Electronic Financial Transfers in the Developing World

With the fast pace of technology development and improving digital experience, electronic transfers globally are being adopted at a rapid pace. The Consultative Group to Assist the Poor (CGAP), an independent policy and research center dedicated to advancing financial access for the world’s poor, has taken a closer look at increasing electronic transfers and risks it creates for financial inclusion in the developing world.

According to a CGAP brief published earlier this month, the value of electronic transfers that are delivered into store-of-value accounts and accessible via debit cards or mobile money wallets is expected to more than triple between 2010 and 2017 to over $194 billion.

Electronic transfers certainly have a range of advantages over traditional vehicles. Among the ones mentioned most often are higher efficiency, reduced leakage, and faster, more convenient and more secure payments to recipients. Electronic transactions have a potential to foster financial inclusion when they are linked to bank accounts or mobile wallets. They allow users to create savings and have a better chance to sustain well-being in rough times. However, the actual data demonstrates that most recipients withdraw 100% of their payment at once and do not use the account again until the next transfer takes place.

Electronic funds transfers in developing countries are mostly targeted to the part of population that lives in remote locations. In those locations, however, the mobile networks may be quite weak and experience failures. Unreliable connections and errors in transactions create unsatisfying experiences and are likely to turn away users seeing more problems caused by the use of the service than benefits.

Usually, funds are transferred in bulk, which means that a certain number of recipients will receive money in one day. A bulk settlement creates heavy pressure on the access point to meet liquidity demands, which is a particular challenge in remote and less secure areas. As a result, recipients are forced to wait for a significant amount of time to receive their funds. They have to often come back the next day if the point of access is overwhelmed and doesn’t have sufficient funds. CGAP sees the process as a vicious cycle because the shortage of liquidity undermines the trust in the system and creates uncertainty in the ability to access funds any time. Out of fear, users want to withdraw all of a payment at once and as soon as it’s deposited, which thereby facilitates liquidity issues at cash-out points.

WFP Kenya’s Cash for Assets Program study this year has demonstrated that 21% of the recipients are unable to cash-out the desired amount of their transfers due to insufficient agent liquidity. Electronic payments users in the developing world are often new to digital interfaces and may be uncomfortable with multistep processes of accessing funds. In addition, because of errors that may occur due to the lack of knowledge on how to use the service or network problems, recipients may end up paying extra fees for frequent transaction failures and repetition. The necessity to ask a professional for assistance, the risk to be charged for fraud and errors can reduce trust and make the system seem inconvenient to the recipient. It is likely that as a result of inconvenient experiences with electronic payments, people will develop similar opinions for formal (digital) financial services overall. Recipients often don’t know about the extra charges and fees associated with fund transfers. As a result, they are vulnerable to unfair treatment and fraud. According to CGAP and WFP Kenya, recipients for 62% of cash for the Assets Program did not know that there were transaction fees despite paying a transaction fee of at least KSH 50 for each withdrawal. The same statistic for Fiji is as high as 68%. And in Ghana’s LEAP Program, 80% were unaware of their payment amount. The data demonstrates that there is a vast opportunity for mistreatment and fraud with electronic payments users in developing countries. Since users are not aware of charges and fees, agents can freely take advantage of them and hence, increase the costs associated with electronic payments services. As a result, users may turn away from digital payments as they would see them as expensive and risky. See also http://letstalkpayments.com/

 

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