e-Learning Hub | Digital financial literacy: be smart with your money in digital age
Awareness raising and motivation workshop >> Interactive readings >> Digital financial services for better inclusion
to digital economy
Digital financial services for better
inclusion to digital economy
INTRODUCTION
In today’s digital world, having access to digital financial services is important for being part of the modern economy. These digital financial services, like using apps for banking or paying with your phone, are changing how we handle money. These changes are made possible by fintech, which means using technology to make banking better for everyone. However, even with all these new ways to bank, cash is still used by a lot of people. This shows that there is a gap between people using traditional and those using digital means of money management. It is important to bridge this gap so everyone can access digital financial services. As more people learn about managing money online, there is a rise in digital financial inclusion. This has many benefits, like convenience, safety, and economic growth for everyone.
What is digital finance?
Digital finance is a general term and describes using financial services on phones, computers, the internet, or cards connected to digital payment systems. Digital finance includes everything like apps, websites and tools that let people and businesses manage their money online. This means they can make payments, save money and get loans without having to go to a bank in person or talking directly to a financial company.
Digital financial services and providers
Digital financial services (DFS) are financial services that have digital technologies as their basis. They include money-related activities and products, like online banking, mobile apps, digital wallets, contactless payments, machine-readable documents and electronic signatures. Using digital technology in these services helps more people access them, especially those who usually do not have access to banking services. It also encourages the financial sector to create new ideas and ways to help people with their money.
There are diverse digital financial service providers that offer digital financial services to companies or regular people. A digital financial service provider can include traditional banks or insurance companies but also electronic money issuers or fintech firms.
What is Fintech?
Fintech is short for financial technology and describes the use of technology in the financial industry. This includes using computers to analyse data, using quantum computers for computing tasks, storing data online, teaching computers to learn from data, and artificial intelligence. The aim is to make financial services better and easier to use for companies, business owners, and regular people.
What are digital payments?
Digital payments, also called electronic payments, describe the transfer of money between to accounts using electronic devices like phones, computers, smartwatches, tablets and any other electronic device.
A digital bank account falls into one of three groups: for businesses, for government, or for regular people. When money moves between any two of these groups, it is classified into different types of digital payments. One type, called G2P payments, happens when the government (G) transfers money to regular people (P). This kind of payment, like social aid, unemployment payments, or tax refunds, helps vulnerable groups of people become part of the digital economy.
Is there a cash-digital divide?
The cash-digital divide describes the gap between people using cash and those using digital payment methods. Some groups of people, for example elderly people, often have less access to digital tools which makes it more difficult for them to perform digital financial transactions and prevents their socioeconomic inclusion and equity.
However, while the term “divide” suggests that there is a strong separation between people using digital payments and others using cash, studies suggest that the gap between cash and digital is not always that clear. In reality, cash remains an important payment method alongside digital payments, even for people who are confident with the digital world. Just because a person uses cash it does not mean they do not know how to use digital payment methods. The Eurosystem wants to keep cash available as a valid payment method to meet the financial needs of all people. They are even thinking about adding a digital euro to give more options for payments.
The importance of digital financial literacy
Digital financial literacy describes a combination of knowledge, skills and abilities that people need to make good personal decisions concerning their money while using digital technologies. Through a good level of digital financial literacy, people are able to access digital financial products and services that meet their needs, like digital transactions, payments, savings, credit and insurance. Through this, all people including those with fewer opportunities can experience greater digital financial inclusion in society, which is an important driver for social inclusion as well.
Financial inclusion through technology
Financial inclusion means that everyone (businesses as well as regular people) has access to affordable banking services from trustworthy institutions.
With the rise of technology, digital financial services have started to strengthen financial inclusion, with benefits for many low-income households and small businesses who previously had limited access to traditional banks. For example, during the pandemic, the government could provide quick and secure financial support to “hard-to-reach” people and businesses, securing their financial inclusion.
The benefits of digital financial inclusion
Digital financial inclusion means using digital tools to provide affordable banking services to people who currently do not have access to traditional banks, making sure these services meet their needs and are affordable.
The benefits of digital financial inclusion are the following:
- Making banking more convenient
- Giving access to more financial services online
- Gathering helpful data to improve people’s lives
- Improving safety
- Making financial services more accessible to everyone
- Improving social welfare and economic growth
- Reaching the poorest people in remote areas
Questions for self-assessment
SOURCES
Appaya, S. and Shaikh, S., 2024. Embracing Disruption, Unveiling the Future: The Story of Digital Financial Services. World Bank Blogs. Available at: https://blogs.worldbank.org/en/psd/embracing-disruption-unveiling-future-story-digital-financial-services.
Center for Strategic and International Studies (CSIS), 2024. The Future of Digital Financial Inclusion. CSIS Features. Available at: https://features.csis.org/future-of-digital-financial-inclusion/.
Consultative Group to Assist the Poor (CGAP), 2020. Digital Pathway to Financial Inclusion. CGAP Blog. Available at: https://www.cgap.org/blog/digital-pathway-to-financial-inclusion.
Demirgüç-Kunt, A., Klapper, L., Singer, D., Ansar, S. and Hess, J., 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. ScienceDirect. Available at: https://www.sciencedirect.com/science/article/pii/S2214845017301503.
European Central Bank (ECB), 2024. Digital Financial Services and Financial Inclusion. ECB Economic Bulletin. Available at: https://www.ecb.europa.eu/press/economic-bulletin/articles/2024/html/ecb.ebart202402_02~d821c613a7.en.html.
International Monetary Fund (IMF), 2020. Digital Financial Inclusion in the Times of COVID-19. IMF Blog. Available at: https://www.imf.org/en/Blogs/Articles/2020/07/01/blog-digital-financial-inclusion-in-the-times-of-covid-19.
Kagan, J., 2023. Financial Technology (Fintech). Investopedia. Available at:
ScienceDirect, 2024. Financial Inclusion. ScienceDirect Topics. Available at: https://www.sciencedirect.com/topics/economics-econometrics-and-finance/financial-inclusion.
World Bank, 2024. Digital Financial Inclusion. World Bank Publication. Available at: https://www.worldbank.org/en/topic/financialinclusion/publication/digital-financial-inclusion.
World Bank, 2024. Digital Financial Services. World Bank Publication. Available at: https://pubdocs.worldbank.org/en/230281588169110691/Digital-Financial-Services.pdf.
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