The struggles of success: addressing the poor’s financial needs through digital finance

Why we wrote this Snapshot

It’s been more than ten years since Kenyan mobile operator Safaricom launched M-PESA, one of the first digital finance innovations to hit the developing world. Since then banks, mobile network operators, FinTechs, and other third party organizations have followed suit and now offer a range of digital financial services to underserved customers. Mobile phones enabled Africans to leapfrog the inaccessible and underdeveloped landline networks. Similarly, digital finance has enabled many to bypass the often unreachable and impenetrable banking system. Digital technology and innovation have brought financial services deep into rural, hard-to-reach, poor areas. This access has given digital finance a leading role in the journey to financial inclusion in sub-Saharan Africa and beyond.

While access to these services has continued to grow, meaningful use of the available digital financial services has struggled to keep pace. Despite significant annual increases in account registration, there is a growing gap between adoption and use. At the end of 2016, only 21% (118 million) of the 556 million globally registered mobile money accounts were used more than once a month (GSMA). In this Snapshot we wanted to explore where digital finance has successfully addressed financial needs, and where it is struggling to beat existing informal and formal alternatives.

What we found

We found that while access to digital finance continues to grow, there is a gap between access and use. Limited uptake has been attributed, in part, to a failure to digitally replicate the complex financial needs and money management strategies of low-income populations. Many digital financial services were developed without a solid understanding of the complex means by which the poor manage their money. Consequently, these digital financial services struggle to deliver a superior alternative to customary informal financial tools. While digital finance has successfully addressed many payment and transfer needs in developing markets, sophisticated financial services — such as saving, insurance and credit — are still struggling to compete with informal alternatives.

What’s more — as the digital finance ecosystem expands — unanticipated, negative consequences are emerging. These include unsophisticated borrowing behaviour leading credit bureaus to blacklist customers for defaulting on their digital loans, as well as the use of mobile money to finance gambling. The digital finance community should track and note both these unexpected repercussions and the challenges that limit usage.

Ten years on, while the potential for digital finance is undeniable, using digital technology to meet a range of financial needs in developing markets is a work in progress. Read Snapshot 1 for more details on our findings. Click here to sign up for alerts when new Snapshots are released.

Snapshot 1: “Which Financial needs can be (and should be) addressed by DFS?” is one of 16 Snapshots designed to address a range of questions within the digital finance space. These questions cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What we Know” about the topic in question, highlight “Notable New Learnings” and call attention to “Implications” for future research and investment.

Originally published at www.financedigitalafrica.org on November 7, 2017.