metadata: authors: 0: author: Klapper,Leora
count: World
docna: 0: docna: Expanding Financial Inclusion through
            Digital Financial Services : A Literature Review
docty: Policy Research Working Paper
abstracts: cdata!: Worldwide, account ownership increased
            by 50 percent in the 10 years spanning 2011 to 2021, to
            reach 76 percent of the global adult population. The goal of
            financial inclusion is not just for more adults to have
            accounts but for account owners to benefit from using them,
            such as for digital payments, which provide a range of
            positive benefits that extend far beyond convenience. This
            paper reviews the evidence demonstrating how digital
            payments can expand financial inclusion among recipients and
            encourage the use of additional formal financial services,
            such as savings, credit, and insurance. It explores how
            digital transactions offer greater security and privacy,
            especially for women, as well as opportunities to build a
            digital credit history for credit risk assessments. The
            introduction of digital payments to low-income adults brings
            some risks, however, such as fraud and phishing scams
            targeting accounts, over indebtedness in digital credit, and
            customers receiving incomplete or incorrect information on
            the fees and costs of financial products.
display_title: Expanding Financial Inclusion
            through Digital Financial Services : A Literature Review
listing_relative_url: /research/2024/12/34438665/expanding-financial-inclusion-through-digital-financial-services-literature-review
topicv3: Private Sector Development m1326060 1921,Economic Growth m1326241 471,Information and Communication Technologies
            m1326624 133,Gender m1327621 615,Financial Sector Development m1327681 1920
publishtoextweb_dt: 2024-12-19T00:00:00Z
dois: 10.1596/1813-9450-11008
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 22
author_keys: 0: author_key: 390572
model_extractions: Policy Research Working Paper 11008 Expanding Financial Inclusion through Digital Financial Services A Literature Review _Leora Klapper_ Development Economics Development Research Group December 2024
Policy Research Working Paper 11008

# **Abstract**

Worldwide, account ownership increased by 50 percent in the 10 years spanning 2011 to 2021, to reach 76 percent of the global adult population. The goal of financial inclusion is not just for more adults to have accounts but for account owners to benefit from using them, such as for digital payments, which provide a range of positive benefits that extend far beyond convenience. This paper reviews the evidence demonstrating how digital payments can expand financial inclusion among recipients and encourage the use of additional formal financial services, such as savings, credit, and insurance. It explores how digital transactions offer greater security and privacy, especially for women, as well as opportunities to build a digital credit history for credit risk assessments. The introduction of digital payments to low-income adults brings some risks, however, such as fraud and phishing scams targeting accounts, over indebtedness in digital credit, and customers receiving incomplete or incorrect information on the fees and costs of financial products.

This paper is a product of the Development Research Group, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The author may be contacted at lklapper@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
**Expanding Financial Inclusion through Digital Financial Services: A Literature Review**

**Leora Klapper, Development Research Group, World Bank**
# **1. Introduction**

Access to financial services—including payments, savings, credit, insurance, and investment products—allows households and small businesses to mitigate economic shocks, as well as build healthy and productive futures. Digital financial services, when used responsibly, makes these benefits more widely available, thereby driving financial inclusion for women and other underserved groups.

Expanding access to finance through digital channels and methods is one of the primary strategies for meeting United Nations Sustainable Development Goal 8.10, which targets ownership of an account at a formal financial institution, such as banks, regulated microfinance institutions, and mobile money service providers. Account ownership is just the first step, however. To truly reap the benefits of financial inclusion, account holders must be able to confidently and responsibly use their account to store money, save for the future, access credit, and make payments.

In this paper, we discuss the academic evidence on the benefits of digital financial services for expanding financial inclusion. We bring data from the demand-side Global Findex showing where technological enablement is associated not only with increased account ownership but also—and more significantly—with increased _usage_ of financial services. Direct digital payments out of and into an account are the most significant and dispersed way in which adults are using their accounts, and an example of how digital approaches help deliver the benefits of financial inclusion for more people. The data also points to opportunities to expand financial access and usage by supporting payment digitalization, including with stronger consumer protection.

