Financial Inclusion

Reaching the Digital Economy's Last Mile

How global companies can help advance digital financial inclusion of consumers, employees and entrepreneurs in developing economies.

By: Dan Salazar

January 22, 2019

Over the last decade, the world has made tremendous progress in expanding access to financial products and services for underserved communities. The 2017 Global Findex database shows that 1.2 billion adults have obtained a bank account since 2011, including 515 million since 2014. Access alone, however, is not enough to achieve meaningful financial health. One-fourth of financial accounts opened in developing countries are dormant. Some account holders, as a recent study in Mexico showed, simply convert the digital payment to cash. Clearly more work is needed to ensure that the base of the pyramid (BOP) users can join, participate and benefit from growing digital economies.

A new series of papers by Mastercard’s Global Prepaid team highlights various pathways for building robust, commercially viable approaches to digital financial inclusion.  Global companies, with their vast networks, innovation capabilities and reach, are well-positioned to help bring millions of unbanked or underserved consumers into the digital economy.

Establishing a critical mass for digital payments

The potential for digital growth is largely untapped, particularly in sub-Saharan Africa and South Asia. Globally, 37 percent of person-to-merchant payments are digital. In sub-Saharan Africa and South Asia, this percentage drops to 14 to 16 percent. Addressing these opportunities can unlock the spending potential of financially underserved populations, who collectively spend more than $5 trillion per year.

As we show in “Building Digital Liquidity to Enable Payments at the Base of the Pyramid,” the potential for digital growth lies with connecting suppliers and merchants who touch consumers, employees and entrepreneurs who are under or unbanked on a daily basis.

At Mastercard, our goal is to develop and deepen digital liquidity throughout the payments ecosystem. Building digital liquidity means making it easier for people to access a digital account, use it to transact and keep or grow their balance over time. But this development and deepening often doesn’t come effortlessly or all at once. To build digital liquidity in a balanced and inclusive way, we need to develop a full 360-degree view of how consumers receive and make payments.

From our perspective, there are three areas of focus for driving digital liquidity:

  • Payment Inflows. How consumers and businesses receive money—either in the form of wages or social subsidies from the government, or payments from customers.
  • Payment Outflows. How consumers and businesses spend money—at retailers, on transport and basic services, and in payments to suppliers and employees.  
  • Value Chain Payments.  How consumers and businesses participate in value chains.

New opportunities in different sectors

These opportunities offer benefits for society, but also for business. In “The Role for Last Mile Partners in Expanding Payments at the Base of the Pyramid, we highlight various sectors where these opportunities are largely untapped and where global companies can leverage their networks to help bring consumers into the digital economy.

Many merchants and suppliers are already realizing the value of digital transactions: Payments are easier and real-time data makes for better business decisions. Moving away from cash yields greater efficiencies and enables expansion to new markets.

Nontraditional actors such as contract manufacturers, mass transit providers, fast-moving consumer goods companies, energy providers and agribusinesses will be important for building digital liquidity and driving financial inclusion. These are the organizations that sell to, buy from and employ millions of consumers and small merchants who are still left out of the formal economy. These are the sectors where we see the strongest potential for payments growth. Not only do these actors play a critical role in serving the base of the pyramid, they also have a vested interest in the digitalization of their business models. They stand to benefit from the tools—more efficient digital payments, as well as from the outcomes—greater financial inclusion.

Contract manufacturing.  Digitizing payrolls for garment industry workers has shown great promise in reducing inefficiencies. In Bangladesh, for example, 90 percent of salaries paid by businesses are still distributed in cash. There, Business for Social Responsibility partnered with the Bill & Melinda Gates Foundation to digitize worker salaries in 21 factories. Subsequent surveys found that factories that implemented digital payments saw a 53 percent reduction in time spent on administration. Furthermore, the proportion of women who could not save because a family member controlled her wages decreased by 69 percent.

Mass transit.  Even as urbanization takes hold around the world at a rapid pace, mass transportation remains unaffordable for the poorest 20 percent of the population in many emerging cities. The opportunity to digitize recurring transit payments presents benefits for governments, business and society as a whole. Access to convenient and affordable mass transit will allow cities to operate more efficiently and enable greater economic mobility.

Fast-moving consumer goods.  Digital payments also provide access to new markets and new revenue sources for merchants. The Jaza Duka partnership between Mastercard and Unilever is one great example. By digitizing information from suppliers and local distributors, we can analyze merchants’ purchase history, and transform it into a proxy for credit. Together with Unilever, we created a safe digital platform for merchants to access and use low-risk micro-credit, which is underwritten by a local bank. Participating merchants saw sales grow 20 percent on average in the first six months after gaining access to the loans.

Energy access.  The revolution we are witnessing in energy access, especially with the introduction of pay-as-you-go (PAYG) providers, will not be possible to scale without the incorporation of digital payments. The combination of solar technology, the internet of things (IoT) and digital payments has produced a new business model capable of reaching millions of new consumers who were previously off the grid. Mastercard formed a partnership with M-KOPA, a PAYG provider operating in East Africa, to provide an open and interoperable solution that allows customers to make payments through the use of QR codes and their mobile phones. Furthermore, we believe that energy access is only the beginning of applications for the PAYG business model, which has the potential to bring valuable products and services to entirely new markets, leveraging the data captured through consistent digital transactions.

Agriculture.  Finally, food and beverage companies that source agricultural products are another high-opportunity sector. Digital payments make doing business for the smallholder farmer safer and more efficient. The farmer no longer has to hold large amounts of cash during harvest, for example. And doing business digitally means fewer farmers must travel long distances to markets. For agribusinesses, having more digital payments means more real-time data on transactions up and down the chain, which can inform better business decisions. Digitizing transactions between the agribusiness and a farmer also creates a “data footprint” that allows greater supply chain visibility.

A win-win for all

While these stakeholders have not traditionally been considered drivers of financial inclusion, they have a vested interest in and stand to benefit from greater financial inclusion and digitization of payment ecosystems. It is abundantly clear: we cannot make progress toward sustainable change without collaboration with “last mile” partners who also believe in the power of financial inclusion and digitization to lift people out of poverty. Furthermore, “last mile” stakeholders who participate in this effort will gain corresponding benefits to their business while also helping to create a robust payments ecosystem.

By engaging with a broad and diverse group of strategic “last mile” partners we can tackle the challenge of viable financial inclusion and help move hundreds of millions of people toward financial health and inclusive growth.