This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 20, 2021 - December 26, 2021

Technological innovation has made major inroads into financial services, providing access for the financially excluded and underserved populations, and enabling their participation in formal economic sectors.

The World Bank says financial inclusion starts with payments, as they serve as a gateway to other financial services, such as savings, credit and insurance.

Digital financial services (DFS) have transformed payment systems, spurring the development of new business models, applications, processes and products, giving the unbanked and underbanked populations access to a broad array of financial services. 

“Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs — transactions, payments, savings, credit and insurance — delivered in a responsible and sustainable way,” says Rekha Reddy, senior financial sector specialist at the World Bank.

“Being able to have access to a transaction account is the first step towards broader financial inclusion, since a transaction account allows people to store money and send and receive payments,” she says.

According to the World Bank in its Global Findex Database — a survey last conducted in 2017 — 1.7 billion adults globally remain unbanked.

In Southeast Asia, 265 million, or 44% of adults, are still unbanked, according to the United Nations Capital Development Fund in its report “Measuring Progress 2020: Financial Inclusion in Selected Asean Countries”. To address this problem, the Asean member states have been working towards bringing this down to 30% by 2025.

The unserved or underserved groups in Malaysia often include the lower-income group, as well as micro-businesses and small and medium enterprises (SME), says Rajendar Dhorkay, Malaysia country head for Instarem, a digital cross-border remittance provider.

“Some end-consumers also remain unbanked because they find most financial services too expensive. These groups usually benefit from the lower costs of digital banks,” he says.

The one positive takeaway from the coronavirus pandemic is the accelerated adoption of DFS due to the increased reliance on e-commerce as well as growing aversion to physical stores.

This trend has pushed businesses to upgrade their payment systems infrastructure, and regulators to update their supervision and frameworks.

E-wallets — sometimes known as digital money or mobile wallets — have become a common digital payment method in the country. E-wallets are more accessible than traditional banking facilities and have changed the way people carry out their financial transactions.

Rekha says, “Access to the formal financial sector can help reduce poverty and inequality by helping people invest in the future, smooth their consumption and manage financial risks. Underserved individuals and businesses benefit from being incorporated into the formal economy.

“On the flip side, banks and governments benefit from incorporating the underserved into the formal financial system.”

Moreover, digital wallets are as formal as bank accounts as they are also regulated, Rekha adds.

“In most cases, they are typically for facilitating payment and not savings, collecting interest and other financial services. They can also be used by those without bank accounts. These accounts can be topped up with funds that directly debit bank accounts, credit cards or through physical top-up cards that can be purchased from physical stores,” she says.

In Malaysia, the population of the unbanked stood at 8%, or two million of the country’s 24 million adults, according to Bank Negara Malaysia in its Financial Stability and Payment Systems Report 2017.

While this may seem a small number in comparison to regional neighbours, there is still a need to address this segment if the country aims to be a full-fledged cashless society.

Coopers (PwC) Malaysia in September, shows that the country is closer to bridging that gap. PwC noted that the average transaction frequency on e-wallets has almost doubled, and weekly transaction values have increased more than three-fold since its survey in May 2018.

Instarem, for example, can attest to remittances having doubled year on year globally over the past two years.

“This trend will further drive the growth of alternative banks, and we can expect these players to expand offerings beyond the payments space through the creation of their ecosystem or the integration of lifestyle solutions. In Asia-Pacific alone, we have Grab’s super app or Alipay’s online payment and lifestyle platform. On a global level, social media platform Facebook recently launched its digital wallet, Novi, a blockchain-based platform designed as part of the company’s ‘metaverse’,” Rajendar says.

Government initiatives such as e-Tunai, e-Penjana and e-Belia accelerated this adoption and helped enhance customers’ preference for using touchless payment options to reduce handling cash during the pandemic.

This explains why DFS players have diversified into offering products like micro-investments, debit cards and insurance — signalling the next growth frontier for e-wallet providers, and the opportunity for regulators to enumerate the informal economy.

“E-money accounts have immense potential to boost financial inclusion by providing the underbanked and unbanked populations with access to secured digital accounts such as mobile money accounts which act as normal bank accounts — Gcash in the Philippines is an example — or financial products or services,” says Kennedy Komba, director of strategy and financial inclusion policy at the Alliance for Financial Inclusion.

