There are many benefits to making banking accessible and affordable to everyone. The benefits include increased usage of digital finance, greater financial inclusion, and decreased disproportionate exclusions from the financial services industry. However, there are also some risks to this change.
Disproportional exclusions from financial services
Despite all the efforts to make banking accessible and affordable, disproportional exclusions from financial services continue to occur. The global financial crisis and the COVID-19 pandemic highlighted the vulnerabilities of those excluded from mainstream financial services. These findings are also relevant to communities seeking to expand financial inclusion.
As more countries make the transition from traditional to digital finance, a more significant number of people will be able to access this new kind of finance. However, the relationship between these new technologies and financial inclusion can sometimes be obscure.
One of the most common barriers to financial inclusion is a need for more trust in the banking sector. Individuals experiencing economic hardship may be hesitant to open a formal bank account for many reasons. Some people are concerned about the long term stability of financial institutions. Alternatively, people might need to be made aware of the convenience of the formal sector. In many cases, economically disadvantaged individuals may be more comfortable using their phones to complete basic transactions, a behavior that will eventually lead to a traditional bank account.
Greater financial inclusion leads to more significant digital finance usage.
In addition to the many benefits digital finance brings to individuals and companies, it has several drawbacks. For example, corporate providers can discriminate against low-income customers, and the quality of financial services can be compromised.
In addition, low internet access and a lack of broadband can limit access to digital financial services. This can be due to inadequate infrastructure or deficient regulatory frameworks.
Digital financial inclusion is a process of increasing access to formal financial services, with a focus on providing financial services that are affordable and safe. These financial services can help people generate income, invest, and prepare for global crises. It can also help people recover from emergencies.
The increased access to digital finance is predicted to lead to GDP growth, increased investment, and more employment. Moreover, it could reduce the leakage in spending.
However, a study by Beck and Brown (2017) suggests that banking services are more likely to be used by households with higher incomes. Moreover, this could have an impact on the rural and urban sectors.
Digital financial exclusion manifests as voluntary digital financial exclusion.
Digital financial inclusion is a strategy aimed at improving the access of the financially excluded to digital financial services. This includes the digital delivery of basic financial transactions, such as electronic transfers and payment cards.
Digital finance is a form of intermediation in which a financial intermediary provides financial services in return for a fee. It can include traditional banks and non-bank financial institutions.
Using digital finance is beneficial to both governments and individuals. However, several issues can hinder its implementation including regulatory and digital channel issues. Regulatory measures must be implemented to ensure that digital finance’s benefits for individuals and businesses are maximized.
One issue that can inhibit the implementation of digital finance is the need for more trust in digital channels. Generally, customers have little faith in online platforms and are likely only to accept them once their confidence is rebuilt. Consequently, this can result in a reduction in the uptake of digital-led financial inclusion programs.
Risk of digital financial inclusion reshaping the financial services industry
Digital financial inclusion has emerged as a means to increase access to finance for economically disadvantaged individuals. It also offers governments a convenient way to provide rapid and secure support to individuals and businesses.
Despite its benefits, digital financial inclusion can also lead to unintended consequences. These risks, however, must be addressed by national and global leaders to achieve complete digital inclusion.
One key issue is the level of trust in digital channels. People in the informal sector are less likely to trust bankers and marketers and rely more on family and friends for recommendations. In the absence of such trust, poor individuals can be hindered from participating in a formal financial system.
Another challenge is the need for digital literacy. They are developing people who need help understanding how to use digital devices to carry out basic transactions. They may have operating software systems on their mobile phones, but they still need to be able to convert stored value on their smartphones into cash.