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Digital Finance

Digital finance is a robust medium to broaden the access outside the financial services to other sectors, which includes agronomy, infrastructure, services, energy among others. People without a bank account are accessing the financial services via the digital medium. Several stakeholders are utilizing the cell phones along with a gamut of agents to provide simple financial services at better suitability and reduced cost against conventional banking. It is also known as “Branchless Banking”.

Traditionally, the huge expenditure involved in constructing and managing conventional banks has been a key stumbling block for connecting with the low income groups. A banking infrastructure is not easy to manage in remote areas, while it would be expensive for customers in the rural areas to commute to the urban centres.

Digital finance assists in negating the obstacles. Agents having cell phones are the most optimal medium for handling less value transactions for low income groups, cost effectively. Cash flow into innovative digital finance firms keeps increasing for consolidating assigned digital banking, mobile solutions and delivery platforms among others.

The impact of digital finance on the global economy is expanding at an accelerated pace. It is transforming the way financial transactions are done. The benefits of the digital finance are many, including cost decrease, development of essentially digital financial products and services, including advanced ones. Certain digital finance products are delivered on modified global digital platforms.

The technological advancements provide new prospects for FinTech start-ups. It also assists various stakeholders including governments and firms to steer development. There is a need for a highly effective global regulatory infrastructure to manage digital finance.

The Establishment of a Facilitating Scenario for Digital Finance Needs Certain Critical Policy and Regulatory Queries to Be Resolved Such as:

  • Corresponding the keenness for innovation with assurance about the legal framework.
  • Regulating and protecting the provision of modified digital finance tools such as e-money.
  • Comprehending AML’s concerns pertaining to digital finance and mobile-empowered international remittances.
  • Monitoring digital financial services.
  • Regulating a wide array of third-party agents.

The provision of financial services via highly innovative technology, which includes mobile money, could be a driving force for the utilization of a gamut of financial services – credit, insurance, savings among others.

According to Jin-Yong Cai, International Finance Corporation Executive Vice President and CEO, “The benefits of digital finance extend well beyond conventional financial services: This can also be a powerful tool and an engine for job creation in developing countries.”

As per Thomas Duveau, the Head of Mobisol Solar Home Systems, “The buzzword ‘digital finance’ is already an everyday reality for our Tanzanian, Kenyan, and Rwandan customers who are using Mobisol Solar Home Systems. Paying for solar power in small instalments through mobile money is not a ‘fancy option’: It’s already the norm for commercial transactions by those at the bottom of the economic pyramid.”

Digital finance is also critical for the retail business. It ensures the small businessmen have the access to funding, along with the electronic payment systems, robust financial products and the opportunity to construct a financial track record.

According to Walt Macnee, President of the MasterCard Center for Inclusive Growth, “Innovations in electronic payment technology like mobile and prepaid enable people to live more secure, empowered and included lives and that digital money will be the only way to achieve universal access to finance by year 2020.”

Digital Finance is a priority for banks in the recent past. The innovations like mobile deposits have radically changed the reach of banking. Currently, customers are finishing most of the transactions online using a mobile or tablet device. Customers are very conscious about the latest technology.

The penetration of the digital finance is expected across various segments, including the medium scale business and corporate banking. There are obstacles like security, greater intricacy with regard to the kind of services required for distinct businesses.

Some of The Challenges That Could Be a Stumbling Block for Digital Finance:

Availability of Liquidity with Agents

Agents operating in rural environments usually have problems in honouring their commitments, resulting in displeased customers and falling confidence in the service.

Interoperability

Transferring money through the mobile is usually not interoperable amongst providers. This prevents the flow of money which could have been used to cater to more customers.

Malpractices

The increase in agents has led to various malpractices along with service delays in certain markets.

