Every year, millions of people around the world transition out of poverty in any number of ways — by adopting new farming technologies, investing in new business opportunities, or finding new jobs, for example. At the same time, large numbers of people fall back into poverty due to health problems, financial setbacks, and other shocks. Compounding this situation is the fact that the majority of those living in or near poverty lack even the most basic financial services.
Access to the right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. However, the existing “bricks and mortar” banking system doesn’t work for poor people, in part because most of their transactions are conducted in cash. The global revolution in mobile communications, along with rapid advances in digital payment systems, is creating opportunities to connect poor households to affordable and reliable financial tools through mobile phones, and other digital interfaces
India, which observes “Digital India Day” on April 14, is now expected to be the biggest digital hotspot of the planet. The digital medium is now seen as the most potent tool for cutting the divide between the wealthy elite and have-nots. India’s earlier attempts floundered for several reasons but now the time appears to be ripe for such an enterprise. Digital finance has suddenly acquired a magical nuance.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
However there are several challenges peculiar to India that may constrain a full-scale digital transition in the foreseeable future. On the surface, this transition may not appear to be very deep. But as it pans and plays out, this tectonic shift will have much wider implications and policy executioners will have to contend with a diversity of exponential societal changes. The race to go digital cannot be turned into a sprint. India culturally believes in cash and a paradigm shift in thinking will need time and resources. Digitalization will actually involve a migration to new social and cultural patterns and habits; in a way it is more of a cultural-economic revolution.
There are marked class issues built into India’s cashless transition. The tech-savvy class has poor exposure to critical social theory and will have to get a better grasp of policy impacts on the ground. The digital revolution will have better chances of success if it is driven less by financial punditry and more by empathetic governance. People take to new technologies when they see clear benefits, have greater confidence in the markets and services, find it convenient and can afford it. The painful reality is that providers too often focus on short-term incentives at the expense of long-term consumer trust and loyalty.
Migrating from a cash economy to a digital economy will demand a recast of the entire mindset for consumers. In fact, the last mile of the digital highway is not infrastructure but user skill levels. Making gadgets available will not help unless we bring about a change in the overall outlook of people. Consumers will take up digital platforms and embrace new opportunities if they believe that changing their behavior and exerting the effort necessary will make certain specific pains go away. We have thus to address real pains, not just offer generic benefits.
“You have to look really hard and ask, ‘What problems are being solved?’” says Nick Hughes, who shepherded the team that turned M-Pesa into a revolutionary financial tool in Kenya. “Unless problems are being solved, it becomes a bit of hype.”
India has to contend with a geographical and cultural divide of a great magnitude. The aversion of the “other India” to digital finance is connected to a larger aversion to everything that has to do with technology. This stems from their lack of trust in technology and also partly from a lack of comfort with technology. Women often face additional barriers: less access to mobile phones, lower literacy levels, less confidence in using technology, and restrictions on travel or social interaction.
Thus, increasing financial and digital literacy alone will not be enough to bring about the digital revolution. Changing the financial framework is also not enough. Consumers will have to walk that extra mile if they want to reap the harvest of these new financial tools.
Talk of “cashless societies” might be overblown, but societies in which digital transactions can be made seamlessly by all are by no means fiction. The biggest success story is Kenya. The Kenyans discovered that with the right technology, exchanging money between physical and electronic forms can be done securely, and as naturally as exchanging notes for coins.
The famous mobile network Safaricom developed M-Pesa (M for mobile; pesa is payment in Swahili), a transformative mobile phone-based platform for money transfer and financial services. M-Pesa is the driver of Kenya’s digital financial revolution. Launched in 2007, it quickly dominated the cash-transfer market, and grew at an astounding rate, capturing more than two-thirds of Kenya’s adult population as customers. It now stands as the most developed mobile payment system in the world, and has heralded a development revolution impacting millions of low-income Kenyan households.