# **2. Account ownership**

Account ownership is important as a financial foundation for reducing poverty and empowering individuals. Its benefits include a greater ability to save money (Breza, Kanz, and Klapper, 2020; Blumenstock et al. 2018), greater female empowerment (Ashraf et al., 2010; Field et al., 2021), and improved agricultural outputs (Brune et al., 2016). Importantly, account ownership is associated with increased financial resilience, based on research showing that adults with 2
accounts are better able to endure sudden unexpected financial demands than their unbanked peers (Pomeranz and Kasst, 2022).

While owning an account at a financial institution provides numerous benefits, it can be difficult for some users to leverage accounts without access to digital channels. Digital financial services—including accounts designed to be used primarily or exclusively via digital channels, such as the internet or a mobile phone—have the power to expand account ownership to individuals for whom traveling to a bank would be difficult. Mobile money is one such digital financial service fulfilling that promise. A telecom or financial technology firm (fintech) offers these accounts directly to customers, independent of the traditional banking network. Mobile money services are designed to be accessed via mobile phone and supported through local mobile agents—these are independent providers who operate out of convenience-type brick-andmortar stores or kiosks. Customers can use them to execute transactions, such as depositing small amounts of cash, making payments, paying bills, sending remittances, or storing money outside of the home.

There are several account ownership benefits associated with mobile money. They include the ability to send money to and receive money from a more widely dispersed social network (Jack and Suri, 2014; Riley, 2018), resulting in more efficient remittance payments and greater consumption for those living in rural areas (Munyegera and Matsumoto, 2016; Lee et al., 2021). Mobile money account holders have also shown they are more likely to access medical care when they need it (Ahmed and Cowan, 2021) and less likely to rely on dangerous sources of income like transactional sex (Jones and Gong, 2021). Women mobile money account holders experience less poverty (Suri and Jack, 2016). Though mobile money is distinct from mobile _banking_ , which are traditional banking services provided by the customer’s bank, microfinance institution, credit union, etc. and accessed through a mobile phone, there might be similar benefits achieved.

Sub-Saharan Africa and a small number of other countries have seen their financial sectors transformed by mobile money operators. They make finance more accessible by eliminating or reducing distance and costs, two of the most common barriers unbanked adults say prevent them from owning an account. Since digital services can be accessed anywhere by users with a mobile phone or another network-enabled device, and they are often less expensive than traditional 3
analog services or cash transactions, they could be more accessible for members of underserved groups such as women, low-income adults, rural households, and youth.

Thirteen percent of adults in middle- and high-income countries worldwide have a mobile money account as of 2021, up from 4 percent in 2017 (Global Findex 2021). In Sub-Saharan Africa, 35 percent of adults use a mobile money account and about three in five of those account holders _only_ have a mobile money account. The rest have accounts with both a mobile money provider and a bank or similar financial institution. It is difficult to overstate the significant role these accounts are playing in expanding financial access and use in the region. Since 2017, account ownership at a bank or similar financial institution in Sub-Saharan Africa has been flat, yet overall account ownership has grown by 12 percentage points—all of it attributed to adults opening a mobile money account.

# **3. Digital payments**

A digital payment is one where money is directly sent into or received from a recipient’s mobile money or financial institution account. This includes payments made using a debit or credit card, a mobile phone, or the internet. Digital payments include making in-store or online merchant payments; paying utility bills; and sending or receiving domestic remittances; as well as receiving payments for agricultural products; receiving wages; or receiving government transfers, or a public pension directly from or into an account.

Digital payments play an essential role in catalyzing the benefits of account ownership, especially for vulnerable populations. To best conceptualize the benefits of digital payments, it is important to understand how people make and receive payments when digital payment services are not available or widely used.

# **3.1 The costs and risks of a cash economy**

In places that lack digital payments infrastructure, adults—even those with accounts—receive their wages in cash and must use cash to purchase their daily necessities. If they want to or need to use an account, they must travel to the nearest bank, either carrying the money they would like to deposit on the way there, or the money they have withdrawn on the way home. For rural, poor, 4
and female account holders, this travel can be both dangerous and costly. Traveling with large sums of money makes individuals vulnerable to theft and potential violence. Some local governments distribute social benefits at known times and locations, making it easy for thieves to target people.

These issues can be exacerbated for people living in rural areas that lack bank branches. If an account holder wants to make a deposit, withdraw money, or use their account, they must travel all day, potentially paying for bus or travel fare and missing a day’s work, along with the wages that come with it. Even urban residents must send physical cash if they want to supplement their family’s income in their home village, and the recipient lacks a way to receive it directly into an account.

