The Role of Digital Payments in Financial Inclusion and Economic Growth

Digital payments are changing the way we handle money and making financial services accessible to a wider audience, thus fuelling economic growth globally. As technology is growing rapidly, especially mobile technology, and smartphones are becoming more affordable to the masses, thus making digital payment services accessible to a wider audience. Moreover, governments are trying to expand mobile and high speed internet coverage to the rural areas, which will provide financial access to people in rural areas.

Rise of Digital Payments

Digital payment systems have exploded in popularity in the past decade. There are multiple reasons behind this fast growth. Consumer preferences are one of the main reasons, as digital payments are a very convenient way to pay across online as well as offline shopping portals, moreover, digital systems completely gel with the likes of Gen Z and millennial's, as they are very tech-savvy people. With digital systems, no need to carry physical cash and no need to wait in long ATM queues. There are different types of digital payment technologies available in the market currently, some of the major ones are mobile wallets, QR codes, UPI payments, payment links, contactless cards, digital currencies, and online banking. In multiple parts of the globe, digital payments have become the new normal. With these digital payments, a huge population of people who previously didn't have any access to formal banking now have a way to manage their money and make transactions.

Financial Inclusion

Financial inclusion means ensuring that everyone has access to banking and other financial services like savings accounts, credit, insurance, and payment systems, irrespective of their income level or where they live. Providing financial inclusion helps in the economic growth of that region, and it will empower people to improve their quality of life.

How Digital Payments Drive Financial Inclusion

Reaching the Unbanked Population

There are many rural areas where traditional banking infrastructure is unavailable. Building traditional infrastructure could be very expensive, but with digital payment systems, such rural populations too can have access to various financial services. As per a World Bank report, about 1.7 billion adults globally are unbanked. Digital wallets and other digital services allow them to access financial services.

Bridging the Urban-Rural Divide

Traditionally, the rural population has been left out of the financial systems, majorly due to the high expenses of setting up traditional infrastructure like physical bank branches and maintaining them in remote locations. This Urban-Rural Divide can be addressed with digital payment systems. What they need is smartphones and internet connectivity, and can have access to various financial services through their mobiles providing them financial security and allowing them to participate in the broader economy.

Supporting Small Businesses

Small businesses are the backbone of many economies. With digital solutions small business owners can accept payments from customers through various digital channels, reducing the need for cash, as well as it lowers the risk of theft. Digital payments are more transparent and will help them to keep accurate records, enabling them to manage finances in a much better way. Moreover, digital services allow them to have easy access to credit services, which could be a key to their growth and business expansions.

Improving Tax Collection

Digital payment systems also help to improve tax collections as they bring more transparency as well as reduce the size of the informal economy. Especially in developing countries economic activities happening outside the formal economy are very big, which results in the loss of a big chunk of taxes. Making society cashless, enables governments to easily track all transactions, making tax evasion difficult – the result is more tax collections. This is one of the reasons, that different governments promote digital transactions, making it accessible and affordable to common men even in rural parts.

Successful Models

India’s Unified Payments Interface (UPI)

Unified Payments Interface (UPI) payment is one of the most successful digital payment platforms across the globe. UPI was launched in India by NPCI in 2016. UPI allows fund transfers between bank accounts in real-time, using an UPI ID. UPI system has made digital payment systems accessible to millions of people even in the rural parts, which includes street vendors to large businesses. Its benefits like simplicity, security, and quicker transactions have made it a popular choice for both individuals and businesses.

Kenya’s M-Pesa

Launched in 2007, the M-Pesa digital payment system was launched by Vodafone and Safaricom, which was a huge success and changed the financial landscape of countries like Kenya, where the traditional banking infrastructure was not available in rural parts of the country. Around 98 percent population is employed in the informal sector as per a survey in 2005 by CBS, and had a strong mobile penetration in the country. The country was facing severe crime, mostly cash-related crimes, which was addressed to a level with this mobile payment system. Later M-pesa got expanded to other countries like Tanzania, South Africa, Ghana, Tanzania, Egypt, etc. Thus m-pesa financially empowered millions of unbaked populations.

Brazil’s PIX System

Brazil's PIX system was introduced in 2020 by the Central Bank of Brazil. Pix is a real-time payment platform that allows instant transfers between bank accounts. Within one year, pix became the most popular payment system in Brazil. With 42 billion transactions, pix became the most popular payment system in 2023. The platform’s ease of use, low transaction costs, and 24/7 availability are some of the reasons for making it popular and making it a critical tool for promoting financial inclusion and reducing reliance on cash.

Digital payment technology is growing fast and gaining popularity and coverage to the rural and unbanked populations, and thus promoting financial inclusion. This also reduces the reliance on cash and also reduces theft and other crimes that are mostly related to cash. Mobile payments will also help in increasing tax collections, as digital payments help in tracking the large informal economy.