A new report on the opportunities for digitising payments (20-page / 1.50MB PDF) sent to the G20 global partnership for financial inclusion by the World Bank Development Research Group, the Better Than Cash Alliance, and the Bill and Melinda Gates Foundation said that digital payments can help boost economic growth and deliver wider benefits, including improving people's access to financial services in developing countries.
"Not only are digital payments more efficient than cash payments, but their broader adoption also can reduce rates of corruption and violent crime, reduce the cost of government wage and social transfer payments, offer new pathways into the financial system for the disadvantaged, and, importantly, contribute to the ongoing objective of women’s economic empowerment," the report said.
However, the report highlighted a number of challenges that exist to the spread of digital payments, including the safety and reliability of the payment schemes themselves and a lack of physical branches, ATMs and other infrastructure particularly in rural areas of developing countries to compliment mobile payment advancements.
"While the widespread use of mobile phones in low-income countries seemingly suggests it would be easy to provide digital payments by mobile transfer even in countries with the most rudimentary banking systems, widespread mobile phone use is not sufficient," the report said. "Providing physical access to financial services or cash-in/out points and ensuring sufficient liquidity at access points, including in rural areas, remain the core challenges in moving toward digital payments."
"Furthermore, digital payments also face significant infrastructure challenges. The lack of electricity with which to power mobile phones and cell towers, limitations in mobile network coverage, and poor roads and transport networks are all hindrances to the expansion of electronic financial services in rural areas," it said.
Governments should help develop a "supportive regulatory environment" for digital payments, provide for consumer protection and education on the benefits of digital payments and how such systems can be utilised, and also play a "catalytic role in building a digital ecosystem by moving its payments from cash to digital", the report said.
Technology and payments expert Angus McFadyen of Pinsent Masons, the law firm behind Out-Law.com, said the physical, anonymous, largely untraceable nature of cash makes it vulnerable to theft and forgery and means it can be "difficult to transact at a distance". Where "alternative means of transacting are less available", such as in the developing world, this can "cause significant problems", he said.
"Here we have internet banking and cards, but access to these is more limited in the public at large in the developing world," McFadyen said. "What does have mass penetration in the developing world is the mobile phone, and this can be a great means of facilitating and accessing financial services. Many of the devices are old or have limited features and so these services may not be as feature rich as we would expect, but they are still functional – this also means that you can’t necessarily roll out a European mobile payments service into a country with more limited mobile data or fewer modern handsets without redesigning aspects of it."
However, McFadyen highlighted the success of some mobile payment schemes in developing countries, such as the Vodafone-backed M-Pesa service which is in widespread use in parts of Africa, including Kenya.
Digital payment providers are showing increasing interest in expanding into developing countries where the market for gaining customers and growing their business is less saturated, McFadyen said. He said that the often "highly underdeveloped" regulatory framework around digital payments in those countries gives digital payment providers greater freedom in designing their services.
Digital payment providers must, though, recognise that there is a risk that an unstable regulatory environment may change and "destroy propositions", the expert said. McFadyen pointed to the views many regulators around the world have publicised on the rise of virtual currencies like Bitcoin as evidence of how the regulatory environment can develop and erect barriers to certain innovations.