The role of digital financial services (DFS) — the use of mobile technology (i.e., mobile money) as a channel to deliver low-cost financial services offers banking to unbanked and underserved populations to drive financial inclusion.
It provides access to a range of financial services and products for populations using fair, transparent and cost-effective means. Mobile Money (m-money) is the use of mobile phones to perform financial and banking functions. It can be used to assist billions of people who have little or no access to traditional financial services to transfer funds using cell phones without using cash. Users can securely receive funds, pay utility bills, make bank transactions, transfer funds, and purchase goods and services using the mobile phone.
The current trends indicate that 55% of households in the world do not have access to financial services. The poor often must rely on informal financial services that may be more costly and less reliable. The different types of bank payment cards (e.g., debit cards, credit cards, prepaid cards, ATM cards) potentially compete with m-money. In order to assess the benefits for m-money, it is necessary to understand how m-money is different from these payment cards. The main benefits are as follows:
- The mobile phone penetration is high, with more people owning mobile phones to access mobile financial services.
- A mobile phone is an interactive device which the customer can check account balances and credit information, make transactions using m-money. A card is a simple payment instrument, typically not allowing its user to check account details or transfer money between accounts.
- A mobile phone has other functions such as communication, where as the card’s purpose is a dedicated payment instrument.
- A mobile phone allows remote, non face-to-face payment without an additional device. In contrast, a card requires a point-of-sale (PoS) terminal, the Internet, or a phone for remote payment. Therefore, with m-money, the user not only has the device but also the communication channel.
- Both payment cards and m-money reduce the use of cash. Although prepaid cards can be useful for people without bank accounts, m-money has a higher potential to provide a wider range of financial services for the unbanked.
- As the mobile technology advances, mobile financial service can promote a range of other financial services offerings from — mobile credit, mobile payments, mobile savings, remittances and mobile insurance options to drive financial inclusion.
- In a developing country, the existing financial infrastructure has poor penetration, with a limited number of payment instruments and a larger unbanked population. Therefore, mobile payments (m-money) may be the only viable alternative to cash.
- In other countries, the penetration of payment (debit and credit) cards, ATMs, and PoS devices and the competitive structure of the financial services sector meant that the benefits for m-money complements other services.
Despite the development of mobile financial services, distinctive risks and challenges like fraud and money-laundering affect the service. The main components enabling these risks are anonymity — the risk of not knowing a customer’s actual identity, and it can be diminished through enhanced “Know-Your-Customer” procedures and identification tools for consumer insight. Elusiveness — the ability to disguise mobile transaction totals, origins, and destinations. It can be diminished through transaction limits and enhanced customer profiling, monitoring, compliance and reporting. Rapidity — the speed with which illicit transactions can occur. Its risk is checked by flagging certain types of transactions and managing risks of third-party providers. Lastly, the risk of poor oversight, which can be mitigated by transparent processes, guidelines on mobile services, clearer licensing, government regulation of providers and effective risk supervision within bank and non-bank mobile financial service providers.
The author is the Managing Director at Stalworth Consulting Group, LLC (www.scg.ug) a management and strategy consulting firm focused on digital strategy, emerging technology advisory and inclusive financial services.