Cashing out: Ruth Goodwin Groen in The Economist Intelligence Unit

Original Article in The Economist
by Ruth Goodwin-Groen @RuthGoodwinG
July 14, 2015

The UN’s Third International Conference on Financing for Development in Addis Ababa this week poses a crucial question: what investments are needed to actually deliver a more sustainable, inclusive and prosperous future? Countries that have invested in the shift to digital payments have a compelling answer.

The Addis Conference brings together governments, businesses and civil society to mobilise the resources needed to implement the UN’s Sustainable Development Goals (SDGs—the foundation of the post-2015 development agenda) and a new global climate agreement, both of which are due later this year. The Addis Conference is an opportunity for policymakers to turn rhetoric into action, by agreeing on the funding and financial tools that can put the SDGs within reach.

The good news is that many of the solutions, technologies, and skills needed to achieve these global goals already exist. One important factor is the transition from cash to digital payments. There is growing evidence that digitising payments boosts transactional efficiency, reduces costs, improves transparency and accountability, unlocks domestic resources, and drives financial inclusion in the places that need it most.

Consider, for example:

In Mexico, the government trimmed its spending on wages, pensions, and social welfare by 3.3% annually, or nearly US$1.3bn, by centralising and digitising its payments;[1]

In Brazil, the Bolsa Família cash transfer program cut its transaction costs from 14.7% of total payments to 2.6% when it bundled several benefits onto one payment card;[2]

In India, a McKinsey study estimates savings for the government of over US$22bn annually through automated payments that help reduce transaction costs and fraud.[3]

Not only can digital payments deliver major cost savings in straightened fiscal times, they also offer governments a rare boost on the revenue side of national ledgers. By bringing more people and businesses into the formal economy, digital payments can vastly expand a country’s tax base, providing new funds to invest in the drivers of productivity and growth.

And with digital payments still having much room to grow in many parts of the developing world, the opportunity for greater financial inclusion is immense. Some 2bn individuals[4] around the world are still excluded from formal financial services. Similarly, almost half of all SMEs in low-income countries remain locked out of the basic financial services they need to grow and generate more jobs.

The financial exclusion of so many people and businesses – all potential sources of economic growth –makes no sense, particularly at a time when growth is now slowing in much of the developing world. Figures like these also demonstrate why drafts of the Addis Accord prepared in advance of the conference repeatedly call for greater financial inclusion, including for women and SMEs.

These figures are also a reminder of the huge economic opportunities presented by digital payments. The Economist itself devoted a front cover earlier this year to the emerging “Planet of the Phones”, in which four out of five adults will have a smartphone by 2020. With these technological tools and digital know-how expanding so rapidly around the world, the commercial opportunities for businesses that have the foresight to invest in digital payment capabilities are considerable.

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[1] Babatz, 2013, “Sustained Effort, Saving Billions: Lessons from the Mexican Government’s Shift to Electronic Payments.” Better Than Cash Alliance Evidence Paper: Mexico Study

[2] Lindert, Hobbs, and de la Briére, 2007, “The Nuts and Bolts of Brazil’s Bolsa Família Program: Implementing Conditional Cash Transfers in a Decentralized Context.” World Bank Social Protection Working Paper No. 0709

[3] Ehrbeck et al, 2010, “Inclusive Growth and Financial Security: The benefits of e-payments to Indian society.” McKinsey & Company Financial Services

[4] Demirguc-Kunt et al, 2015, “The Global Findex Database 2014: measuring financial inclusion around the world.” Policy Research working paper no. WPS 7255. Washington, DC: World Bank Group