Strategies: What We Can Learn from the Digital Money Index

While digital-money adoption holds great promise and has become a priority for governments globally, adoption is varied. To understand the drivers, enablers, and barriers to digital money, Citi and Imperial College London devised a digital-money readiness index

Given the importance of money to society—coupled with the problems associated with transacting in cash—the potential for digital money is enormous. Indeed, Citi research indicates that mobile payments could reach a transaction value of around $1 trillion by 2016.

Yet for this potential to be realized, it is imperative to understand not only what will enable the growth of digital money, but also the potential barriers. Given this, Citi and The Imperial College, London, joined forces to create the Digital Money Index, a quantitative report on the global journey towards cashlessness.

Stages of Readiness

What is digital money? The Digital Money Index defines it simply as “monetary exchange by electronic means.” This is essentially any monetary transaction that does not involve physical cash or paper checks.

Armed with this definition, the Digital Money Index focuses on the journey toward cashlessness as a global one, identifying how “ready” certain countries are for digital money and the common enablers and barriers they face. The readiness of the 90 countries studied are grouped into four stages: incipient; emerging; in-transition; and materially ready.

Undoubtedly, the advent of mobile-phone solutions has given the journey towards cashlessness new momentum, enabling digital money to spread to the unbanked and developing markets, and therefore inspiring further innovation.

However, the journey towards cashlessness has only just begun. And proof of this is the fact that most of the countries recorded in the Digital Money Index are within the earliest, “incipient,” stage of readiness. Such countries—of which there are 30 in total—include Russia, Iran, Nigeria, and Argentina, and are characterized by a lack of affordable (and basic) IT infrastructure, as well as financial services that are either limited or expensive.

Second is the “emerging” stage, where basic IT infrastructure and financial services—the key pillars of digital money—do exist, and relevant regulation is present. That said, regulation is often not enforced, and the IT that exists is not easily accessible to all. This results in a preference for cash. Countries in this stage include India, Greece, Jamaica, and Kenya.

Certainly, the challenges of the “incipient” and “emerging” stages have largely been resolved in the countries—such as the UAE, Brazil, Spain, and Italy—included in the “in-transition” stage. Often, these countries have even successfully deployed state initiatives, such as social disbursements, using digital money. Often at this stage, industry-led solutions such as stored value tap-and-pay solutions for transit, as seen with Oyster in London, serve as accelerators in further driving adoption.

Finally, countries such as the U.K., the U.S., Germany, and France are considered “materially ready,” exhibiting ubiquitous IT diffusion and a familiarity with digital solutions, as well as offering supportive business and regulatory environments. In such an environment, the private sector provides innovative, convenient, and accessible digital-money solutions that drive consumer adoption.

Clear Benefits

So how can a country progress through these stages? Before looking at how, it is important to explore why a country should encourage digital-money adoption.

In this respect, the benefits are clear. Digital money provides simplicity and security to processes that are otherwise arduous, complex, or exposed to human error.

This saves costs. Citi estimates show that the cost of the end-to-end cash collection for companies can be between 2% and 5%. Through simplifying the collections process, digital money holds the potential to significantly lower these costs.

Of course, digital money also adds security and transparency to money flows. For instance, the World Economic Forum estimates that there is a leakage of 5% to 25% of all government benefits to fraud, theft, and incorrect payments. Yet, by transferring money directly to the recipient—therefore removing the need for intermediaries—digital money significantly reduces the risk of theft, fraud, and leakages, as well as eliminating the risk of human error.

Indeed, according to the Inter-American Development Bank (IADB), the share of participants in Argentina who admitted to paying bribes to receive their disbursements fell from 3.6% to 0.3% after implementation of digital government disbursements.

What’s more, payments and collections through digital money are easily tracked, thereby holding the potential to reduce fraud for both consumers and companies.

Knock-on Effect

Yet of all the drivers, financial inclusion—bringing financial services to the unbanked—seems to have the most potential to trigger change in both the developed and developing markets.

Statistics discussed during the launch of the Digital Money Index show that some 300 million Indians are below the poverty line. According to the World Bank, approximately 70% of Nigerians do not have bank accounts, and even in the United States, 70 million people are unbanked or underbanked.

Many consumers in both developing and developed markets lack Internet access and cannot travel to the closest bank branch, yet do have mobile phones. The creation of digital-money solutions for mobile phones, therefore, means that those at the bottom of the economic pyramid can finally access basic financial services.

And the benefits of this are widespread. Indeed, if all the countries represented in the Index increased their adoption of digital money by 10%, it could enable 220 million individuals to enter the formal financial sector. This has the potential to bring more than $1 trillion from the informal economy into the formal economy. At a 10% tax rate, that would mean $100 billion in additional government income. This would also result in $150 million in additional deposits and loans.