However, a deeper slicing reveals some underlying issues. Few mobile money accounts are actively used. While money flows through these networks, most of the volume comes from users merely topping up prepaid mobile accounts in transactions averaging less than a dollar. And when people do make remittances, those receiving the money tend to cash it in, taking the money out of the system and limiting the potential for mobile money to become a medium of exchange – a mobile wallet for buying things or to provide banking services over mobile networks.
Similarly, a survey of accounts opened under Pradhan Mantri Jan-Dhan Yojana (PMJDY), India’s flagship financial inclusion program, found that only 33 percent of all beneficiaries were ready to use their Rupay cards. The others were bewildered by the complicated PIN and activation procedures. Inconsistent electricity and sporadic internet access further eroded customers’ trust in ATMs and POS machines, with one failed transaction enough to make an entire village swear off formal financial institutions.
India should avoid the usual overstep and haste, such as the way it pushed millions of new users onto the digital economic grid by virtual fiat of demonetization, triggering large sale social and economic disruption. Instead, the government must make sure that the pace of this journey is determined by the ability of it people to cope with it.
There will be challenges in shifting consumer behavior. In Kenya, agents were incredibly important to educating customers and assisting them with their first transactions, building awareness and a comfort level with the technology that eventually led to habitual usage. India’s business correspondent (BC) model — the equivalent to the agent network in Kenya — remains relatively underdeveloped. The sticking point is that the commissions of banking correspondents, who are an important piece in this ecosystem and key touchpoint for users, are low and the government is not willing to consider this issue. Recent research by the Helix Institute of Digital Finance revealed that in the BC model Indian agents earn a median income of $52 per month, compared to agents in Kenya who earn $192 per month.
Managing the agent network is the most critical post-launch success factor. Agents conduct the cash-in and cash-out functions, enabling customers to convert cash into electronic money and back again in convenient locations. In the eyes of the customer, the agent is the face of the company. This means the agent can either build or destroy trust and credibility. Many providers focus on building their agent networks as fast as possible, without careful attention to the agents’ business case and profitability. Experts suggest three key tenets in managing an agent network: (1) grow the customer base and the network in tandem; (2) understand agent economics and risk — the business case for agents is not that simple; and (3) only enroll agents who have the right skills and dedication, and be prepared to train and retrain.
Building inclusive digital economies requires the collective action of governments, industry, financiers, and civil society. Before speeding ahead, we need to build the infrastructure, align the policies, and create the tools that will enable the poor to comfortably board the digital train.
When we design solutions that recognize all as equal partners, we have a real chance to of reaching the goal. Each society is at different stages of digital financial inclusion and the necessary solutions and interventions must be appropriate for the cultural and economic context. By respecting the cultural outlook of the people and embracing their concerns we enlist their buy in, and that is what paves the way for lasting and sustainable success.
Moin Qazi, a former banker and an accomplished poet and writer, has contributed articles to leading publications around the globe and authored several books. He holds doctorates in Economics and English and is author of Village Diary of a Heretic Banker.
IT IS, of course, fitting that the United Nations celebrate diversity. The hundreds of flags in front of its headquarters, and the 365 languages into which the Universal Declaration of Human Rights is translated on an official UN website, are just two symbols of the institution's commitment to the world's ethnic mosaic. But this week's Human Development Report, from the United Nations Development Programme (UNDP), takes the commitment to diversity further. Released each year since 1990, the Human Development Reports provide an update on the fight against poverty around the world, each time with a new theme. This year's report ties two themes together, arguing that respect for diversity is integral to development. State-builders in countries like Iraq and Afghanistan will no doubt be thumbing through the report with interest, in the hope of learning something about how to make fractious ethnic groups work together for prosperity. It also offers them an opportunity to share their views: this year, the Afghan president, Hamid Karzai, contributed an essay on his country's language policy.