Komba adds that the advent of DFS can enhance opportunities for women, youth, the forcibly displaced and other vulnerable groups to access and control their finances and increase their participation in the global economy.

“Financial inclusion for women also helps reduce the exposure of poor and rural households to income shocks, thus improving growth, and promoting more sustainable and equitable development,” he says.

Mobile wallets provide better accessibility to those living in rural areas without access to physical bank branches that are commonly located in urban areas, says Shankar Kanabiran, Malaysia financial services consulting leader, Ernst & Young Consulting Sdn Bhd.

“It can be difficult for some households to get a bank account for an array of reasons. Mobile wallets and mobile payment apps allow these households to make payments, store funds, transfer money to other financial accounts and even write cheques, depending on the app,” he says.

DFS are also more affordable because mobile wallets and most payment platforms are either free or inexpensive to use.

“[DFS] can be used as a medium to channel aid to the B40, as seen during the Covid-19 pandemic, when aid and incentives were distributed via e-wallets,” says Shankar.

Rekha concurs. Mobile wallets and payments platforms can help support the inclusion of small merchants and consumers in the formal financial system by reducing dependence on cash and increasing the efficiency and security of transactions while lowering their costs, she says.

Apart from payments and transfers, DFS have also opened up opportunities for small businesses — many of which struggle to secure loans to expand their operations, says Paul Harapin, revenue growth lead for Asia-Pacific at Stripe, a global payments solutions provider.

“Over 30% are not able to secure loans from banks, and there is an addressable market there,” he says.

Some digital wallets in the region already have functions beyond payments, enabling users to maintain deposits, complete peer-to-peer transactions and access broader financial services. 

Rekha adds, “Through electronic payments, consumers can transfer funds, pay bills and pay for goods and services from their home, or in a market or store setting, making them a rapid, secure way for governments to reach underserved and vulnerable populations with social transfers and other financial services, especially during times like this Covid-19 pandemic period when transport and movement around the country are unsafe or limited.”

But despite the many benefits, there are potential risks associated with DFS — cybersecurity and data privacy being the most pressing.

“Mobile wallets and digital financial services will continue to involve money, and where the money goes, fraudsters will follow. With more digital channels available to customers, virtual interactions are increasingly making identity verification more difficult, exposing [customers] to cybersecurity risks such as malware,” says Shankar.

On the other hand, there is also the issue of over-indebtedness.

According to Rekha, there are problems associated with digital credit, where users do not fully understand the cost of borrowing. 

“While digital credit has proven to help address short-term liquidity constraints, the speed and ease of acquiring these loans can lead to impulsive borrowing, over-indebtedness and default,” says Rekha.

In some instances, there is also a risk of discrimination due to algorithmic scoring. “Due to the proprietary nature of these algorithms and the amount of technical expertise needed to truly evaluate them, regulators are not equipped,” she adds.

Improving financial inclusion also requires beefing up digital infrastructure and strengthening financial literacy, add the experts.

“It includes support not just to increase penetration of mobile phones and broadband connectivity, but also improvements that support well-functioning payment systems and interoperability, credit infrastructure and enhanced coverage of credit data,” says Rekha.

Rajendar agrees, adding that greater investment, collaboration and time are needed to bridge this gap.

“Bank Negara Malaysia, for example, will have to cooperate with industry players and invest in resources to promote digital literacy, which could be in the form of resource portals or the creation of more user-friendly platforms. Of course, having more digital payment solutions in Malaysia will not automatically solve all the industry’s problems and improve financial inclusion at the same time.

“Even with more players, there will be certain consumers and SMEs who still prefer face-to-face banking at physical branches, or simply lack the digital literacy to do so. This requires more time to give everyone a chance to learn and adapt to the new, digital normal,” he says.

Work needs to be done to boost financial literacy as well.

Rekha cautions, “We need to be cognisant that there are different ways in which people can be supported in building healthy financial habits that need to be tailored to the individual. For example, a working adult may not have time to take a full course on personal finance, but an app that supports budgeting or encourages savings behaviour or helps compare the costs of credit could be helpful.” 

On the other hand, for young people who are still in the school system, a study found that “comprehensive financial education for high school students in Brazil not only supported students’ saving and budgeting behaviours, it also had positive spillover on parental financial behaviour”, Rekha says. 

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