Each of these risks is higher for women, who face more threats to their personal safety and have greater responsibilities in the home, which make it difficult for them to travel alone to a bank. These barriers could lead individuals to conclude that their money is safer in cash in their home—despite the risks of theft, loss, or loss of control, that exist there. Without digital payments, many individuals face barriers to account adoption that negate the potential benefits.

Owning and using digital financial services can help mitigate or even eliminate these risks by allowing users to access services and execute transactions through a mobile phone or an internetenabled device. With digital financial services, users can transfer money quickly and safely over long distances, regardless of the physical location of senders, recipients, or banks. Instead of traveling to their place of employment to receive wages, to a government building to receive a transfer payment, or to the bank to make a deposit or withdrawal, users can execute these financial transactions from their device wherever they happen to be. It is therefore not surprising that two thirds of adults in Kenya report that the mobile money service M-Pesa is the quickest and easiest way to receive money from family living elsewhere (GSMA, 2014).

This combination of convenience, safety, and efficiency inherent in digital financial services pays off in the form of concrete development outcomes, such as higher consumption, investment, and remittance payments. A study from Kenya found that mobile money users facing an unexpected negative income shock were able to draw support from a geographically dispersed social network and as a result, did not have to reduce consumption. Nonusers, in contrast, reduced food and other purchases by between 7 percent and 10 percent (Jack and Suri, 2014).

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Similarly, in Tanzania, where a large share of the population depends on agriculture for their livelihood, mobile money users were able to maintain their levels of consumption during periods of low rainfall when average consumption decreased (Riley, 2018).

# **3.2 Crime and digital payments**

While digital transactions make mobile money users less susceptible to crimes, they also affect crime more broadly. In the 1990s in the United States, the federal government mandated that social benefits be paid electronically. Taking advantage of the time variation in program roll-out, Wright et al. (2017) studied the effects of digital payments on regional crime. They found that electronic benefit payments were associated with a 10 percent reduction in crime over the next 20 years. Delivering social benefit payments directly to recipients meant that pilfering intermediaries could not easily steal them. The intended recipient received their full benefit payment, and less cash circulated on the black market.

It is also more difficult for corrupt actors to seek and receive bribes when payments are digital, because digital payments are traceable, and recipients have records of total benefits they were expecting and that they received. For example, in India, instances of bribery associated with social security or pension payments decreased 1.8 percentage points (or 47 percent) when payments were made digitally instead of in cash (Muralidharan et al., 2016).

## **3.3 Necessary Precursors to digital payments**

While the benefits of digital payments are vast, there are several necessary precursors that need to be in place before they can be successfully deployed (for a framework of the enablers of digital payments see the World Bank, Bank for International Settlement (BIS) and Committee on Payments and Market Infrastructures (CPMI), 2020). . First, people need equitable access to mobile phones and information and communications technology (ICT) infrastructure, so they can access accounts and the networks necessary to make transactions. Interoperable payment networks and network security are also essential to ensure transactions are safe and can be made between people using different payment platforms (such as between mobile money users and traditional bank account owners). Finally, data privacy and consumer protection regulations are essential for preventing fraud, ensuring that users are not taken advantage of, and providing recourse if they do fall prey to malicious actors or need to dispute a transaction.

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The emergence of Fast Payment Systems (FPS)—also known as instant or real-time payments— has accelerated the digitalization of many of these transactions. FPS enables funds to be transferred instantly, are available 24/7, and often use features like QR codes, payment requests, and phone numbers instead of account numbers. FPS are now available in around 110 jurisdictions and the World Bank’s Project FASTT (Frictionless Affordable Safe Timely <u>Transactions)</u> is supporting low-and middle-income countries in enhancing and implementing fast and secure digital payment systems.

# **4. The benefits of digitalizing different payment types**

Several types of payments bring distinct development benefits to payers and recipients. These include payments that individuals receive, such as government transfers, wages, agriculture payments, and remittances, as well as payments they make, like utility bills and merchant payments.

# **4.1 The development impact of digital government payments**

Eighty-five million unbanked adults receive government payments in cash, including 45 million women, and 40 million adults in the poorest 40 percent of households in their economy (Global Findex, 2021). Digitizing these government payments has the potential to produce several positive outcomes for both governments and recipients. These include motivating greater account ownership, reducing administrative costs, and decreasing the time it takes for people to receive their funds.

