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Bridging the digital divide by enhancing effective digital finance usage among the poor: An RCT project | Part 2

Posted on by Deepesh Singh

Digital financial services (DFS) have been hailed as a game-changer that transforms developing nations, especially the lives of low- and moderate-income individuals. However, disappointingly, these services have performed below expectation, as several technical and behavioral factors hinder their adoption.

In a previous blog on Griffith Asia Insights, we delved into people’s experiences with DFS in Bangladesh and Indonesia and revealed their significant challenges. Despite technological advancements, people still prefer cash transactions to digital methods. This preference stems from a lack of trust, confidence, and perceived value in DFS, especially in cash-heavy economies.

The blog also highlighted several important issues, such as the impact of the digital divide on individuals at the bottom of the economic pyramid (BoEP) and support mechanisms to promote the adoption and effective use of financial technology among economically disadvantaged people.

The specific circumstances of individuals and their communities play a significant role in the DFS adoption process. For instance, take Hina, a small business owner in Munshiganj, Bangladesh. Although Hina has access to a mobile payment app and understands the benefits of DFS, she chooses to conduct her transactions at her local bank. These transactions consume valuable time and energy that she could use for family or business purposes. Although she actively engages in other activities on her smartphone, such as social media and gaming, she hesitates to use DFS independently. This reluctance underscores broader issues of limited financial literacy, perceived complexity, and distrust.

In 2023, a survey by Griffith Asia Institute and MSC  examined 2,000 respondents from low-income households in Bangladesh and Indonesia. It revealed the growing popularity of digital payment platforms, such as bKash, Rocket, Nagad, GoPay, OVO, and ShopeePay. These platforms offer savings, loans, bill payments, and money transfers. These services cater to those who lack access to traditional banking. The survey showed that while 55% of households use digital banking in Indonesia, it is not as prevalent in Bangladesh, where only 17% use it.

The survey reveals noticeable differences in trust, confidence, and willingness to use digital payment methods, with a higher perception of risks in Bangladesh. More than 33% of the survey participants in Bangladesh expressed concerns about fraud and financial losses with digital banking services, compared to just 12% in Indonesia. A significant majority—86% of respondents in Bangladesh preferred cash payments when shopping, and 73% preferred to send money to their families in cash. They cited convenience as the primary factor behind their choice. Conversely, these percentages were lower in Indonesia, at 49% and 46% respectively.

Research by Dipu and Sultana suggests that inefficiencies in digital payment systems contribute to this issue. They propose that user-friendly designs, simple interfaces, and comprehensive onboarding processes could increase DFS adoption. Our survey data clearly shows that more than 90% of respondents in Bangladesh use social media apps and YouTube frequently. However, only 14.5% of men and 15.3% of women use mobile banking apps, and merely 11% of men and 6% of women use mobile payment apps frequently. These low numbers signal the need to design DFS in a way that is as user-friendly as social media apps to increase adoption.

The situation is slightly different in Indonesia. Social media and YouTube usage is significantly higher, with 79% of men and 80% of women actively engaged. Additionally, the country has strongly embraced mobile banking and e-commerce apps. About 55% of Indonesians use digital banking services, which indicates a higher level of trust and confidence in digital financial transactions. This increased adoption is due to superior customer facilitation, support mechanisms, and higher income. The structured support effectively addresses concerns and fosters trust in DFS, which is not as prevalent in Bangladesh.

Our regression analysis of survey data from Bangladesh shows that the presence of local agents significantly boosts the likelihood of individuals to download and use DFS apps, and the results are statistically significant (p<0.01). Agents offer crucial handholding and personalized guidance, which is especially important for users with limited technological proficiency. This discovery emphasizes the significance of agents’ deployment in rural areas to promote DFS adoption.

Given these insights, Bangladesh is ideal for our randomized control trial (RCT) and intervention. The lower baseline of digital payment adoption, coupled with lower confidence and trust in DFS, offers fertile ground to study the impact of targeted interventions.

We must identify best practices for DFS adoption and address the factors that hinder its acceptance among non-users and low-frequency users. In response, the Griffith Asia Institute has been conducting an RCT in Bangladesh’s Munshiganj district with 230 participants from two upazilas. This trial came into being in partnership with the Asian Development Bank Institute (ADBI) and MSC and with funding support from the Citi Foundation.

The experimental design has established treatment and control groups with similar observable characteristics, which enabled reliable evaluation of the program’s impact through a comparison of outcomes between these groups. An endline survey and periodic technology acceptance model (TAM) surveys will collect data on the factors that affect individuals’ decisions to adopt and use DFS. Additionally, we will use a diary-based data collection tool to capture data on changes in participants’ financial behaviors, decision-making processes, and challenges over one year of the survey.

