Two billion individuals and 200 million micro, small, and mid-sized businesses in emerging economies today lack access to savings and credit. Even those with access must often pay high fees for limited product choice. Economic growth suffers. But a solution is literally at hand. Digital finance—financial services delivered via mobile phones, the Internet or cards linked to a digital payment system—could be a boon to individuals, businesses, and governments across the developing world, boosting GDP and making the aspiration of financial inclusion a reality.
How large are the potential benefits of digital finance?
A new McKinsey Global Institute (MGI) report, Digital finance for all: Powering inclusive growth in emerging economies, is the first to comprehensively quantify the economic impact of digital finance. In addition to extensive economic modeling, the report draws on the findings of seven country visits that cover a range of geographies and income levels (Brazil, China, Ethiopia, India, Mexico, Nigeria, and Pakistan) and more than 150 expert interviews, and lays out the key conditions that will need to be met to capture the benefits.
MGI finds that digital finance could boost the GDP of all emerging economies by as much as 6 percent versus a business-as-usual scenario or $3.7 trillion by 2025—the size of Germany. This additional GDP could create up to 95 million new jobs across all sectors of the economy. Nearly two-thirds of the GDP increase will come from improved productivity of businesses and governments as a result of digital payments. One-third is from the additional investment that broader financial inclusion of people and micro, small, and medium-sized businesses would bring. The small remainder comes from time savings by individuals which enables additional hours to be spent on work.
Other findings on the economic impact of widespread adoption of digital finance include:
· Digital finance has the potential to provide access to a financial account for the first time to 1.6 billion people, more than half of them women—and many in the middle class. For all individuals, convenience, cost, and the range of financial products available would dramatically improve. People in towns and cities will no longer have to spend valuable business hours in line at a bank; rural households can forgo trips to nearby towns and spend more time on income-generating activities. MGI estimates that individuals in emerging economies could save 12 billion hours a year by switching to digital financial services.
· Emerging economies could sustainably unleash $2.1 trillion in new loans to individuals and small businesses.
· Governments could gain $110 billion by reducing “leakage” in expenditure and tax collection.
· For financial service providers, the cost of offering customers digital accounts can be 80 to 90 percent lower than using physical branches. Financial services providers could save as much as $400 billion in direct costs from the shift from cash to digital payments and expand their balance sheets by as much as $4.2 trillion.
· The economic potential varies significantly depending on a country’s starting position. Lower-income countries such as Ethiopia, India, and Nigeria have the largest potential, with the opportunity to add 10 to 12 percent to their GDP, given low levels of financial inclusion and digital payments today. In comparison, middle-income countries such as China and Brazil could add 4 to 5 percent to GDP—still a substantial boost.
· The economic gains from digital finance in fact could exceed the report’s estimates, as the analysis does not quantify many long-term benefits including the formalization of informal economies that tends to boost productivity, and the fact that women with access to finance are more likely to spend household income on food, education, and health care, building the human capital of the future. Taken as a whole, digital finance can accelerate progress toward meeting many of the UN’s Sustainable Development Goals, leading to important societal benefits.
Susan Lund, a partner at the McKinsey Global Institute and co-author, said:
“Using traditional brick-and-mortar banks, we’ve seen financial inclusion improve slowly as a country’s income rises. But we don’t find any correlation between mobile-money usage and income. Rather than waiting a generation for incomes to rise to close the financial inclusion gap, developing countries can use mobile phones to provide digital financial services for the vast majority of its citizens within a decade.”
Olivia White, a partner in McKinsey’s Global Banking Practice and co-author, said:
“Shifting from cash to digital payments will lower financial-service providers’ cost structure, open up profitable new ways to enlist new customers, and create trillions of dollars in new deposits. But whether those new deposits go to banks or nontraditional players is up for grabs.
Three building blocks need to be in place to capture the economic opportunity
Businesses and government leaders will need to make a concerted effort to secure these potential benefits. Capturing the economic and societal benefits will require three building blocks to be in place:
· Widespread mobile and digital infrastructure. The rapid spread of mobile phones is the game changer that makes the economic benefits from digital finance possible. In 2014, nearly 80 percent of adults in emerging economies had a mobile phone, while only 55 percent had financial accounts—and mobile phone penetration is growing quickly.
· Dynamic business environment for financial services that allows space for competition and innovation at the same time as limiting risk.
· Digital finance products that meet the needs of individuals and small businesses that they will prefer to existing alternatives.
The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. The partners of McKinsey & Company fund MGI’s research; it is never commissioned by any business, government, or other institution. The Lauder Institute at the University of Pennsylvania ranked MGI the Number One private sector think tank in the world in its 2015 Global Go To Think Tank Index.
