Financial Inclusion – Pakistan taking the right steps under technology to curb poverty and achieve economic growth
The word “digitization” refers to the process of transfiguring information into digital form and mapping you into a digital economy. Digitization has immensely changed the work pattern of individuals and non-individuals such as trading businesses and corporations, whether small & medium enterprises (SMEs) or large corporate businesses, government or private sectors, and non-profit organizations or ordinary people.
The concept of revolution became familiar to the textile industry in Britain in the late 18th century; before that tasks of the textile industry were only done painstakingly with the help of hands. Secondly, revolution arrived when Henry Ford laid down the concept and understood moving assembly lines and accompanied it with mass production. Henry Ford’s revolution can also be regarded as the Industrial Revolution. And now the third revolution is named as Digital Revolution (Digitization).
In today’s millennium, technology is used as a barometer of a country’s potential to compete in a digitized market around the globe. Therefore, the performance of countries is measured through main indicators like technical environment and its creations, Information and Communication Technology (ICT) infrastructure, the adaptation of new technology by government, private sectors, and individuals, and the impact of innovative technologies. Digital technology is an important route to increasing prosperity through the impact of innovations. This technology has changed the face of the world in many areas such as the industrial landscape, government attitudes, the financial industries, etc.
The digital economy has been growing at 10% per year more than the economic growth of the world, approximately three times higher. It generated US$24 trillion in the year 2015 on account of e-commerce and it accounts for 30% of all transactions made globally. The number of transactions was completed on 2.5 billion smart devices among the world’s 7.4 billion people. A ten percent increase in broadband and mobile increases the per capita gross domestic product by 1.38% and 0.81% respectively in emerging countries.
No doubt, the year 2015 could be considered a year of digital planning by governments globally, where, its role was emphasized to achieve goals like Digital India and Kenya’s Vision 2030, European Commission disclosed as the Digital Economy and Society (DESI), G-20 Countries agenda of High-Level Principles for Digital Financial Inclusion and Pakistan’s program of National Financial Inclusion Strategy (NFIS) vision 2020.
The world is changing with the change in technology for instance; innovations are emerging like robotics, responsive web-based services, 3D printing machines, etc. The Digital revolution is held as a strong yardstick with a long-term outlook to ease customers for timely servicing as and when required by them and organizations for competing and achieving their monetary goals. Therefore, the main theme behind digitization is to enhance efficiency, reduce costs, provide 24/7 hassle-free services and increase productivity.
Changing workplace environment
The technology revolution is at its peak and has reformed industries worldwide. It is now used as a tactical instrument for attaining the objectives of organizations. To make businesses successful, a huge amount of investment is being done in this capacity to compete in future technologies. Digitization is one of today’s famous technologies that have modified the ways of doing business; resultantly digitalizing the economy seems around the globe and has given the roadmap of transformation. Concerning digitization, a new famous saying has been invented in the world of technology which is known as Digital Tsunami that has changed today’s work style, crushing the biases on unemployment that may increase in the country’s economy. However, it has positively contributed to the Gross Domestic Product (GDP) to employment ratio by creating new avenues of job opportunities by assigning projects and portfolio commissions through the platform of the online system. Digitization has reduced the problems of quality services, products, and design features. The adaption of 3D technology, translating documents, conscripting insurance policies, giving account statements, enquiring balance inquiries, doing online business, making payments from one place to another place, etc is no more difficult task now.
Before the implementation of technology, the capitalist system of the economy faced a crisis of decreasing profit rates and efficiency. This emergency is also famous as Fordism which made a breakthrough internationally by using automation in a workplace environment. This new phase is commonly known as the post-Fordist era. After the year 1970, technology is now considered a powerful tool and viable for organizations in attaining objectives and rejecting the view of Manichean that technology is either a blessing or it is a curse.
So it is a fact that a radical shift is happening, economies are going into digitization at a greater speed with the support of the internet. Yet, more than half of the population of the world is away from the use of the internet and 3.9 billion people are far behind in the use of mobile phones and internet access. The female user ratio is on the lesser side due to several reasons like less education and lack of access to finances in developing countries.