# **4.1.1 Government payments can motivate account ownership**

Eighteen percent of adults in developing economies opened their first financial institution account to receive a payment from the government (Global Findex 2021). Even before the COVID-19 pandemic, when the volume of government payments increased across the world, 140 million women globally had opened their first account to receive digital government payments. This association between government payments and first account opening persists even in some high-income countries. In Argentina for example, 20 percent of women account owners opened their first account to receive digital government payments (Miller et al., 2020). By digitalizing payments, governments can incentivize recipients to open accounts, a first step in delivering the financial benefits associated with account ownership.

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# **4.1.2 The greater efficiency of digital government payments**

Delivering cash payments is costly for both governments and recipients. To do it, governments need to acquire large sums of cash and have the infrastructure to administer payments to recipients. Similarly, recipients must travel to central locations to receive their payments, which can create physical security risks and comes with opportunity costs due to lost wages or productivity.

Digitalizing government payments, in contrast, increases efficiency by reducing the administrative burden of payment disbursement as well as the time lag between payment deployment and payment receipt, according to multiple research studies.

A study from Niger, for example, found that switching government transfer payments from cash to digital delivery reduced administrative costs by 20 percent compared with the cost of disbursing payments in cash (Aker et al., 2016). Similarly, the government of South Africa found that disbursing payments by smart card cost just one third of what manual cash payments cost (CGAP, 2011). In Mexico, a 1997 switch to digital payments reduced spending on wages, pensions, and social welfare by an estimated 3.3 percent annually, the equivalent of about $1.3 billion (Babatz, 2013). The authors attribute the reduction in spending to a reduction in unauthorized or incorrect payments and, to a smaller degree, to increased interest payments and reduced bank fees to the government, which no longer had to withdraw large sums of cash to make payments.

Governments can also gain revenue by digitalizing payments, according to a study in Cambodia, which found that digitalizing person-to-government payments to the Ministry of Public Works and Transport was associated with a doubling of revenue from almost $15 million in 2017 to $37 million in 2019 (Fichers and Naji, 2020).

In Mexico and in India, reductions in fraud brought significant cost savings from payment digitalization. Specifically, when India transitioned from cash to digital pension payments, instances of internal fraud and leakage dropped by 47 percent. This saved the government millions of dollars, enough to cover the development costs of the new digital benefits system. The digital pension program also brought benefits for recipients, reducing the amount of time 8
they spent collecting their payments and increasing the value of their payments, since they received the full amount (Muralidharan, Niehaus, and Sukhtankar, 2016).

While useful and convenient in normal times, the speed of digital government payments can be especially important during an emergency. For example, during the Ebola crisis, the Liberian government was able to quickly pay healthcare workers in rural areas by providing accounts and digitalizing payments into them (BTCA, 2015). Similarly, digital payments made quickly can help prevent recipients from reducing consumption during a negative economic shock. In Bangladesh, for example, recipients of a government emergency program that provided mobile money payments in anticipation of peak flooding were 36 percent less likely to go a day without eating (Pople et al., 2021). Similarly, Syrian refugees who received digital transfers via cards spent $25 more per month on food and water than non-recipients (Lehman and Masterson, 2014).

# **4.1.3 The benefits of digital government payments for women**

Receiving government payments digitally brings many specific benefits for women. In addition to greater economic freedom and independence, they and their children also benefit from several positive externalities.

One of the biggest benefits of digital government payments for women is privacy. Because accounts belong to individuals, and payments into accounts are private, recipients can—at least temporarily—keep the fact of the payment private from family members or friends who would ask for the money if they knew about it.

The evidence for this idea shows that women’s consumption choices change when they have access to their own account, and those choices often benefit both them and their children. For example, in Niger, women who received mobile money safety net payments after a drought spent between 9 percent and 16 percent more than those who did not receive the payments on items that they prioritized, such as more nutritious food (Aker et al., 2016). This change in consumption persisted even when the program and payments ended, suggesting that account ownership and use empowered women by increasing their household bargaining power.

Similarly, a study in India found persistent socio-cultural effects associated with government payments for women. Women who received social benefit payments into their own account were 9
more likely than those paid in cash to find employment. Women whose husbands were opposed to them working saw the largest treatment effects (Field et al., 2021).