Of course, the knock-on effect of this is an increase in capital for businesses and therefore an increase in employment, a significant driver for governments to promote digital money.

Four Key Pillars

However, moving towards cashlessness requires the establishment of four key “pillars:” institutional environment; enabling infrastructure; solution provisioning; and propensity to adopt.

The first pillar, “institutional environment,” refers to the work of the government in building the confidence and commitment of the private sector.

India, for instance—listed as an “emerging” country in the Index—continues to create standards around mobile payments, and the government has started issuing government benefits and student scholarships through the technology.

Of course, developing regulations and solutions is pointless without the infrastructure to support the digital movement of money. Given this, the second pillar listed in Citi and Imperial College’s Digital Money Index is “enabling infrastructure.”

Kenya and Ghana provide examples of countries that have driven investments in mobile infrastructure and enabled telco-led mobile money initiatives. A number of countries in the Middle East have improved their digital money readiness by making significant investments in infrastructure and transitioning to e-government service delivery

India, too, is fast-growing its infrastructure. In the mid to early 1980s, it had 2 million telephones for 750 million people. Today, according to Sam Pitroda, advisor to the Prime Minister of India on public information infrastructure and innovation, it has 900 million phones.

Once the government has created a sophisticated regulatory and infrastructure backdrop, what remains is creating solutions to suit the needs of the region, and persuading the consumer to adopt. These final two enablers however—“solution provisioning” and “propensity to adopt”—are perhaps the trickiest to achieve.

For both, there is a clear divide between the developing and developed markets. While developing markets are driven by the need to adopt digital-money solutions, the developed markets—where consumers already have access to sophisticated and convenient digital-banking solutions—are driven by desire. For them, it is more a question of “form factor”—choosing between different, convenient ways to access financial services and make transactions.

“Solution provisioning”—the third pillar of digital-money enablers—is associated with the creation of solutions that are suited to the target consumer and region. For the developing markets, for instance, this means creating solutions that are multifunctional and can operate by text rather than through the Internet.

For developed markets, this means growing and vibrant e-commerce, the use of stored value schemes for transit, digital government disbursements and private sector investments in point-of-sale infrastructure.

Government disbursements play a key role in driving adoption, as seen in Brazil and Argentina. For developed markets, it means innovators have to look at the already-existing solutions and ask what it is they are unable to do.

One example of such innovation has been the introduction of mobile point-of-sale solutions. Using a smart phone as a POS terminal has enabled small retailers and individual service providers (e.g., taxi drivers) to accept card payments, thus unlocking new revenue while increasing convenience for the end-user and digitizing physical cash flows.

Certainly, this conflict between need and desire that exists between the developing and developed markets influences consumers’ “propensity to adopt,” the final pillar of enablers highlighted in the Digital Money Index. In the developed markets, for instance, existing solutions often work well and changing consumer behaviour requires a superior experience against the status quo.

Barriers

Of course each of these enablers can also act as barriers to overcome. The failure to persuade the consumer to adopt, for instance—regardless of the regulation and infrastructure in place—halts the journey toward cashlessness. And one of the main barriers to consumer adoption revolves around cultural attitudes to money.

Germany and Japan, for instance, are two countries that primarily use cash despite being “materially ready.” Indeed, Germany has about three times as many ATMs than point-of-sale terminals, due to a belief that carrying cash prevents overspending.

Yet there is hope. Changing something so culturally ingrained may take several generations, but eventually, increasing sophistication and comfort through digitization is expected to lead to increased use.

And the impact of culture is not all negative. Indeed, cultural attitudes can also serve to inspire adoption in countries that are not yet deemed “ready.” While categorised as “incipient,” Venezuela, for instance—driven by the need to reduce fraud, theft, and leakages—has a large appetite for digital-money solutions. Indeed, it has more point-of-sale terminals per capita than many European countries that appear high on the index (Germany, France, and the Scandinavian states among them).

Certainly, identity presents another challenge to digital-money adoption in two ways: a need for identity and a desire for privacy. Successful transactions rely on the knowledge of from where, and to whom, money is being transferred. Yet providing a large number of people with an identity they did not have before—as they move into the formal economy through the use of mobile banking—is complex. This is especially true when, at the same time, they desire privacy and anonymity, something that cash is able to provide.

Regardless of where a country is on the scale of readiness, collaboration between the government, private sector, financial sector, technology operators, and innovators is the only way forward.

One Step Closer

We are just starting to understand the drivers behind digital-money adoption. And knowledge—not only understanding the drivers, enablers, and barriers of digital money, but also looking at the successes and failures of other countries—is the key to progression on the global journey towards cashlessness.

And, as such, through the creation of the Digital Money Index, we are one step closer.

–Greg Baxter is global head of digital strategy at Citi.