Digitalising financial inclusion – Digital financial literacy an imperative

The recent statement by Minister Eran Wickramaratne on the assurance that the digitalisation of financial inclusion has full Government support provokes the assertion that any Government initiative in this regard by way of support or formulation itself, would be part of the National Financial Inclusion Strategy (NFIS) that the Governor of the Central Bank said was to be introduced in 2019 and which would thus be all-encompassing. 

It is hoped that work is well underway in this regard to make the NFIS a truly dynamic and successful initiative. In spurring Government initiative in this regard, Prime Minister Ranil Wickremesinghe too has recommended that a digitalisation law be enacted to give it legal force. 

Quite rightly, the opportunity to accelerate financial inclusion through digital finance is clear, and the impact would be very significant on both the lives of the financially excluded and the broader economy. Regulators and policymakers have critical roles to play in supporting and enabling this digital innovation.

The whole point of this commentary is to reiterate the importance of financial literacy as an imperative in any financial inclusion strategy that is to be formulated. There can be no financial inclusion without ensuring the basic level of financial literacy, that is, if those who are responsible for such a strategy are really committed to the success of a NFIS, in the recognition that financial inclusion deals with the most vulnerable sectors of the population who are currently excluded and unless they are financially literate, they can very easily be exploited as a result of their financial ignorance. Unless they are able to understand the fundamentals of a financial transaction, they will just not be ready to be included into the mainstream of general banking business or an electronic payments system. 

Financial literacy is thus a vital pre-requisite for financial inclusion just as digital literacy is a key component of the digitalisation process. We do not have to reinvent the wheel - the Bill and Melinda Gates Foundation has done amazing work around mobile banking technology as one of the key drivers of financial inclusion and development. There is a lot of best practice and resources in the S.E. Asian region itself that we can draw on to take this all important initiative for the greater good of those who are unwittingly left out of these technological revolutions that we are now confronted with.

Digital financial literacy is thus more profound in an era where financial technology is evolving on a daily basis to encapsulate the whole spectrum of financial services. This is beyond the capacity of the financially vulnerable strata of society to even comprehend and it is up to the regulators to ensure that those that are automatically drawn into the use of these services are conscious of the costs and the risks, which should not outweigh the benefits, of being financially included.

Target groups: Senior citizens

The fear and mistrust of digital solutions and payment systems is part of the culture of the older generation, better known as senior citizens, at least in Sri Lanka, who have the serious misconception that fintech (financial technology) is not for them, but for the present generation who are young and tech-savvy. As a result they are missing out on digital solutions that can make life so much easier for them when they need them most. 

These are highly intelligent people, both men and women who are retired professionals – lawyers, civil service administrators, doctors – who just don’t wish to have anything to do with fintech; some of them are unable to even operate their very costly smartphones which have been given them by their tech-savvy children, except for the basic functions, thus negating the whole objective of these appurtenances. It is so sad that they are even unable to download and operate the taxi service apps which have revolutionised travel in our daily lives today and which will be a boon especially to senior citizens who wish to be mobile. 

This is of course due to the short-sightedness of the relevant companies providing these services, which do not make them user-friendly with senior citizens in mind, to win their acceptance. There is so much potential in this segment which these companies should be tapping; that is, however, if they are even aware that they are currently, definitely not part of their customer base. 

Accordingly, consumer education will be critical in convincing these target groups and a largely unbanked population, of the benefits of digital payments and solutions and winning their widespread acceptance. At the same time, it needs to be stressed that the onus is on the private sector to design digital payment solutions that are tailored to the needs of individuals and easy to understand. It is imperative that consumers are informed and assisted in how to use PINs, ATMs, and the other basics of the digital payments technology.

The NFIS must therefore ensure, in this digitalisation initiative, that an enabling environment is created, that fosters low-cost, innovative, solutions by the private sector that, in turn, can use its expertise and compete, to provide such solutions in a sustainable manner. 

Without a vibrant private sector to build and maintain a sustainable infrastructure and design appropriate products, governments will not be able to foster an inclusive and responsible digital financial ecosystem. A true public private partnership is needed to drive innovative financial inclusion. 