Therefore, the motive behind working on this paper is to analyze the role of digitization and its significance in financial inclusion that has a far-reaching influence on the economy and its implication and challenges of some new risks and some well-known to the financial industry such as operational risks, consumer rights risks and the cybercrime risks. Further to know the programs being introduced at national and international levels by the policymakers envisioned in countries like Gulf Corporation Council (GCC) countries, G-20 countries’ High-Level Principles for Digital Financial Inclusion, Pakistan’s vision of 2020, and the United Nation in its due part, always plays by initiating different policies.
Digitization in financial inclusion is a hidden weapon for those households who are deprived of financial services due to two main factors; low income and living in remote areas of the country and also beneficial for the contribution of female access to assets accumulation. The use of financial inclusion confers equal access to all, good quality services, and the welfare of society as a whole.
It enables financial industries like banks to reach millions of fresh clients who are currently deprived of banking services due to the above-mentioned reasons, especially the reason of no proper financial structure and brick-and-mortar existence. This method can face these challenges with the support of agents and most importantly mobile devices.
It delivers the services of banking at a low cost, particularly to the massive sections of needy groups. It ensures the quality of services and quality of experiences of enjoying them timely for everybody therefore; there is a concept that banking services are in nature of public good. Hence, the idea of branchless banking must prevail to endorse equal opportunity in the financial system for all.
Because of the convenience and portability of mobile devices as a part of digital financial inclusion, millions of clients will be brought into the network of the financial industry will reduce the volume of cash basis transactions not only today but also in the future, and resultantly, economic development and stability of the financial system will come to exist.
The inclusion of digital technology serves the underprivileged segment of society; however, it has some uncertainties like cybercrime which may be anonymous to a person who is new to formal financial services and unaccustomed to his rights. To reduce risks, regulatory frameworks are needed to supervise the models of financial inclusion namely say digital transaction platforms, retail agents, and devices.
The important element of Digital Financial Services (DFS), among others, is a mobile device, mostly used as a platform to make financial transactions. If we look at the significance of mobile technology it has been subscribed to 7.6 billion globally having total revenue of $1 trillion in the year 2015 with the 4.2% of global GDP contribution amounting to $3.1 trillion in economic value addition and nearly 17 million people are directly employed along-with 15 million jobs are indirectly produced additionally. Therefore, it seems that mobile technology addresses the socio-economic challenges across the world, especially in the field of digital financial services (DFS).
There are approximates that more than 2.5 billion people are outside the network of the financial system. Merely one among five adults living daily life less than US$2 per day and having an account, means that approximately 80% of poor people are out of the financial system. However, among adults in developed countries, approximately 89% are enjoying financial services. Hence, the motive of financial inclusion must be to cover those people who lack access to financial services. No doubt, it is a challenging task mainly due to factors like the absence of infrastructure, the cost of providing services, and the perfect products that satisfy the needs according to customers. So, the digitization has potential to bring financial solutions to unbanked areas of society by using a mode of cell phones and possibly installing ATM Booths.
Measures to be taken
To achieve the economic goals of a country, robust steps are required to implement digital financial inclusion in its true essence, where the role of developing and developed countries has significant importance by encouraging each other to make wider and more robust growth of the economy with the support of extending financial intermediation and boosting access to the electronic payments, drafting insurances, savings, and providing credit services. Regulatory policies are required to be framed to facilitate economic benefits for migrants enabling them to transfer remittances to their home countries at low cost.
Apart from this, developing countries are required to increase women’s participation in the economic growth of a country by giving them access to finances and budget decisions for the betterment of their livelihood and thus economic development. To do this, a solution lies in digitizing financial inclusion.
Digitization overcomes the problems of cost and physical walls that otherwise might have plagued the significance of financial inclusion. This supports delivering the opportunity to swiftly scale up contact to services of financial industries employing cellular phones and point of sales etc. It can reassure the women’s participation in the ownership of economic asset accumulation. Electronic payments, mainly by governments and employers, require practicality and privacy for women who need financial services. Financial inclusion enables women to open their accounts and let them introduce themselves to the formal economy by making small ventures.
Plenty of opportunities flourish and are tied up with financial inclusion, and so are the multifaceted challenges. Governments around the world have to address them. The regulatory concerns should be on top priority by the governments and must find out solutions with the helping hand of private sectors in building such a financial infrastructure that must have the capability to cover rural areas and to ensure fair competition among the service providers. The full responsibilities are on the shoulders of the governments, international financial agencies, the financial industries, and private sectors to curb the growing thrust of approximately, over 2.5 billion people who are still outside the financial system. As such, urgent steps are needed to suggest the solution to these issues and must be a prominent agenda of governments around the globe.
