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Digital Banking Changes the World

digital banking
Cash-based systems for holding money are inefficient and hold a lot of risk, with especially high consequences for the world’s poor. With ‘digital cash’ and saving methods, more people are able to experience financial inclusion in modern banking, suffer less risky consequences and begin investing in their future.

Much of this banking is done through mobile phones, which have become increasingly available to developing countries. About 89 mobile phones exist per 100 people in these areas. Even non-financial institutions, such as small businesses, use mobile payments in order to perform faster business and expand their customer base.

Studies in Mexico have shown that in areas where more banking institutions were introduced, there was a rise in informal small businesses, as well as a seven percent rise in incomes. This demonstrates that greater access to banking systems can lead to economic stimulation.

Having financial transactions performed on mobile phones makes banking services cheaper and more feasible for the poor. Digital banking also comes with better financial records, making it easier for banks and other lending programs to develop credit scores, and lending methods that are tailored to their clients.

With digital banking, immediate transactions can be made from the comfort of one’s home, saving people time and money by avoiding a possibly long commute and day away from work in order to get to a bank. Digital banking also makes money less susceptible to common risks such as thievery, natural disasters, or manipulative friends and relatives.

Some people in these situations even pay others to keep their money safe, adding another unnecessary payment to their expenses.

Long distance transfers also become easier to accomplish. Many households in developing countries receive their income from a family member working in other parts of the country who sends money periodically.

A poll was conducted in 11 sub-Saharan African countries that discovered that 83 percent of those polled had made a payment to someone far away using cash. This involved giving money to bus drivers, asking friends to carry money, or taking time off work to deliver the money themselves.

These processes are not only unsafe, but they can be unreliable and slow.

After a bank was set up in a region in Malawi in 2002, farmers used it to hold their money after the harvest, so that they would be able to continue buying fertilizer throughout the year. Their crop yields grew, therefore increasing overall income, while allowing these farming families to send children to school for even more future investment.

Recently in Kenya, clients of M-Pesa, a mobile money program, were observed and compared to Kenyans without the program. When natural disasters or unexpected events came, M-Pesa clients were able to receive financial assistance from friends and relatives at a much faster rate, making any negative impact much smaller, and allowing their regular lives to be interrupted as little as possible.

The success of M-Pesa has sparked motivation for other countries to create similar programs. Tanzania has over 47 percent of their population using mobile banking, and Uganda has begun the process, and already has 26 percent of their population as a member of a mobile banking system.

Even governments benefit from mobile banking. Since Mexico’s adoption of digital banking in 1997, their government lowered their spending on wages, pensions and social welfare by $1.3 billion, or 3.3 percent annually.

A study was done in India that concluded the government could save $22 billion annually just by digitizing all payments and transfers.

Although digital banking is expanding throughout the developing world, there are still 2.5 billion people without any banking system. Governments, non profits and private groups are now working on making banking more digital, and therefore more accessible to these bank less people.

-Courtney Prentice

Sources: Skoll World Forum, Bill & Melinda Gates Foundation, Forbes, Global Envision, TIME, Foreign Affairs
Photo: Gulf Business