Use of digital financial services in the financial inclusion of women

While digital financial services offer convenient customer interfaces, there is a learning curve that represents a challenge to women not accustomed to the usage of financial services. 

Women’s use of digital financial services requires specific enhancements to market conduct and consumer protection regimes. Ensuring that women are encouraged to be entrepreneurs in the digital finance products market, to be able to understand the needs of women in the digital finance space, is an important consideration in the financial inclusion of women.

Digital finance is certainly not the panacea for all ills in the financial inclusion of women, if it is not recognised that increasing digital financial literacy, is key to increasing usage of digital financial services, recognising that women often have less capability in the use of financial services, especially in the digital space.

The concern of the affordability of digital solutions is an important consideration and the effective use of data, in enhancing the digitisation of financial inclusion of women in particular. 

The unattractive economics of serving them continues to be a challenge for the supply side in terms of resource and investment mobilisation. For the target customers, the solutions on offer are often not attractive alternatives to the current informal solutions. Moreover, they are held back by a low level of financial literacy and overall awareness. 

Digital payments 

The digitisation of the money transfer sector – With two billion “unbanked” people in the world, these telco-led solutions are not only an amazing business opportunity, but also a promising trend in financial inclusion and development. 

Remittances in Sri Lanka averaged approx. $ 500 million from 2009 until 2018, reaching an all-time high of $ 729.35 million in January 2018. The potential in this mass market offers so many opportunities for efficient and sustainable digital solutions, catering to specific market segments in the remittance landscape, particularly in catering to the female labour force which predominates in this sector and to their specific needs. Government initiatives to support this key foreign exchange earner for the country are therefore an imperative and should be a top priority in the proposed NFIS. 

Digital financial literacy – an imperative in the digitisation of financial inclusion initiatives

There is no doubt that all the technological jargon we are confronted with almost on a daily basis – blockchain, sandbox, crypto currencies et al – in digital finance is also increasing the complexity of the financial services ecosystem, by disaggregating traditional value chains and enabling new, non-bank entrants to participate. 

It is imperative that policymakers remain aware of not only the opportunities afforded by digital finance, but also the risks arising from its increased complexity. In particular, they need to be aware of the exponential increase in data generated by individuals and used by supply-side operators. Consumer protection, especially for those individuals new to formal financial services, needs to remain front and centre.

“While fintech can be transformative, its benefits will not be fully realised if we cannot provide the necessary building blocks for its foundation which include financial literacy and identity”1.

National identification numbers can also function as payment cards and provide identification for banks and money-transfer operators. Identification systems have great potential for increasing financial inclusion if they are made easily available online to all financial service providers in a country. 

By developing a robust, online database of secure identification cards that can be easily verified, financial service providers can much more easily—and cheaply—conduct KYC and credit checks on potential customers, streamlining the account opening process and making access more convenient to users. The greater efficiency enabled by such systems can also go a long way in reducing the cost of service provision.

Government e-payments gateway – Digital payments, particularly by governments and employers, provided via an account, can provide the on-ramp to financial inclusion and in many cases the first account that a person, particularly a woman, has in her own name and under her control. Opening an account can be an important first step for introduction to the formal economy for an entrepreneur and can lead to formalisation of a small business. When governments shift their social, salary, and procurement payments and taxation and licensing receipts to electronic form, it creates a foundation upon which the private sector and person-to-person payments, such as international and domestic remittances, can build. 

It is noteworthy that in a move to digitalise government payments, the Governor of the Central Bank has stated that the Lanka Clear Online payment platform will soon be extended to other key government departments and has also recognised the need to strengthen fintech regulation with a view to nurturing fintech innovations within an appropriate regulatory framework. 

This is paramount in promoting and ensuring public confidence in these mechanisms. After all the safety of their funds is uppermost in the minds of all consumers of financial services and protecting their financial identity is key to this concern and underpins the importance of digital financial literacy as an integral component of financial literacy. 