As the World Bank Report witnessed that digitalization has an incredible impact on the growth of the economy, also financial firms accept that digital technology has reduced expenses with an increase in the efficiency of payments. Privately owned firms have revolutionized the world and citizens are ready to appreciate it quickly. Hence, the responsibility of the government is to introduce full-fledged technology in the country so that each individual must be able to enjoy this blessing.
The introduction of digital innovation and the Internet of Things (IoT) has generated huge opportunities to boost revenues and reduce costs by US$14.4 trillion for the period between 2013 and 2022. The growth rate of the Internet of Things (Technology) has risen from 2 billion in 2006 and has been predicted to 200 billion by the 2020 year-end; resulting in the achievement of more than one hundred percent. By 2020, more than 200 devices will be connected is said to the Internet of Things (IoT).
For achieving that target, the foremost apprehension of financial industries is how to invest in technology with the promise to cope with the challenges coming from innovative products for fulfilling new opportunities and to curb the advancement with maximum efforts of investing in the development of digital communication devices enabling themselves to compete in the digitized market place.
So digitization of banking services is a reality worldwide. As it is digitization that produces an environment of promoting transparency, inexpensive to afford with greater accessibility, and high-quality financial products and services.
Around the world, IT is extremely dispersed technology with maximum use of mobile devices. If we observe the report on GCC countries, it suggests that approximately 98% of banking clients of GCC countries widely use smartphones for meeting their daily needs as highlighted below in figures showing an amalgamation of shreds of evidence for the adoption of digital technology. To take benefit from this, half of the banks have allocated a budget of between US $5 million and US $20 million for taking initiative in the digitization of financial inclusion, according to the World Islamic Banking Competitiveness Report 2016.
Despite the enormous use of mobile technology, GCC countries are yet significantly behind the basic policies that needed great attention to bring the above ratio to mobile banking which will not only dig gains for consumers but will also reduce the cost of doing business with financial services.
Below is the transcript of mobile banking customers of different ages in GCC countries.
The United Nations has been endorsing financial inclusion for achieving the Sustainable Developmental Goals by 2030, so to achieve this digital technology is needed in this area. As G20 countries have well-defined the role of digitization in their reports namely “High-Level Principles for Digital Financial Inclusion” with emphasis to provide financial services to unbanked areas. This report explores the benefits of digitization. So far the successful tool is the use of mobile for transferring electronic payments as 78% of financial services depend upon the mobile phone in Kenya.
Leaders of the G20 held the summit in September 2016 for consecutively two days in Hangzhou, China for updating the version of G20 financial inclusion indicators. During the summit, eight principles were introduced based on managing risks and innovation of products by encouraging digitization in financial services to curb poverty and achieve economic growth. These eight principles are:
- Promotion of Digital Financial Services Approach (DFS)
- Easing Innovation by mitigating Risk to Achieve Digitization
- Provide appropriate Regulatory Framework for DFS
- Increasing Digital Financial Services through a suitable Infrastructure Ecosystem
- Establishing Accountable Digital Financial Practices to Guard Consumers
- Support Digital and Financial Knowledge and Awareness Programs
- Enable Consumer Identification for DFS
- To track the progress of Digital Financial Inclusion
According to Global Microscope Report 2016, Pakistan has placed 2016 with the same ranking of 5 as compared to the previous year 2015, scoring 55 out of 100 in the field of financial inclusion far behind India ranked 3, taking a score of 78 out of 100 with the incremental score of 7 corresponding the previous year of 71. Scoring means a policy to give attention to every part of financial inclusion.
So to bang on every bit of digital financial inclusion, Pakistan launched its national financial inclusion strategy in May 2015. This will be achieved by making stringent regulatory policies of Enhanced Due Diligence (EDD), Know Your Customer (KYC), Combating against Financing Terrorism (CFT), and true efforts of agents across the country to keep the implementation of regulations by the service providers.