These findings suggest that account ownership and having control over one’s income can impact cultural norms and empower women to make their own financial decisions. Importantly, there is evidence that digital government payments are also popular with women. A study from Bangladesh found that 80 percent of mothers preferred to receive education subsidy payments digitally, citing reduced wait times and no longer needing to travel as reasons for their preference (Gelb et al., 2019).

# **4.2 The benefits of digitalizing wage payments**

One-hundred-sixty-five million unbanked adults, including 50 million women, and 70 million adults in the poorest 40 percent of households in their economy, received private sector wage payments in cash (Global Findex 2021). Like government payments, digitalizing wage payments yields important benefits for both payment recipients and senders. As with digitalized government payments, digital wage payments are responsible for motivating increased account ownership. According to the Global Findex 2021, 32 percent of adults and 29 percent of women reported opening their first account to receive a wage payment.

A further benefit of digital wage payments relates to savings. Numerous studies find that digital wage payments are associated with increased savings and a greater tendency to keep payments stored in an account. Studies in Bangladesh and Afghanistan find that workers paid digitally saved more than those who were paid in cash (Breza, Kanz, and Klapper, 2020; Blumenstock, Callen, and Ghani, 2018). In Bangladesh, this increased saving and account usage was also associated with greater financial literacy—workers paid digitally developed the ability to use their accounts without assistance and to avoid illicit withdrawal fees (as compared to workers who received an account but continued to be paid in cash). Given that 62 percent of both unbanked adults and unbanked women in developing economies report being unable to use a financial institution account without assistance, understanding that users can “learn by doing” could incentivize firms to digitalize payments even if recipients are reluctant, and deliver effective onboarding or ongoing support to ensure they develop the financial capabilities to use them.

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Digital wage payments are also cheaper and safer for recipients. In Liberia, teachers who were paid digitally saw the cost of receiving their payments fall 92 percent (including bus fare) from $25 per paycheck to $2. This cost reduction was accompanied by an increase in time spent teaching—because they were paid digitally, teachers no longer had to travel to town to receive their wages and instead spent more time in the classroom (Dusza, 2016). Eliminating travel also improves recipient safety, as noted in the section on digital payments and crime (Wright et al., 2017).

Additional benefits of digital wage payments come from their speed and efficiency compared with manual cash payments. Outcome data collected from firms that digitized wage payments (i.e., not in comparison to a control group) suggests that these benefits apply also to the firms making them. In Jordan, three garment factories that digitized their wage payments saw the time needed to make payments decline by between 66 percent and 70 percent, depending on the type of account the wage was paid into (BTCA, 2021a). Similarly, in India, after transitioning to digital wage payments, the clothing company GAP saw savings equal to the wages for 16 fulltime workers per month (BTCA, 2021b). In Senegal, 82 percent of businesses reported that they felt safer with digital payments because they did not need to travel with all employee paychecks (BTCA, 2021a).

# **4.3 The benefits of digitalizing agriculture payments**

In developing economies, 160 million banked, and 145 unbanked adults received agricultural payments in cash (Global Findex 2021). In contrast to wage and government payments, agricultural payments have a very low rate of digitalization: of the 11 percent of adults in developing economies who received them, three quarters received them in cash. The one exception to this trend is Sub-Saharan Africa, where the share of adults receiving agricultural payments is higher at 26 percent—more than twice the developing economy average—and a higher share received them into an account. This is likely a byproduct of payment digitalization programs initiated by large supply chain wholesalers and enabled by large, rural, mobile money agent networks—a large share of the region’s digitalized agriculture payments are paid into mobile money accounts.

Digital agricultural payments allow farmers to more efficiently access new markets and better agricultural inputs, improve their resilience to shocks, and increase their productivity. When 11
transacting solely in cash, in contrast, there may be information asymmetries between farmers and markets, resulting in farmers selling their goods for less than their market value, resulting in lower incomes and higher risk. Digital financial services can help address this by improving transparency about market prices across agricultural value chains, allowing farmers to reduce their dependence on intermediaries and experience shorter transaction times (GSMA, 2019). Digital financial services also make it easier to access more complex financial products like index insurance, which allow farmers to mitigate risk and smooth consumption when faced with income shocks (Delavallade et al., 2015).