The interventions for the treatment group seek to increase their adoption and usage of DFS relative to the control group. The interventions have two main components:

  1. Personalized discussion and handholding: This consists of hands-on learning experiences from trustworthy sources to establish credibility;
  2. Establishment of trust in digital financial services and their capability: This consists of the provision of practical guidance from credible experts to enhance users’ confidence and knowledge levels, which will thereby increase the adoption and learning rates of DFS.

The current research intends to rigorously test interventions for digital financial services (DFS) designed to accelerate adoption. It seeks to determine the optimal level of individual engagement to receive technical support, identify the most effective facilitation, and establish the best methods to increase DFS adoption.

We intend to provide in-depth information to develop effective policies as part of this research. The insights from the research study will be designed to be used by policymakers and other stakeholders to encourage and strengthen DFS adoption. Our ultimate goal is to improve financial inclusion and empower individuals so that more people have access to and can benefit from financial services.

The article was first published on the Griffith University website on 25th July 2024.

References:

  • Barquin, S., de Gantès, G., Vinayak, H. V., & Shrikhande, D. (2019). Digital banking in Indonesia: Building loyalty and generating growth.McKinsey & Company, February 6.
  • Chatterjee, R., & Hunter, S. (2023, November 6). Bridging the digital divide by enhancing effective digital finance usage among the poor| Part 1. GAI blog https://blogs.griffith.edu.au/asiainsights/bridging-the-digital-divide-by-enhancing-effective-digital-finance-usage-among-the-poor-part-1/
  • Davis, F. D., Bagozzi, R. P., & Warshaw, P. R. (1989). Technology acceptance model.J Manag Sci, 35(8), 982-1003.
  • Dipu, S. M. A., & Sultana, T. (2021). Smart GOALA: An Alternative Marketing Channel for Connecting the Peri-urban Marginal Dairy Farmers with the Urban Consumers in Bangladesh. InDigital Transformation and Human Behavior: Innovation for People and Organisations (pp. 353-367). Springer International Publishing.
  • Kaka, N., Madgavkar, A., Kshirsagar, A., Gupta, R., Manyika, J., Bahl, K., & Gupta, S. (2019). Digital India: technology to transform a connected nation. McKinsey Global Institute.Ministry of Housing and Urban Affairs.
  • Lee, J. N., Morduch, J., Ravindran, S., Shonchoy, A., & Zaman, H. (2021). Poverty and migration in the digital age: Experimental evidence on mobile banking in Bangladesh.American Economic Journal: Applied Economics, 13(1), 38-71.

Bridging the digital divide by enhancing effective digital finance usage among the poor | Part 1

Posted on by Deepesh Singh

Rubina, a grocery shop owner in rural Munshiganj in Bangladesh, owns a basic feature phone. Her use of the phone is limited to talking to her friends and relatives, sending and receiving text messages, and occasionally using bKash (a mobile financial service) to receive payments or pay suppliers. She cannot use bKash by herself and relies on her husband to use the service for her. She cannot afford a smartphone. However, she sometimes borrows her husband’s smartphone (the only family member to have one) to watch YouTube videos. She does not know how to use social media and messaging apps.

Hafid, a farmer who also runs a photocopy and mobile accessories shop, hails from a semi-urban area of Bandung, Indonesia. He has a smartphone, and he mostly uses it for accessing social media and doing online shopping. The ‘super app’ he uses works for both online shopping and digital payments.

The examples of Rubina and Hafid illustrate how many low and middle-income (LMI) people are divided in terms of using digital platforms and services like WhatsApp/Telegram-based messaging, social media, YouTube videos, digital payments, online shopping, etc. Hafid’s experience is representative of being in a far more advanced stage of the ‘digital journey’ compared to Rubina. Their journeys differ in terms of their access to, and use of, smartphones to engage in the digital economy due to a range of barriers such as affordability, capability, and confidence.

This digital divide is real and growing. Its impact is particularly evident in the realm of financial services where the role of digital technology has been increasingly promoted as a game changer for achieving greater financial inclusion. However, despite the high levels of investment and promotion towards the adoption and effective usage of digital financial services, bridging the digital divide remains a persistent challenge.

Many factors lead to the digital divide―the status of infrastructure, cost and accessibility of smartphones, lack of education, lack of financial and digital literacy, poor User Interface/User Experience (UI/UX, regulatory challenges, and commercial driver―as very clearly articulated in this article. But there is a behavioral angle to it as well. In multiple markets in the global south, we have seen that the LMI people still prefer personal interaction rather than digital mode―there is still a lack of trust in technology and a lack of confidence to use technology (especially in the case of digital payments), and a lack of value proposition that digital financial services (DFS) offer, especially in cash-heavy economies. The same is true for using digital platforms to grow businesses. This results in poor digital skills and a broadened digital divide.

