A Digital Pathway to Financial Inclusion

This paper discusses the cash-digital divide that creates inequities in the financial lives of the poor. It presents evidence that connecting poor people to an integrated digital financial system will generate sizeable welfare benefits.The paper states that the cash-digital divide makes it expensive and risky for poor people to perform basic financial activities. It also drives a wedge between poor households and the formal economy by making it costly for financial institutions to transact with them. Countries are likely to pass through four stages of market development along the path to an inclusive digital economy. Commercial assets required to navigate this pathway will vary across these stages. Financial regulations and business models must be calibrated to harness those assets at each stage. Infrastructure components that will help to achieve digital financial inclusion include:

• Connectivity, such as a telecoms network, that enables customers to communicate with the providers transaction authorization system through a mobile phone or other digital interface;
• Cash-in/cash-out networks that enable poor customers to convert their physical cash into digital money, and vice versa;
• System for capturing and verifying the identity of customers;
• Virtual accounts that enables digital payment connectivity.