Cashless payment hopes pinned on developing nations

Amsterdam's Public Transport Chip Card. [VeloBusDriver/Flickr]

This article is part of our special report The demise of cash?.

SPECIAL REPORT: Business and civil interests representing the mobile payments markets are developing global principles, standards and codes of conduct for digital finance, as cashless payments move to the fore in the developing world, following a meeting this summer in Perth, Australia.

The fifth annual Responsible Finance Forum – backed by the United Nations Capital Development Fund (UNCDF) and the World Bank Group – convened over 100 industry, government and private sector leaders to discuss how to deliver digital financial services fairly and safely.

Focusing exclusively on the use of technology to provide financial services and products for the poor and in the developing world, the Forum concluded that global principles, standards and codes of conduct for responsible digital finance are needed.

The quest for global standards testifies to the growing take up of digital payments systems across the developing world.

Over 2.5 billion adults worldwide lack access to formal financial services and digital finance is widely recognised for its potential to expand financial inclusion and improve the livelihoods of the poor.

World without cash for cash-strapped world

Integrating digital payments into the economies of emerging and developing nations addresses crucial issues of broad economic growth and individual financial empowerment, according to research issued by the World Bank this year.

The research found growing evidence from around the world that digital payments offer immediate benefits for both senders and receivers in developing economies.

“The benefits of digital payments go well beyond the convenience many people in developed economies associate with the technology,” according to Dr Leora Klapper, the lead economist at the World Bank Development Research Group.

“Digital financial services lower the cost and increase the security of sending, paying and receiving money. The resulting increase in financial inclusion is also vital to women’s empowerment,” Klapper added.

Examples in Latin America and Africa are on the increase. The Mexican government is saving an estimated €10 billion each year following a shift to electronic distribution of many government payrolls, pensions and social benefits, according to a study released last December by The Better Than Cash Alliance.

Nigerian President Goodluck Jonathan participated in the official launch of a new government card pilot program called ‘eID’ in August this year. In the pilot phase, a state agency is issuing identity cards with electronic payments functionality to 13 million Nigerians.

West adopts mobile payments for transport, social security

The initiative represents the largest rollout of a biometric-based payment card in the country, and the broadest financial inclusion programme in Africa.

“The card builds a window to a social security benefit system and therefore it is a card every Nigerian should get,” President Jonathan said.

Using the card as a payment tool, Nigerians can deposit funds and receive social benefits with the added security of biometric verification.

If mobile and contactless payments offer the developing world a chance to play catch up, they are not being ignored in Europe and the west.

Since September, all UK-issued contactless American Express, MasterCard or Visa credit, debit, pre-paid or charge payment cards have been accepted for payment on London public transport.

Last summer, Barcelona city council issued a free app that lets people create a profile linked to their car’s number plate and make corresponding parking payments using their smartphones.

Meanwhile, Toronto rolled out a prepaid card this year, which enables recipients without bank accounts to receive direct deposits for their welfare and social security payments.

Financial services protection needed

While digital technology can improve access to formal financial services for the unbanked, these new business models also carry new risks for consumers and small businesses.

“Digital technology offers tremendous opportunities to expand access to formal financial services. But it is important to also consider and address its risks in order to ensure that it benefits the customers, especially the poor,” according to Peer Stein, the director of finance and markets global practice at the World Bank Group.

Against this backdrop, the discussions at the Responsible Finance Forum focused on risks with particular relevance to digital financial services, including breaches of data protection, fraud, and inadequate consumer recourse, among others that pose challenges for both financial service providers and regulators.

“The Responsible Finance Forum provided a starting point from which to develop umbrella principles to advance responsible digital finance,” said Beth Porter, a UNCDF policy adviser, adding: “These high-level principles could inform more specific standards and codes for financial services providers, mobile network operators, and technology companies providing services, as well as influence policies and regulations of financial and telecommunications regulators.”

“Governments have to take the lead and drive digital financial development forward,” said Geoffrey Lamb, chief economic and policy advisor to the co-chairs and CEO of the Bill & Melinda Gates Foundation. “The evidence shows that private sector firms will innovate and citizens will quickly learn to use and appreciate digital payments.  But we need governments to establish the vision, the digital platforms and the regulatory assurance to pull the hundreds of millions of currently excluded people into full participation in the modern economy.”

“We recognize that while the opportunities of digital payments abound, getting there takes work,” said Ruth Goodwin-Groen, managing director of the Better Than Cash Alliance. “Yet digitising payments is achievable when a government articulates a clear vision, leads by example and provides the right incentives for the private sector to do what they do best: innovate, develop infrastructure and create products designed to succeed in the marketplace.”

A digital wallet refers to an electronic device that allows an individual to make electronic commerce transactions.

This can include purchasing items on-line with a computer or using a smartphone to purchase something at a store. Such wallets are also increasingly used to authenticate holders’ credentials, to verify age for example.

Such digital wallets comprise systems (the electronic infrastructure) the application (the software that operates on top) and devices (the physical platform, such as a smartphone).

An individual’s bank account can also be linked to the digital wallet. The credentials can be passed through a retailer’s terminal wirelessly using near field communication (NFC).

Many are speculating that these smartphone “digital wallets” will eventually replace physical wallets. The system has already gained popularity in Japan, where digital wallets are known as Osaifu-Keitai are more widely used than elsewhere.



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