Digital Financial Inclusion in the times of COVID-19

In the words of Mulyani Indrawati, Finance Minister of Indonesia, “Financial inclusion matters not only because it promotes growth, but because it helps ensure prosperity is widely shared. Access to financial services plays a critical role in lifting people out of poverty, in empowering women, and in helping governments deliver services to their people.”

What is digital financial inclusion?

Digital financial inclusion involves the use of the cost-saving digital way to arrive at the presently financially excluded and underserved populations with a view of formal financial services well-matched to their requirements that are responsibly delivered at a reasonably priced rate to customers and sustainable for providers. Components of digital financial inclusion includes:

  • Digital transactional platforms facilitate customers to make or obtain payments and transfers and to store up value electronically.
  • Devices used by the consumers can either be digital devices that transmit information or instruments that attach to a digital device such as a point-of-sale terminal.
  • Retail agents that have a digital device linked to communications network to transmit and obtain transaction information enable customers to facilitate cash in and cash out.
  • Additional financial services via the digital transactional platform can be offered by banks and non-banks to the financially excluded and underserved.

How does the pandemic impact the Financial sector?

The public as well as the private sector’s response to the crisis has been resulting in an overall acceleration of the digital financial inclusion process in emerging contexts, particularly in West African countries, where it was still falling behind in terms of regional trends. In terms of the demand for finance, both advanced and emerging countries have witnessed significant growth in the contribution and use of digital financial services, as people have looked for other substitute to run and administer the financial aspects of their lives. As per the report titled “Global Digital Payment Market” published by UnivDatos Market Insights. Owing to the sudden COVID-19 outbreak demand for contactless payment, the market is expected to witness high growth and is expected to reach a market size of US$ 65.3 billion in 2020. Post 2020 the global digital payment market is expected to witness growth and would grow at a CAGR of 18.55% during the 2021-2026 period to reach US$ 167.6 billion by 2026.

The following table illustrates the level of digital financial penetration in various countries during the pandemic:

Country

Projected year of Maximum Penetration

Level of Digital Financial Services Penetration (%)

Ratio of the Digital Financial Services (%)

Thailand

2020

68

-20.0

Vietnam

2021

54

-36.5

Indonesia

2023

62

-27.1

Cambodia

2024

39

-54.1

Philippines

2024

62

-26.7

Sri Lanka

2025

53

-37.8

India

2025

69

-18.8

Myanmar

2027

36

-57.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on Digital Payments and Transfers

Surges in the usage of digital payments and transfers have been administered on a worldwide scale, and in extensively different context, in the outcome of the outbreak. Even countries that registered significantly high levels of use of digital financial services preceding the pandemic have experienced a rise in their subscription and usage, as population segment that had so far forced the market comprising of rural people to change out of necessity. The table below highlights the growth of the sector globally.

Growth Particulars

Growth Rate

Credit card volumes

65%

Cross border payments

50%

Us consumers in debt

87%

Market capitalization

(32%)

Indian digital payments

42%

Indian Digital Transaction Overview, 2020

Narendra Modi, The Prime Minister of India says, “I dream of a Digital India where mobile, and e-Banking ensures financial inclusion.” A recent study by Local Circles for the year 2020 found that about 42 percent of Indians had increased their usage of digital payments in the three weeks post the outbreak, primarily to purchase indispensable items, both at physical vendors and on e-commerce platform. The table depicts the position of the digital market during the pandemic.

Unit: (Rupees in billions)

Types of transactions

February

March

April

May

Atm withdrawals

1,392.7

1,242.9

683.7

1,025.6

2RuPay card (pos)

103.1

81.8

28.5

59.7

IMPS

2,145.7

2,019.6

1,211.4

1,694.0

UPI

2,225.2

2,004.0

1,511.4

2,183.9

AEPS

113.9

101.7

147.1

188.3

 

 

 

 

 

 

 

 

 

 

Outlook for 2021-2022

The legendary business tycoon and investor Warren Buffett said, “Digital financial inclusion and transformation is a fundamental reality for businesses today.” The pandemic has resulted massive growth of the sector in terms of fostering the use digital payments as well as transfers to enable e-commerce which also provides a solution to mitigate the impact of the virus. With reference to the Indian consumers, the process of financial inclusion has transformed the market and shifting into digital means has been largely witnessed during the pandemic. Like India, consumers have invested in the market and have a growth rate of about 87%. Overall, the current year 2021 will transition to fully digital remittances for trade in goods and services for all the sectors in an economy.

 

Author: Tinku Rai

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