It is important to remember that achieving financial inclusion isn’t just about innovative technology, investments, or infrastructure. It’s also about changing behaviors, building trust, and working with communities. As digital transformation continues to change the financial inclusion landscape, it brings with it several important questions―how is the digital divide impacting those at the bottom of the economic pyramid (BoEP) and how can effective support mechanisms drive technology adoption and effective usage? What can be considered as the best practices to drive DFS? Is there a single factor or combination of factors the cause hindering the adoption of DFS among poor non-users? And what roles do the diverse circumstances of individuals and their communities play in it?

This is the focus of a major new research program being conducted by the Griffith Asia Institute in partnership with the Asian Development Bank Institute (ADBI) and MSC (MicroSave Consulting). Made possible through funding support from the Citi Foundation, this program examines how the digital divide impacts the poor in developing countries and identifies practical support mechanisms that can drive technology adoption and effective usage. Through the use of surveys, diaries, and a randomised controlled trial (RCT), the findings will have significant implications for developing policies to promote financial inclusion.

To understand the practical support mechanisms better, data is being collected from low-income individuals in Indonesia and Bangladesh about their usage and attitudes towards DFS. In particular, the RCT will examine the effect of various instruction and support mechanisms on the adoption of digital payments by owners of micro- and small enterprises. Based on these findings, solutions will be designed and tested with the aim of supporting individuals to develop their digital skills and build confidence in their ability to use DFS.

This study will help policymakers and practitioners better understand the digital divide and what practical approaches can be used to ensure that, as new technology continues to develop and evolve, it can provide solutions that benefit all members of society, including the poor and vulnerable.

This blog is the first of a three-part series that will showcase the developments of this research project and highlight our findings along the way.

The article was first published on the Griffith University website on 6th November 2023.

The Digital ID Hackathon Africa by the Upanzi Network and MSC (MicroSave Consulting)

Posted on by Deepesh Singh

Many countries in Africa are transitioning toward national digital ID systems. However, the success and impact of a national digital ID program depend on its uptake and use cases. Currently, most use cases of digital ID in Africa are limited to elections, financial inclusion, and telecom. However, this technology can significantly improve people’s lives on the continent.

Carnegie Mellon University’s Upanzi Network and MSC (MicroSave Consulting) launched a series of regional hackathons for African university students to identify new and innovative use cases of digital ID across the continent. The first hackathon would focus on Eastern Africa and allow students to explore how digital ID systems could foster regional integration and inclusion.

The hackathons include an educational component for all participants. Before they submit their ideas, students will participate in a virtual course to understand and appreciate digital ID, its key features, and technical knowledge of digital ID platforms. Once finalists are selected, students receive mentorship from digital ID experts for guidance and support as they develop their prototypes for potential real-world applications. The top team from each hackathon will present their digital ID use cases at a regional conference.

“These regional hackathons are an important way for African university students to help develop the solutions needed for the digital transformation of the continent,” says Assane Gueye, co-director of the Upanzi Network. “To achieve sustainable implementation of digital ID within African countries, there needs to be a local knowledge capacity that understands both the technology and the nuances of their respective countries’ challenges and culture.”

The Upanzi Network, located at CMU-Africa in Rwanda, is a Bill & Melinda Gates Foundation-funded initiative that works toward a secure and resilient digital transformation of Africa. The group creates, tests, innovates, and helps implement digital technologies at scale.

“These hackathons will allow students to explore new digital transformation approaches. The use cases emerging from these hackathons will reflect a deep understanding of local contexts and cultural nuances, ensuring they are both relevant and sustainable. This initiative aligns perfectly with our commitment to building sustainable, inclusive, and resilient digital economies across Africa,” says Mitul Thapliyal, partner at MicroSave Consulting (MSC).

MSC (MicroSave Consulting) is a leading global consulting firm specializing in financial, social, economic, and digital inclusion. For the last 25 years, MicroSave Consulting (MSC) has worked closely with governments, financial institutions, and development organizations to drive digital transformation, enhance financial systems, and foster sustainable development.

Registration is now open for the Eastern Africa Digital ID Hackathon and will close August 11, 2024 and 11:59 p.m. CAT.

Join the Discord channel to form a team.

Learn more about the hackathons | Register to participate in the Eastern Africa hackathon

How can digital financial services accelerate community resilience in locally-led adaptation initiatives in Africa?