As per SBP quarterly Branchless Banking April-June 2016, branchless banking has improved in many areas in terms of per account with a significant rise of 26%, 18%, and 6% in total deposits, average deposits, and the total number of accounts respectively. Similarly, the value of transactions has witnessed good growth as depicted below:
In the quarter that ended September 2016, transactions of Branchless Banking (BB) raised to 118.8(M) valuing PKRs.543.6 billion, giving a rise of 2.5% in volume and a 6.8% raise in the value of transactions as compared to last quarter.
Presently, providers of Branchless Banking (BB) are nine operating throughout Pakistan. To achieve the maximum advantage of financial inclusion, Pakistan has set a goal of achieving 50% account ownership for adults and 25% ownership of accounts by female adults under the program National Financial Inclusion Strategy (NFIS). This settled target has to be achieved by 2020. So to achieve this, players are needed to make wide plans and to spread the digitization of financial services in the unbanked areas where the physical existence of branches may not be suitable.
Among the shares in the market, Easypaisa is with 30% leading from the front and is branded as the market leader, Upaisa has 13%, and JazzCash has a share of 18% in providing the services of Branchless Banking (BB). However, Time pay, Mobilepaisa, and HBL Express are required to maximize their efforts through agents for the promotion of activities of branchless banking.
State Bank’s quarterly report suggests that 0.9 million fresh accounts were introduced in BB, leading to total of BB accounts up to 14.6 million, depicting a rise of 93% from March 2015 to this quarter ended June 2016 as illustrated by the below figure:
Women’s accounts include 14% of the total 14.6(M) comes to two million accounts and only needs immediate attention to achieve the settled target of NFIS by 2020. To pass this milestone, informative programs should be launched through print media, electronic media as well as social media.
To make the NFIS program successful in Pakistan, the role of the Pakistan Telecommunication Authority (PTA) is as valuable as SBP in the digitized economic system of a country, as per the chairman of PTA, till August 2016, 35 million broadband subscribers, out of which 32 million were a mobile broadband subscriber. This figure displays a country’s potential to bring the unbanked population via digital financial inclusion.
Implementing the digital system in financial services brings both speed and coverage with some inherited risks and challenges in the pillars of financial inclusion.
The Digital Transactional platform:
It typically includes at least one non-bank and one bank. This enables a client to use the device to make and receive payments and transfers and to store value electronically. This may generate the risk of accuracy in real-time transactions and reconciliation of the records. Insurances are required to reduce these types of risks. Services of insurance can be arranged from the services of a third party. Further to hedge this risk, limits can be applied on deposits and withdrawals.
Digital technology-related risks:
Financial inclusion extensively uses mobile phones and is considered a medium of transferring, storing, and receiving payments electronically. Therefore, this needs a great deal of quality, security, consistency, and reliability of the information in just time. If these services face the risk of disruption, then there are high chances that privacy and security might be breached that may cause while transferring the digital data via a transmission system.
It initiates because of financial crimes, consumer crimes, and new operational risks. They arise because of the distance between the provider of services and the agents. The risks of operations comprise Agent-related risks including financial and consumer risks. Operational risks are comprised of fraud, errors of agents, and poor handling of data. Financial risk arises due to non-compliance with Anti-Money Laundering and Combatting against Financing Terrorism (AML/CFT).
Other risks for digitization may include the risk of product and model-specific issues in digital financial inclusion, consumer protection risk, increased need for cross-sectorial coordination and communication, and customer identity.
Financial Inclusion Challenges
To face these challenges of digitization of financial inclusion; some intuitions have been analyzed to face challenges of modernizing the new era of digitization. They are concentrating on the security system that will lead to acting as a value-addition, solidifying the partnership through the apposite channel of partnership or acquisition or merging with other third-party, focusing on IoT (Internet of Things) rather than experiencing more expenses, usage of best communication tools, identifying interconnected devices, create single identity framework – this new era allows to identify the relationship between IoT objects such as devices, information, data, users and services, and finally assessing the blockchain technology on IoT, according to the report named “Seizing opportunity in the new age of Financial Services”. This will lead to supervising digital financial inclusion effectively and will prevent the issues of quality of experience and quality of services that usually accounts for the main aspect of consumer-related issues. Blockchain is a new database. Most people use a bank as an intermediary at the time of the transaction, but the blockchain is a new technology that involves the digital ledger. A blockchain allows consumers and suppliers to get into the connection without any need for middlemen or intermediaries.
The Author is Lecturer (Management Sciences), SZABIST