As it relates to productivity, digitalizing agricultural payments can positively impact crop yields and investment. A study in Malawi found that farmers who received wages into an account rather than in cash spent 13 percent more on farming equipment and saw a 15 percent increase in crop value (Brune et al., 2016). Similarly, in Kenya, mobile money users purchased more inputs, including fertilizer, labor, and pesticides, and sold a higher percentage of their harvest (Kikulwe, Fischer, Qaim, 2014).

As for efficiency gains, evidence from a coffee-buyer in Uganda suggests that digitalizing payments saves time and money and reduces risk (Kvaran and Peters, 2017). In Tanzania, an agricultural exporting company found that switching from cash payments to digital payments reduced time and financial costs for farmers; the savings totaled 6,000 hours and $8,000 for the 300 affected farmers (Seetharam and Johnson, 2015). Another coffee farming study in Uganda found that farmers who use mobile money received 5 percent higher prices on average for their coffee than non-users, because they were able to access higher-value markets and rely less on local traders (Sekabira and Qaim, 2017). Finally, a 2017 study in Cote d’Ivoire found that farmers with mobile wallets saved more and were 50 percent less likely to face difficulty feeding their families (Lonie et al., 2018; IFC, 2019).

# **4.4 The benefits of digitalizing remittance payments**

In 2021, approximately 125 million unbanked and 150 banked adults in developing economies sent or received domestic remittances exclusively in cash (Global Findex 2021). Remittances can be a crucial tool for reducing poverty, especially for rural households, where more than half of remittances are sent (IFAD, 2022), as they tend to be poorer and have fewer economic opportunities than households in more urban areas. Crucially, digital financial services reduce 12
the cost of sending and receiving remittances and thus are associated with reduced poverty and increased consumption among recipients.

Digital payments make remitting easier and quicker. Instead of having to pay someone to carry cash back to the village or waiting until they have the time and money to travel home, senders using digital remittance payments can use their mobile phone to send money instantly. This ease of use is associated with higher remittance payments. For instance, a study in Bangladesh found that poor rural households received larger remittance payments when they opened a mobile money account. This in turn reduced their dependence on borrowing, allowed them to spend more on food, and made them less likely to experience extreme poverty (Lee et al., 2021). A similar finding from in Uganda showed that opening a mobile money account was associated with a 36 percent increase in the total value of remittances and a 13 percent increase in per capita consumption (Munyegera and Matsumoto, 2016).

Curiously, another study in Bangladesh finds evidence of the opposite: that mobile money decreases consumption among recipients. An explanation for this finding is that recipients and senders view digital remittances differently. Unlike cash, digital remittances may be earmarked for specific purposes like education or health. As a result, recipients consume less when under financial stress despite receiving a payment (Lee et al., 2023).

The G20 has also recognized the importance of efficient cross-border digital payments, including remittances, and has brought together various stakeholders and standard-setting bodies to advance these efforts (G20, 2020). For example, the World Bank and the IMF provide technical assistance to to promote digitalization and improve transparency, with the goal of lowering costs and increasing the speed of cross-border payments.

# **4.5 How digital payments enable deeper financial usage**

Previous iterations of the Global Findex database found that digital payment recipients tended to cash out the money they received into an account. Data from the Global Findex 2021 finds that is changing, with 83 percent of digital payment recipients in developing economies also making a digital payment. Furthermore, 63 percent of payment recipients stored money using an account and 42 percent saved formally. In other words, receiving a digital payment is associated with making a digital payment, and with using an account to save, borrow, and store money. This has 13
important implications not only for end-user safety, efficiency, and convenience, but also for the ability for account holders to access credit.

Historically, financial institutions managed the risks of lending by only issuing loans to people with a proven history of paying loans back as evidenced by their credit history, and by requiring collateral to secure the loan. These methods can be effective if a potential borrower has a credit history and valuable collateral to offer. Yet many low-income adults and women do not. The practical consequence of relying on credit histories, therefore, is that low-income adults, women, migrants, and other excluded groups are shut out of formal credit markets (Demirguc-Kunt, Klapper, and Singer, 2017).

Establishing a pattern of payments in and out of an account via digital payments can function as a form of “alternative data” that lenders can use to assess borrower risk. Using mobile money services to make digital payments creates an official record of income and spending. Users with a limited financial history can leverage this payment record to obtain credit under more favorable loan terms.