Recipients should understand, for example, how the cash- transfer program works, the importance of PIN numbers, what to do if something goes wrong, and how they can save some or all of the payment, rather than withdrawing all of it upon receipt. Without this, there is a risk that recipients could lose trust in the system, and financial inclusion objectives would not be achieved. 

What is necessary is the creation of a basic template to cater to the needs of those at the extreme end of the spectrum in financial literacy. E.g.: A farmer who does not even have a bank account must be taught how to deposit money in his account and be able to withdraw it whenever he needs it, or to make payments that he needs to make. These templates can be customised to meet the needs of different target groups depending on their level of financial literacy.

Similarly, family members who are sending international and domestic remittances can send more money home. Instead of remittances being cashed out, remittances sent to a bank account, e-wallet, or smart card, for example, can go into accounts that support safe saving and also increase transparency and traceability.

The NFIS now provides a great opportunity for the government and other stakeholders in this important venture, to collectively develop robust, specific initiatives under each of these action headings. Only governments have the authority to be prime movers on much of this agenda, especially with respect to regulatory reform, driving electronic payments via payroll and social benefit disbursements, but in partnership with the private sector. To increase the use of digital remittances , for example, to put in place a robust system of digital payments requires significant physical infrastructure— not just mobile telecommunications, but also accessible cash- out points.

Increased transparency – Given the liquidity and transactional anonymity of cash, cash payments are subject to “leakage” (payments that do not reach the recipient in full) and “ghost” (fake) recipients, particularly in the context of government transfers. By moving toward digital payments, the traceability of the payment process is improved. First, recipients have digital records of the amount of the payments they are to receive. Second, digital payments generally require more stringent identification documentation, making it harder for ghost recipients to remain undetected.

Consumer education – Poor recipients and those living in remote areas might not be familiar or comfortable with using a digital payment system. This is especially a challenge for social cash transfer programs that, by definition, often target the poorest people. Assuring basic financial literacy is necessary for recipients to be educated about using and remembering their PINs, understanding how much money they should receive at each pay-out period, and knowing what to do if something goes wrong.

Mobile ownership – Many digital financial services are accessed through mobile phones, The issue is that while mobile connectivity is spreading rapidly, it is not spreading equally. The GSMA2 Mobile Gender Gap Report 2018 report found that over 1.2 billion women in low and middle-income countries do not use mobile internet and estimates that women are, on average, 10% less likely than men to own mobile phones than men and 26% less likely to use mobile internet than men; regionally, the largest gender gap is in South Asia, where women are 37% less likely to own a phone than men. 

In Sri Lanka mobile penetration has risen from 96% in 2012 to 126% in 2017. The last three years in particular have seen very strong growth. However the technology in this space caters primarily to the needs of the corporate users who are tech savvy and who form the target group for the marketing of smart phones, the growth of which is leading to the rapid decline of land line usage in the country. 

Constraints that reduce women’s access include amongst others, cost (the primary reason). Since moving toward digital payments will bring many individuals into the formal payments system for the first time, regulators should establish appropriate ‘Know Your Customer’ (KYC) account opening and documentation requirements that do not have the unintended consequences of excluding legitimate businesses and consumers from the financial system. 

For example, documentation requirements for opening an account may exclude workers in the rural or informal sector, who are less likely to have wage slips or formal proof of domicile. Regulations should ensure that such safeguards also support financial inclusion, for both traditional bank accounts and digital e-wallets. Mexico’s approach to KYC—which provides tiered or “progressive” KYC—has been documented on behalf of the G20 Global Partnership for Financial Inclusion (GPFI).

Digital finance literacy initiatives

While there are digital literacy initiatives like that launched by Facebook in collaboration with Sarvodaya, to raise awareness about the potential of the internet and the need to remain safe while being online, they will go a long way in enhancing digital literacy in Sri Lanka, There is however a desperate need for digital financial literacy initiatives to be launched in Sri Lanka on the lines of similar initiatives introduced by international and regional consultative groups operating in our neighbouring countries. 

