- The pandemic has proved that digital financial inclusion is crucial – and that it cannot depend on cash-out services.
- Weak financial infrastructure makes digital transactions difficult – and people often mistrust digital financial services.
- Governments and financial institutions can earn that trust by building a resilient and inclusive financial system.
Last summer I met a woman in Mumbai as I was piloting the questionnaire for the World Bank's Global Findex database. Even though she had a bank account for receiving government safety net payments, she didn't use it for routine transactions. She still preferred to pay for a bus into the city centre to pay her utility bills in cash, because she didn't know how to use the app on her phone and she didn't trust that the money would go through.
In response to COVID-19, governments are rolling out relief payments, more salaries are being paid into accounts, and we’re seeing a surge in digital remittances sent home by migrant workers. If past research is any indication, most recipients will prefer to withdraw the entire sum in cash, just like the woman I met in Mumbai.
But the pandemic has shown that digital financial inclusion cannot rely on cash-out services. Business correspondents can close, ATMs can run out of money. A resilient digital financial system requires both expansive account ownership and a wider digital ecosystem so recipients can use the money in their account to pay their bills, purchase food, and send money to family members in need.
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There are many roadblocks to digital financial services adoption. Among the most important is trust – trust that money in the account is safe, that people are being offered appropriate products, and that agents aren't adding on extra fees. About half of all unbanked adults in Latin America report not having an account because they don’t trust financial institutions. Digital COVID-19 relief payments offer big opportunities to build up that trust.
During the pandemic, cash has carried a big administrative burden – it's unsanitary, and waiting in line to be paid violates physical distancing. But digitalization could also expose customers, especially women, to financial services they might be unprepared to use.
People have good reasons to mistrust financial institutions. Mystery shopper audits in Latin America and Sub-Saharan Africa found that loan officers failed to provide consistent information on costs, that inexperienced borrowers got less information than experienced borrowers, and that printed materials on borrowing costs were missing or failed to meet guidelines. A similar mystery shopper study in Chennai, India, found that bank staff almost always refused to offer basic accounts.
The onus for good financial behaviour should not rest exclusively on customers. Consumer safeguards are critical for building public trust in the financial system, so that people use their accounts to build financial security. For example, requiring clear and easy-to-understand product terms may be especially important for low-income women, given their relatively limited financial experience and capability. There's evidence to support this: experiments in Mexico and Peru found that bank customers presented with simplified statements about credit and savings products made better financial choices. Regardless of how literate they are, people cannot make good financial decisions if they are given inaccurate or incomplete information.
There's also a role for the government in financial education. The evidence for traditional classroom-based financial education is underwhelming. What's working are interventions to improve financial capability that leverage teachable moments, such as when adults are applying for credit or when women are receiving government payments. Also, technology such as text messages can provide information cheaply and improve financial behaviour. Governments and financial service providers can partner and leverage technology to make it easier for government transfer recipients to know the amount of money they should be receiving, the closest operating cash-out point, and expected fees.
The rapid digitalization of payments during the COVID-19 crisis will also create new electronic data points that can be used to compute alternative credit scores. But this new payment data needs to be collected responsibly. Take-up of digital financial services requires consumers to trust that their data and personal information will be kept safe, and governments should ensure that fintechs and financial institutions have cybersecurity systems in place.
It's also important to remember that financial capability comes through experience. There's growing evidence of 'learning by doing'. For example, in Mexico, government beneficiaries who received a debit card accumulated sizeable savings, since using a debit card makes it easier and cheaper to withdraw money and because account holders use their debit card to check their account balances more frequently and build trust with the bank.
Our new paper shows that factory workers in Bangladesh who are paid into a payroll account learn to use more account features and use their accounts more efficiently and without assistance, as compared to workers paid in cash. Workers who get auto-deposit wage payments become savvier financial customers, and the benefits spill into the entire community; agents operating around factories that pay digital wages are less likely to add on extra fees because the workers in the area know their rights.
Governments and employers are playing a formative role pushing the pace of digitalization by making COVID-19 relief payments into people's bank accounts. But people will not use their accounts unless they trust the financial system. Let's use this unprecedented moment to introduce policies that help people develop that trust – and then keep them in the system to build their financial capability once the immediate crisis has passed.