Smartphones and mobile phones are beginning to have more of an impact on the world of finance, and a new report from the McKinsey Consulting Firm suggests that compared to banks, its mobile devices could have a bigger impact on finance in developing nations over the next decade.
Using a mobile phone or the Internet to pay bills has become common in the western world. In-store payments need to be handled as soon as possible, and mobile payment options are becoming more widespread. In developing countries, mobile solutions could make a significant impact but most people there have little to no access to a bank account even though the situation in India is slowly changing.
A new study by McKinsey Global Institute predicts mobile financial services in developing markets are the area to focus on right now. In doing so, the GDP of these economies would increase by nearly US$ 4tn by 2025.
According to the report, digital finance has the potential to provide access to financial services for 1.6 billion people in emerging economies, more than half of them women. It could increase the volume of loans extended to individuals and businesses by $2.1 trillion and allow governments to save $110 billion per year by reducing leakage in spending and tax revenue. Financial-services providers would benefit too, saving $400 billion annually in direct costs while sustainably increasing their balance sheets by as much as $4.2 trillion.
In India, the story may turn sweeter as the financial inclusion will release $689 billion as new loans to individuals and small businesses, while governments of South Asia could gain $32 billion by reducing loop holes in expenditure and tax collection. Financial services providers are also expected to benefit from the shift from cash to digital payments, expanding their balance sheets by as much as $799 billion in India by offering customers digital accounts, which can be 80-90% lower than using physical branches.
Digital finance could boost India’s gross domestic product (GDP) by $700 billion by 2025 and create 21 million new jobs across sectors. According to the report, digital finance, delivered through mobile phones, internet or cards linked to a digital payment system, will benefit individuals, businesses and governments across the developing world, boosting GDP and widening financial inclusion.
The report further suggests “The rapid spread of mobile phones is the game changer that makes this opportunity possible. In 2014, nearly 80 percent of adults in emerging economies had a mobile phone, while only 55 percent had financial accounts—and mobile phone penetration is growing quickly. Mobile payments can lower the cost of providing financial services by 80 to 90 percent, enabling providers to serve lower income customers profitably.”
Currently less than one percent of transactions are made through digital platforms in India.
"Digital tools allow us to reach people left out of financial services," said Michael Schlein, president and CEO at Accion, a global microfinance and fintech non-profit organisation. "What's radically changing are disruptive new digital tools. All of a sudden far distances that used to be insurmountable and transaction sizes that were prohibitively small are no longer."
The new tools could be life-changing for a huge portion of the world's population, Schlein said. More than half of the 1.6 billion people who McKinsey researchers said can be reached by these technologies are women. And in addition to the individuals outside the financial mainstream, 200 million businesses also stand to benefit from access to financial systems.