Diversity and development might seem to sit oddly together. But they are intimately linked, and the report seeks to show that they are not related in the way many people assume. The UNDP's press release says unambiguously that “there is no evidence that cultural diversity slows development”, and dismisses the idea that there has to be a trade-off between respecting diversity and sustaining peace. Some of the world's richest and most peaceful countries are historically multi-ethnic, such as Switzerland, Canada and Belgium. And most of the world's richest countries are now the destination of immigrants from around the world, making America, Britain and other wealthy nations hugely diverse.
But there is some evidence that diversity has costs. In a recent book, “The Size of Nations” (see article), two economists show that managing ethnic diversity is expensive, as governments must deal with the demands of groups competing for scarce resources. In the United States, a study has shown that people are willing to pay more for services like education if they can live with people more like them in ethnicity and class. In other words, people place a value on being with others like them. Multi-ethnic nations have been breaking apart recently (the Soviet Union, Yugoslavia); few countries have merged during the same period, and those that have were ethnic mates (East and West Germany, North and South Yemen).
A quick look at the Human Development Index (HDI), released each year in the report, seems to support the idea that diversity has its costs. In the bottom 35 countries ranked as having “low human development”, all but three are in vastly diverse Africa, where borders drawn by colonialists showed no respect for tribal, linguistic or religious identities. Meanwhile, while single-ethnicity states are rare (just 30 countries in the world do not have a religious or ethnic minority that constitutes at least 10% of the population), they are strongly represented at the top of the HDI: places like Norway, Sweden, the Netherlands, Japan, Ireland and Austria.
One of the authors of the report, Stefano Pettinato, acknowledges that diversity can be a source of problems. But the report's intention, he says, is to reject the simple causal link that diversity hampers development. He points to rich countries that are also diverse, whether by history (Belgium, Switzerland, Canada) or massive immigration (America, most prominently). Yes, he says, ethnicity plays a role in the conflict and corruption that plague African development. But it is unscrupulous politicians who take advantage that are to blame—not diversity itself.
Ethnicity plays a role in the conflict and corruption that plague African development. But it is unscrupulous politicians who take advantage that are to blame—not diversity itself
The report recommends several political strategies for coupling diversity and development. One is “asymmetrical federalism”—the type of constitutional arrangement seen in Spain and Canada, where regions dominated by a cohesive minority (like Québec or the Basque country) get special local-government powers that others do not. This both recognises the region's distinct identity and binds it to the central state. After all, the authors point out, most people in Spain's minority regions see themselves as both Spanish and Basque (or Catalan or Galician)—not just one or the other. Giving those overlapping identities constitutional form can be one way to stabilise a diverse country. However, it can also give rise to resentment among the majority—be they anglophone Canadians or Castilian Spaniards—over the privileges of minorities.
The authors of the report argue for several other policies to protect and promote what they call “cultural liberty”, with certain caveats. For example, they support affirmative action, which, they say, has led to an increase in the number of black professionals in America, and has helped ethnic Malays in Malaysia and various minorities in India as well. But they lightly question the wisdom of letting such policies become entrenched, asking for example whether the children of affirmative action's beneficiaries should themselves be eligible for a helping hand.
The authors also propose treating “cultural goods” differently from other kinds when discussing trade. They give some of the oft-cited statistics about the cultural dominance of a few countries—for example, that America accounts for 85% of films screened worldwide. Their assumption is that, left to raw market forces, products from smaller cultures would be drowned out of the market. But rather than proposing restrictions on, say, importing American films, the authors propose allowing governments to take positive action to boost the production of their local fare. (Some trade agreements treat such support as an illegal subsidy.)
While the report is full of feel-good language and social-science jargon, like “participation exclusion” and “living mode exclusion”, it is an interesting first stab at marrying diversity and development, two subjects not often found side-by-side. The report is, by its own admission, short on data about just how bad the problem of cultural exclusion is around the world. But it estimates, probably not too wildly, that one in seven people in the world is a member of some kind of disadvantaged minority. When engineering a new constitution, founding fathers in Iraq, Afghanistan and other nations under construction, as well as those who would advise them, would do well to take the suggestions of this report to heart.