Posted on by The Helix Institute at MSC

The urgency to accelerate locally-led adaptation (LLA)

Currently, the 10 countries most vulnerable to climate change are all from Africa. Additionally, Africa’s adaptation bill increased to 5-15% of its GDP in 2022. The continent will be hit hardest by droughts, floods, and other catastrophes in   a 2⁰C temperature rise scenario by 2050, which will cost up to USD 50 billion per year to adapt to. Therefore, the escalating impacts of climate change demand immediate and comprehensive action to mitigate and adapt to these effects. The urgency of LLA to accelerate climate resilience cannot be overstated.

LLA is crucial for climate action It empowers communities to devise and implement relevant and sustainable adaptive strategies and focuses on local knowledge, cultural context, and grassroots participation. The Global Center on Adaptation proposes eight LLA principles to enhance the design and implementation of initiatives through a community-centric approach so that these strategies can be deployed effectively.

MSC introduced the role LLA plays to enhance community resilience in a series of conversations. We looked at the value of equitable engagement and indigenous knowledge when we shed light on the role financial inclusion and local governments play to empower pastoralist communities. This blog delves into the foundational elements of how digital financial services (DFS) can accelerate community resilience within LLA frameworks. We explore areas where the integration of digital financial approaches can strengthen climate adaptation and resilience.

Why do we need digital financial services to deploy climate finance?

Climate finance is essential to drive LLA. Our earlier research on enabling and financing locally-led adaptation shed light on how finance is vital to community resilience. It has to be deployed at the required scale for community-led initiatives. Effective climate finance mechanisms for LLA require robust accountability and transparency frameworks to ensure that funds are used efficiently for their intended purposes. It also builds trust among local communities and other stakeholders, which encourages continued investment and support for adaptation initiatives.

Climate finance products for LLA initiatives include various financial instruments designed to empower and support community-based efforts to address climate change impacts at different stages of climatic shocks. Climate finance varies in typology based on the needs of an individual or community to finance their adaptation strategy. These products encompass:

  • Grants, which provide non-repayable funds for capacity-building and pilot projects;
  • Concessional loans, which offer favorable terms to finance adaptation projects;
  • Equity investments, which inject capital into local enterprises focused on adaptation practices;
  • Guarantees and insurance mechanisms, which reduce risks for investors and protect against climate-related losses;
  • Dedicated climate funds, such as the Green Climate Fund, which provide targeted financial support for local resilience; and
  • Crowdfunding and philanthropic contributions, which further enable grassroots initiatives.

The combination of these instruments with DFS provides an avenue to quickly empower communities, enhance resilience, promote inclusivity, facilitate innovation, and strengthen partnerships between climate financiers and digital financial providers. Our previous research highlights the need for devolved climate finance, also called decentralized finance, to address climate change locally and help poor people cope with its impacts. DFS is critical to enable the participation of such communities through outreach to the most vulnerable. These are some illustrations of how DFS is important to drive resilience:

  • Firstly, DFS increases accessibility, enhances efficiency and speed of transactions, supports the financial inclusion of marginalized groups, and ensures transparency and accountability in adaptation projects. An example of this is M-PESA in Kenya. It facilitates secure financial transactions through mobile phones, which enables local communities to manage funds for adaptation projects and rapid disaster relief. The figure below shows access points of financial services per 100,000 adults in selected African countries. This highlights the greater penetration of mobile digital financial services compared to traditional banks.

  • Secondly, key aspects include mobile banking and payment platforms, which permit financial transactions without physical bank branches. Additionally, digital microfinance and credit solutions offer small loans and financial services to individuals and small businesses often excluded from traditional banking systems. For example, Tala provides instant credit via a mobile app through alternative data to assess creditworthiness in Kenya. This service empowers local community members to access loans for climate-resilient agriculture, minor improvements to infrastructure, and other adaptation activities.

 

  • Digital retail payment platforms, particularly mobile money services, are vital to protect vulnerable populations against climate risks. These platforms, rolled out predominantly by telecom operators and BigTech firms, have enhanced financial inclusion as they provide a dense and extensive network of financial access points that surpass traditional financial institutions. Mobile money is an informal yet vital risk management tool against climate-related economic shocks for low-income and rural households. Additionally, person-to-person (P2P) remittances allow families and communities to pool and transfer risk affordably, reliably, and flexibly.

 

  • Regulators may view mobile money primarily as a payment service, but its role extends far beyond that. It acts as a financial safety net that enables households to manage climate shocks effectively. Governments have been increasingly using this digital infrastructure to disburse government-to-person (G2P) payments to reinforce the financial resilience of vulnerable populations, particularly in the aftermath of natural disasters. Thus, mobile money has dual functions—it facilitates everyday transactions and provides critical financial support during crises. This underscores its importance as the first line of defense against climate risks in these regions.