The Digital Finance Consultative Group (DFCG)—previously known as the Mobile Money Consultative Group (MMCG)— serves as a platform in Bangladesh through which stakeholders can share their experiences using digital money, as well as to identify opportunities for new product innovations and barriers that may exist in effectively using existing products to reach remote and underserved populations.3

How to Bring More Women into Mobile Money – a design solution blog – part of a knowledge series by the Women’s Financial Inclusion Community of Practice, promotes learning amongst its members and the broader financial inclusion community on overcoming challenges and spurring innovations that further gender equality, in access to and usage of, financial services.4

GRID Impact set out to tackle this problem in Pakistan with Karandaaz, a non-profit development finance company that promotes financial inclusion for individuals through digital solutions. Together, they designed interventions to overcome some of the barriers to mobile money adoption, by improving the user experience and user interface design of mobile money smartphone apps, for various providers in Pakistan. 

They created a design toolkit that addressed the needs of current mobile money customers while also including design features specifically for women, low-income and low-literate users. The design was intended to support providers in growing their customer base to include a low-income female market. A similar guide to the use of DFS in Bangladesh has been developed where only 26%of women have access to the use of formal financial services. This is relevant in a country where over 90% of clients served by micro finance institutions are women.

It is evident that through design, deployment and education, organisations can better address target groups such as senior citizens and women’s perceptions of, and the challenges, with using DFS.

Financial inclusion is by far is the most profound challenge in S.E. Asia, where poverty and illiteracy combine to deprive the most vulnerable sectors of society from being heard, from being represented and from proving that they are indeed worthy of consideration for a place at the table, which will enhance their upward social mobility.

Financial inclusion is on the rise globally. The 2017 Global Findex database shows that 1.2 billion adults have obtained an account since 2011, including 515 million since 2014. Between 2014 and 2017, the share of adults who have an account with a financial institution or through a mobile money service, rose globally from 62% to 69%. In developing economies, the share rose from 54% to 63%. Yet, women in developing economies remain nine percentage points less likely than men to have a bank account. Advances in digital technology are key to achieving the World Bank goal of Universal Financial Access by 2020.5

Sri Lanka’s experience

As has been often said, we must, perforce, translate our very high level of literacy, one of the highest in the world – 96% – from just print literacy, to financial literacy, where Sri Lanka does not rank very well. Even countries like Bhutan have a much higher level of parity between print literacy and financial literacy.

While digitising of government payments of agricultural subsidies, pensions and other retirement benefits such as the Employees’ Provident Fund and Employees’ Trust Fund, may promote the increase in account ownership, it is not a sustainable move if it means that the beneficiaries use these accounts just as a one-off operation to access their benefits, which is very often what happens in most S.E. Asian countries, and even in Sri Lanka and is used by the government to eliminate unscrupulous middle men who would otherwise hire their services to most low and middle-income beneficiaries for an exorbitant slice of the benefits. 

In this digital revolution that is inevitable, it is imperative that we harness the support of international organisations and even our local entrepreneurs, to reach out to specific target groups, to win their acceptance of digital financial technology, through public awareness programs and through user friendly digital solutions that cater to their specific needs. 

This is the responsibility of the NFIS to identify the stakeholders in this strategy from the public and private sector, to enhance digital financial awareness and in achieving the development and acceptance of an open and inclusive digital payments infrastructure. 

(The writer is ex-Director of Bank Supervision and Advisor to the Governor of the Central Bank, freelance writer and independent consultant on financial regulation.)

Footnotes

1 Marie Claude Bibeau – Minister of international Development Canada at the TC’s executive panel on ‘Fintech a game-changer in the financial inclusion of women’ – October 2017

2 Groupe Speciale Mobile Association

3 Guide to Increasing Women’s Financial Inclusion in Bangladesh through Digital Financial Services – written by Tasnuba Sinha and Catherine Highet

4 By Alexandra Fiorillo, GRID Impact, December 2017, Founder and CEO of GRID Impact, a collective of designers and behavioural scientists that solve social impact challenges around the world.

5 The World Bank’s Global Findex database 2017