Examples of alternative data sources include bank deposits and withdrawals, mobile money transaction histories, airtime top-ups, utilities payments, payroll, rent, and taxes, among others (World Bank, 2022). Evidence shows that using alternative data and risk assessments results in lenders extending more loans to low-income borrowers. For example, studies in the United States suggests that including data on past utility and telecom payments in risk assessments reduced the share of adults that were assessed as having no credit score from 12 percent to just 2 percent (Turner et al., 2012; Turner and Varghese 2010). In China, an alternative data model resulted in increased credit access for borrowers who either would not have been offered loans or who would have been required to put up collateral (Feyen et al., 2020). Similarly, another study in the United States found that more individuals were offered loans at an affordable interest rate when the lender incorporated previous transaction data into risk assessments (Jagtiani and Lemieux, 2018).

While alternative data can help potential borrowers access credit, it also has been found to be beneficial to financial institutions, based on evidence that it is “at least as predictive as that held by credit bureaus” (World Bank, 2022). Evidence from Kenya found that using payment and transaction history in creditworthiness assessments reduced the share of nonperforming loans, 14
improving the stability of the financial sector (Cook and McKay, 2015). Similarly, a study from South America found that mobile call data could be used to accurately predict creditworthiness (Björkegren and Grissen, 2020). In Germany, credit-scoring models based off a user’s digital footprint outperformed those based solely on credit scores (Berg et al., 2020)

# **5. The importance of consumer protection for enabling safe and beneficial digital payment adoption**

Throughout this paper, we have highlighted the benefits of digitalizing payments for both senders and recipients. It is necessary to also acknowledge, however, the risks that come with advanced digitalization.

The marketplace for retail financial services can be challenging to navigate, especially for financially inexperienced adults. Although millions of people have been able to take advantage of digital financial services and mobile money, using them safely and in a way that delivers benefits requires both financial and digital skills, which many low-income adults do not have.

Atop these challenges lie several consumer risks that can be exacerbated by the speed and rapid change inherent to digital financial services. Responses to Global Findex 2021 survey questions reveal some of them. For example, the survey asked respondents about their ability to use their account without help. In Sub-Saharan Africa, 31 percent of mobile money account holders could not. Women were more likely to say they could not. That is consistent with a government-toperson (G2P) mobile payments study showing that women were significantly more likely than men to send a representative to cash out government transfer payments (Glynn-Broderick and Koechlein 2021). Women are also more likely to report that their transfer was spent by another family member and to say they had to pay a fee or a tip to an agent to get their money when, officially, there should have been no charge. A nationally representative survey in Côte d’Ivoire similarly found that women are less likely than men to understand the financial products offered through their phones and more likely to lose money to scams (CGAP 2022).

Further Global Findex questions about fees likewise show that in some economies, a high percentage of adults receiving digital wage payments directly into a mobile money account paid unexpected fees to do so. While it is not clear whether these fees were illicit or that the recipient did not understand the fee schedule of their account, they point to ways in which financially 15
inexperienced adults can be vulnerable, especially when they lack information about their account and how they can use it.

# **6. Conclusion**

Digitalizing payments is not simply a matter of incentivizing account owners to use an account. Payment recipients do not always have a choice about how the payer gives them their money. Nor can an account owner use it to pay digitally if a utility company or merchant does not allow it. In many economies, more advanced financial infrastructure—enabled by actors such as governments, telecommunications providers, payment processors, and financial service providers (including fintechs)—is required for safe, affordable, and convenient products to be available.

Likewise, mobile phones and the internet can only facilitate the use of accounts if account owners have reliable electricity, data connectivity, and mobile networks. People will be less inclined to use digital payments if they view them as undependable due to technical problems. Digital enablement is therefore a key prerequisite to enable digital payment adoption—and thereby broader financial inclusion.

All authors are at the World Bank. Corresponding author: Leora Klapper, lklapper@worldbank.org. We are grateful to Laura Starita for excellent editorial support and to Holti Banka, Saba Bint Abbas, Dorothee Delort, and Oya Pinar Ardic for excellent comments. This work was supported by the World Bank Development Research Group. The opinions expressed in this paper do not necessarily reflect the views of the World Bank, its executive directors, or the countries they represent.

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