The Promise of Digital Finance

BERKELEY – An economic development revolution lies literally in the palm of a single hand. As mobile phones and digital technologies rapidly spread around the world, their implications for economic development, and particularly finance, have yet to be fully realized. The sooner that changes, the better for people worldwide.

In emerging economies today, two billion people – 45% of all adults – do not have a formal account at a bank, financial institution, or with a mobile-money provider. The “unbanked” rate is even higher for women, the poor, and people living in rural areas. Moreover, at least 200 million small- and medium-size enterprises lack sufficient credit, or have no access to credit at all.

Entrepreneurship, investment, and economic growth suffer when savings are stored outside the financial system, and credit is scarce and expensive. Fortunately, according to a recent report by the McKinsey Global Institute (MGI), digital technologies – starting with mobile phones – can rapidly fix this problem and foster faster, more inclusive growth.

Mobile phones and the Internet can reduce the need for cash and bypass traditional brick-and-mortar channels. This dramatically reduces financial-service providers’ costs, and makes their services more convenient and accessible for users – especially low-income users in remote locations. MGI estimates that if digital finance is widely adopted, it could add $3.7 trillion to emerging countries’ GDP by 2025. That amounts to a 6% increase above business as usual. In low-income countries with very low financial inclusion rates, such as Nigeria, Ethiopia, and India, GDP could increase by as much as 12%.