Financial Inclusion

Bridging the digital divide is key to building financial inclusion

September 10, 2021 | By Rama Sridhar

This article was originally published in Forbes.

When Indonesian e-commerce platform Bukalapak recently carried out a successful $1.5 billion stock market listing in Jakarta, it came on the heels of an announcement by Singapore-based rival Grab that it plans a listing on Nasdaq that could value it at up to $40 billion.

The meteoric rise of e-commerce businesses in Southeast Asia has certainly caught the attention of investors, who are waking up to the potential of ride-hailing, digital wallets and logistics as the region’s 400 million internet users embrace cashless payments systems and life-changing delivery offerings.

The region’s digital economy is projected to hit $300 billion by 2025, according to a 2020 report by Google, Temasek, the Singapore state investment company, and consultancy Bain.

Yet behind the headlines and impressive numbers lies a stark challenge for any business engaged in Asia’s e-commerce and payments revolution, which is very much underway in India too: tackling the digital divide and boosting financial inclusion.

Assessing The Digital Divide

A harsh spotlight was thrown on this during the Covid-19 pandemic. As lockdowns kicked in, people turned to the digital world to purchase more goods and services online, raising e-commerce’s share of global retail trade from 14% in 2019 to about 17% in 2020, according to a report published in March by UNCTAD.

But for millions of others, it was a different story. According to the World Economic Forum, the pandemic worsened the digital divide for the estimated 55% of the world’s population that remains unconnected. In Southeast Asia, around (download required)150 million adults — 31% of the population — are digitally excluded, mostly due to illiteracy, low income, the fact that economic activity is concentrated in urban areas and lack of access to capital for small and medium-sized businesses (SMEs).

This means there is an urgent need to narrow the digital divide and thereby boost financial inclusion so that as many people as possible can access anything from basic payments to savings and investments. That’s particularly important for those with lower incomes, the less educated, the elderly, people living in rural areas and women.

Populations that are locked out of the formal digital economy are often deprived of technological empowerment, tend to be exploited through higher fees and can face exposure to more intermediaries as well as higher-risk systems. They also find it hard to educate their children to be fully digitally conversant. And finally, most perniciously, their continued reliance on cash, combined with constrained access to credit, means they cannot break out of a vicious cycle of poverty. That puts digital inclusion on par with universal suffrage: it’s a fundamental right.

Economic Benefits

The economic benefits of digital inclusion are clear. It has been estimated in research commissioned by Mastercard that a fully-realized digital dividend could add $1 trillion to the gross domestic product of countries in the Association of Southeast Asian Nations (ASEAN) by 2025. After adding India’s dividend to the equation, this represents a staggering $2 trillion in potential dividends in the region.

Tackling digital inclusion must start with digital identity. More than 1 billion people lack access to a form of identification. A key enabler is having a robust digital identity verification system in place that all participants use to verify the counterparty they transact with.

One of the most striking examples of this is India’s Aadhaar system. Launched in 2010, it has given digital identities to about 1.2 billion Indians through the use of biometric scans and fingerprinting, giving each citizen a unique 12-digit number, paving the way for millions of unbanked people to sign up for bank accounts. The result has been that the percentage of people aged 15 or over with bank accounts rose to 80% in 2017, from only 35% in 2011, according to the World Bank (download required).

A second building block is expanding internet availability, coupled with access to internet-enabled devices at different price points. Tackling cyber risk and fraud is a third.

Fourth, payment infrastructure is required that uses the best of what’s available globally, provides choice to consumers and merchants and creates interoperability between different national and legacy payment systems.

Work is already underway by the private sector to tackle many of these challenges. Gojek, another Indonesian e-commerce company, and Grab both operate programs to digitize the operations of their “micro” business partners and SMEs. In early 2020, Mastercard partnered with Grab to launch GrabPay Card, Asia’s first numberless card that aims to bring financial inclusion to the millions of underbanked and unbanked in Southeast Asia.

None of this can happen in the right way without regulation that facilitates digital commerce, covering licenses for digital banks, data rights and protection, access to data for third parties, and competition rules.

Every time we pull out a smartphone or card to pay for something, we ought to be reminded that not everyone is yet on the digital train and that there is still work to be done on digital inclusion. With the pandemic having highlighted the urgency, there is even more motivation to reshape existing economic models through the efforts of business development leaders. 

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Rama Sridhar, Executive Vice President, Digital & Emerging Partnerships and New Payment Flows, Asia Pacific, Mastercard