Case studies: Opportunities for digital financial services in climate resilience

Africa has witnessed the fastest growth in DFS account ownership globally, from 23% in 2011 to 55% in 2021. Mobile money has particularly emerged as a vital tool that drove this impressive rise. It facilitates a wide range of transactions beyond simple person-to-person payments. These include cash transfers, merchant payments, utility bill payments, savings options, and even government-to-people services. Notably, up to 33% of Africa’s adult population own mobile money accounts. This highlights its extensive reach and diverse use cases.

DFS can provide access to financial tools, such as savings accounts, insurance, and credit, to help individuals and communities better prepare for climate-related events and respond to them. It also enables them to recover from these events. The case studies below show how DFS addresses the adaptation needs of vulnerable populations. This can happen when they prepare for climate shocks before, during, and after them.

Our recent research in Nigeria and Bangladesh draws findings fromvulnerable households’ actions when they face climatic events and the financial products they use to cope with them. The evidence shows that with climatic events’ increasingly unpredictable and frequent nature, low-income households use financial products readily available and accessible within shorter time frames.

Therefore, financial service providers should understand how low-income households in climate-stricken regions use financial services to prepare for severe weather events and recover from them. This would enable the strategic structuring of these services to reach the most vulnerable. This understanding can also inform when and where DFS, such as mobile money, work best for this population, which presents a lucrative opportunity to deploy climate finance to these households to become climate resilient.

  • Before climatic shocks: DFS has the potential to provide the necessary financial resources faster than traditional financial systems before climate shocks through microloans, savings products, and insurance tailored to the needs of vulnerable communities. Such preemptive financial planning helps communities build resilience before disasters strike.
  • During the shocks: Our study findings in Nigeria indicated that farmers who face severe climate events often have limited financial options. They rely heavily on informal savings and loans, which may prove insufficient during extreme weather events. Digital financial services, such as digital weather index insurance and digital emergency loans, can provide more reliable and accessible financial tools to bridge such gaps and help farmers manage risks better.
  • Post-disaster funding: Digital platforms can expedite the disbursement of aid and insurance payouts to ensure timely support to affected individuals. This reduces the recovery time and financial strain on communities. In Kenya, mobile money services have allowed households to save and access credit quickly during emergencies. Such services have been particularly beneficial during climate-related events, where rapid access to funds is crucial.

The path toward enhanced inclusivity and financial resilience

DFS enhances inclusivity and can advance resilience for vulnerable households. Moreover, investments in green technologies through mobile money platforms transform individuals from mere victims of climate change to active participants in the combat against its effects. These platforms enable households and businesses to adopt resilient practices as they channel funds into sustainable projects and technologies that contribute to the broader fight against climate change.

This dual approach to enhance financial resilience through digital products and promote investments in community resilience creates a more robust and proactive economic environment for vulnerable populations. This signifies the potential to increase resilience in a continent where more than 110 million people faced climate-related hazards in 2022 that caused more than USD 8.5 billion in economic damages. The integration of DFS with climate financing will enhance LLA efforts through accessible, efficient, and scalable financial services, which can help vulnerable communities cope with climate events, build resilience, and enhance adaptative capabilities.

 

 

SATHI Evaluation report

Posted on by Saumya Dixit

The SATHI Network, a women-led agent network, seeks to accelerate financial inclusion for rural and marginalized women through the promotion of entrepreneurship, financial literacy, and access to financial services in Bangladesh. MSC evaluated the SATHI Network’s impact through a mixed-method approach. We surveyed 175 members and 172 customers. Findings showed increased income and savings among members, with significant contributions to family expenses. Members face challenges such as technical difficulties and local competition. Training has improved their financial literacy and business skills and enhanced financial resilience and decision-making. Further training is sought for continued growth.

SATHI: A flag-bearer for women’s financial inclusion

Posted on by Saumya Dixit

Aspire to Innovate (a2i) launched the SATHI Network in 2022 to close the gender gap through the promotion of rural and marginalized women’s financial inclusion. This women-led network encourages entrepreneurship, improves financial literacy, and provides financial services. It had a humble start with 100 women entrepreneurs. Today, it has more than 300 members and partners with banks and MFS providers. a2i tasked MSC with the assessment of SATHI Network’s impact and challenges and a survey of 175 entrepreneurs and 172 customers. These evaluated digital financial services, capacity development, customer protection, and behavioral changes.