statista, it is evident that digital payment transactions are increasing at a staggering level.

The study says that the total digital payment transaction value was around US Dollars, 8.49 trillion as of 2022, and it is expected to reach up to US Dollars 15.17 trillion by 2027. This transaction value will grow at a whopping annual CAGR of 12.31% during the forecast period.

With top digital payment trends, there is an increased volume of digital payments boosting the world economy. Yet, it’s not the only important factor in it. Digital payments are also driving financial inclusion. Financial inclusion is a condition in which all working individuals can easily access banking services, credits, savings, payments, and insurance from the official financial services providers.

But why are digital payments essential to financial inclusion?

In this blog, we will cover why digital payments are key to financial inclusion, various modes of digital payments leading to it, its benefits, and some use cases indicating the usefulness of financial inclusion.

Digital payments: the essential doorway to financial inclusion

In the past, thinking about making payments was just a long tiring process. Either people had cash in their pockets all the time, or they were more into credit purchases. Buying the grocery or other essential stuff require small cash denominations, and it is not possible to have them all the time.

Then came digital payments. These are the payments through online mode done at your convenience. Digital payments have brought various banking services into our easy reach. Even the smallest of payments can now be made digitally. This has eliminated our hassles back and forth to the banks.

Also, most digital payments are very convenient and have trustworthy product and service channels. It is affordable for the customers, and every service provider finds it sustainable to help them provide formal financial services to the unbanked or non-excluded population.

All the elements of digital payment mentioned above have made them the most efficient and future-ready payment systems. The future-readiness and the efficient accessibility of digital payments play an important role in increasing the pace of financial inclusion.

So yes, digital payments have played a significant role in financial inclusion. But how? What exactly has digital payment offered for financial inclusion? The answer is simple. Some digital payment modes have made it possible.

The digital payment modes leading to financial inclusion

Digital Wallets – promoting easy access to banking and financial services

You are at a pet store and want to buy a husky pup. You select the pup and go to the salesperson to make payment. But, when you are ready with your 700 dollars, the salesperson tells you that it will be 800 dollars for this one. However, this new information did not bother you at all.

You handed over the 700 dollars in cash and pulled out your mobile phone. Then you opened your digital wallet, added 100 dollars to it, and sent it to the shop’s account. You could do it because the payment service, i.e. the digital wallet was easily accessible.

In this story, you were able to make payments directly into the owner’s account. This process is known as peer-to-peer payments. Through digital wallets, users can make peer-to-peer payments, easily access their bank accounts, and make payments for bills, top-ups, ticket bookings, loans, rents, mortgages, and much more. Due to this growth scenario, many companies are promoting digital wallet app development.

Agency Banking – making payment services available to every individual

Agency banking is a payment system where banking services are made available to the unbanked and financially excluded population by setting up various agents everywhere where there are no traditional branches.

This branchless banking system (agency banking) has increased the formal flow of payments all across the globe. It has also made it more convenient and cost-effective for individuals to use payment services as and when required.

Banks are getting numerous advantages of agency banking. The banks can boost financial inclusion, retain and acquire more customers, improve the customer’s banking experience, reduce operational costs (no branches needed), and increase revenues for both banks and agents.

Cross-border payments – making payments with no bar of boundaries

Cross-border payments are payment transfers of funds between two parties, the sender and receiver, located in two different nations. This type of payment service allows users to send and receive money digitally through mobile devices with the help of banking and other transfer agencies.

Thus, it can be said that the digital mode of international payments has made it easy for everyone with their friends and family abroad and vice versa to make payments. Such benefits indicate that cross-border payments promote financial inclusion with the formal flow of funds across various countries.

Benefits of financial inclusion

Now that we know the importance of digital payments in boosting financial inclusion. We must understand what happens when this boost happens. Here are some vital benefits of financial inclusion:

Improves incomes and lives

With easy access to financial services, small and medium-sized businesses can earn more income and improve the lives of their family. They can also save and manage cash flow which reduces additional costs.

Increased investments in asset building

The unbanked or poor population can use banking services like credits, and loans, which allows them to legally invest in building their assets like buying land, plot, livestock, or houses.

Enhanced security

Previously for savings, people used to keep their money in house cupboards and under their bed pillowcases. But with financial services and their simple options to keep money safe, the funds are highly secured today.

Creates new opportunities

Financial inclusion creates new job opportunities in rural areas, which creates new income streams. The people can also save a significant amount of money as their traveling costs to banks are no longer in the picture. Enough savings removes their tensions of basic financial needs.

The widespread adoption is boosting financial inclusion (Use Cases)

There has been widespread adoption of financial services to boost financial inclusion among various countries. Some of the use cases are:

Brazil – Banking Correspondent Model

Brazil implemented a ‘correspondent’ banking model for extending its reach of banking services to its remote areas. This facilitated the spread of banking and financial services to even the distant and unremembering areas of Brazil.

Kenya – Non-bank MNO

One of Kenya’s top mobile service providers introduced M-Pesa, an m-commerce payment service, in 2006, with a focus on the unbanked. Customers of M-Pesa had the option of exchanging cash for an e-money account kept on the server of a non-bank. M-Pesa’s model of offering mobile payment services for remittances to Kenyan citizens has been a great success.

Conclusion

Financial inclusion is paramount for world economic development and for making people feel safe and included to fulfill their financial needs. Financial inclusion is so essential that it is even highlighted in 8 of 17 Sustainable Development Goals of the United Nations.

And with access to formal financial services through digital payment modes like digital wallets, agency banking, and international remittances, financial inclusion is boosted tenfold. Its power to reduce financial risks, empower new business opportunities, and keep people financially aware and enriched is commendable.

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