New Key to Help Unlock the Power of Digital Payments
by Njuguna Ndung’u, December 11, 2018
Across the global policy community, the jury is now in about the power of digital payments to drive financial inclusion, particularly for women and the poor; improve efficiency and transparency in business and government; and support new economic opportunities. However, there is no consensus around the specific policy mix that will enable this potential to be fully realized.
That’s because responsible and inclusive digital payments ecosystems are not a monolithic, one-size-fits-all equation. Unlocking the power of digital payments in any given country requires a key that should be individually cut according to specific national conditions and market characteristics.
Today, a range of diagnostic tools are emerging that can give policymakers a significant head start. A leading example is the methodological framework recently developed by the World Bank to measure retail payment costs and compare them across payment instruments and across countries. This methodology has been applied with significant success in Albania, yielding valuable data that can inform policy choices about the most effective payment instruments for such countries. Though more limited in terms of scope, the Bank of Canada has also carried out a similar study to estimate the cost of point-of-sale payments in the country, producing valuable data for policymakers. Whereas the World Bank methodology covers all economic actors (demand and supply side), the study of the Bank of Canada focuses on assessing the costs of cash, credit card and debit card transactions at the Point of Sale. Despite the differences, what the survey results and conclusions from these methodologies show is that this type of assessments can become important pillars of policy design and implementation, providing a strong evidence base about costs and potential benefits. In doing so, methodologies for assessing the cost of payment instruments can support the development of payments infrastructure and be an enabler of market development – a critical factor in expanding digital payments ecosystems to meet user needs, thus driving financial inclusion.
A brief snapshot of findings in Canada and Albania provides a good sense of the value of these studies and the data they are able to generate. The study carried out by the Bank of Canada shows the total resource costs of payments instruments stand at 0.78 percent of GDP; the costs of point-of-sale payments in cash are a staggering 0.45 percent of GDP; and the costs of cash increase with the size of transactions. In Albania, a study using the World Bank methodology puts the costs of paper-based instruments – that is, cash, paper-based credit transfers and paper-based direct debits– at roughly 2 percent of GDP. The methodology shows that this cost could be halved by migrating just 70 percent of payments to digital channels. For low-income pensioners, consumers, governments, and payment providers, the potential savings are enormous.
Importantly for policymakers, the World Bank methodology also produces valuable data about who bears the costs of existing payment instruments. For example, for paper-based instruments in Albania, 50 percent of the costs are borne by consumers, 25 percent by businesses, 24 percent by payments service/infrastructure providers, and 1 percent by government agencies. With electronic payments, 55 percent of costs are borne by payment service/infrastructure providers, 30 percent of costs are borne by consumers, 14 percent of costs are borne by businesses, and 1 percent is borne by government agencies.
It’s no secret that surveys can be expensive. However, the ready availability and applicability of this type of cost assessment methodology can substantially reduce costs, with a very strong prospect of generating valuable data. Furthermore – with methodologies already identifying potential savings around 1 percent of GDP – the value and the benefit of policy incentives from these methodologies tend to speak for themselves, and in any case, vastly outweighs any survey costs.
Finally, these studies highlight the significant costs of paper-based or physical payment instruments. Transitioning toward digital payment systems and instruments can meaningfully enhance economy-wide efficiency. However, the data resulting from these cost assessment methodologies should be used in conjunction with existing knowledge products and foundational principles for digitizing payments. It is advisable that efforts to digitize payments focus on four areas:
- Connectivity: Mobile phone and internet connectivity helps ensure digital payment ecosystems develop in an inclusive way that also allows the digital payments ecosystem to be scalable.
- Interoperability: Across payment platforms, interoperability underpins efficiency, competition, and accessibility, helping to drive usage and thus increase market size and lower unit costs.
- Electronic Personal Identification Systems: These identification systems can help ensure user protection, enable innovation to drive new capabilities, and expand digital ecosystems responsibly. Additionally, consolidated national databases and advanced biometrics can boost the confidence of users, investors, and policymakers.
- Regulatory and Institutional Capacity: This capacity supports market innovation and ecosystem growth while also ensuring that growth is inclusive, responsible, and sustainable, including through thoughtful regulation.
The digital platforms now being developed around the world provide great hope that the costs of retail transactions will drastically decline once economies migrate to electronic payments instruments. Digitization will make payments more efficient, effective, transparent, and secure. By putting to work new sets of analytical tools like the World Bank Methodology, combined with the fast-growing knowledge base about digitization, we can bring these vast gains – and a new wave of financial inclusion – within reach.
About the Author
Executive Director, African Economic Research Consortium and Senior Advisor, Better Than Cash Alliance
Professor Njuguna Ndung’u is the Executive Director at the African Economic Research Consortium and Senior Advisor at the UN-based Better Than Cash Alliance