The Key Developments in the Digital Finance:

  • The availability of instruments to expedite the account creation process.
  • The utilization of biometrics (finger and voice) to facilitate customer verification.
  • The use of field oriented management instruments to monitor field personnel.
  • The appearance of third-party agent aggregators.
  • The development of applications that assist financial firms with mobile money amalgamation.
  • The creation of top notch technology that ensures digital payments in retail stores.
  • The use of other data options for arriving at credit conclusions.
  • The leverage of business intelligence.
  • The availability of micro credit through the mobile.
  • The expansion of financial products provided by non-mobile cash benefactors.
  • The advancements in financial competencies.
  • The overall buying and selling in agribusiness using the mobile apps.

Digital financial services are evolving across global markets. Certain nations with the available infrastructure are providing a wide array of products and services. The differences between nations are directed by many aspects, which includes the use of cell phones, the growth of financial infrastructure, the regulatory framework among others.

The part of innovation is critical, since it would ignite enhancement in the fast transforming mobile money environment. Any increase in process efficiency would reduce the cost and decrease obstacles.

The digital finance environment is changing continuously and would be radically different in the long term. In an increasingly integrated international economy, innovations from various markets could be implemented and customized to suit local requirements. It would help consumers from various income strata. The digital finance journey has been excellent, but it is just the beginning.

Digital Money In Action: Will the World Embrace a First From Africa?

The advent of mobile telephony in Africa has been slow. The regulatory environment had stifled the growth by creating a bureaucratic red tape that was a hindrance to many mobile phone service providers from the developed world to invest in Africa. To them Africa was a risky place to do business. This was due to the many internecine conflicts that characterized the African nations after many states had gained autonomy from their colonial masters.

But with the advent of information technology Africa had to reform its regulatory environment to allow the uptake of new trends in technology like the mobile phones to avoid being left in a time warp in a world that was moving towards becoming a global village.

Kenya was no exception; with the improvements in the regulatory environment, majority of Kenyans now own a mobile phone.This has been due to the registration of several mobile phone service providers that offered a wide choice and great variety to choose from. There are two major players in this service industry: Safaricom a joint venture between the government of Kenya and Vodafone, UK and Bharti Airtel from India. The choice of the service provider to choose depends on the added functionalities that the provider gives her clients.

The provision of mobile money transfer by the main mobile service phone provider Safaricom has revolutionized the way Kenyans do business. Kenyans in the urban centers and cities across the country have found an efficient, safe and reliable way of sending money to the rural areas. This has provided an opportunity for Kenyans who took long periods away from home to remit funds for school fees, money to plough land, to pay medical bills and many other services. In the urban centers Kenyans are able to pay for utilities from the comfort of their homes provided they have money in their virtual accounts in their mobile phones.

The Future of Digital Currencies

“Ah but it’s Digital now”. “Digital” a word whose origins lie in the latin digitalis, from digitus (“finger, toe”); now it’s use is synonymous with computers and televisions, cameras, music players, watches, etc, etc, etc. But what of digital money or even digital democracy?

The printing press caused a revolution in its time, hailed as a democratic force for good by many. Books available to the masses was indeed a revolution; and now we also have e-books and technological devices to read them with. The fact that the original words have been encoded into a numerical form and decoded back to words electronically does not mean we trust less the words we are reading, but we may still prefer the aesthetics of a physical book than a piece of high-tech plastic which needs to have its battery charged to keep working. Can digital currencies such as bitcoin really provide a contribution to positive social change in as spectacular a way?

To answer this we must ask what of money, how are we to understand it, use it and incorporate it into a sustainable model of a ‘better world for all?’ Money, unlike any other form of property, is unique in that it may be used for anything prior to an event even occurring. It implies nothing, yet can be used for great good or great evil, and yet it is only what it is despite its many manifestations and consequences. It is a unique but much misunderstood and misused commodity. Money has the simplicity of facilitating buying and selling, and a mathematical complexity as demonstrated by the financial markets; and yet it has no notion of egalitarianism, moral or ethical decision making. It acts as an autonomous entity, yet it is both endogenous and exogenous to the global community. It has no personality and is easily replaceable, yet it is treated as a finite resource in the global context, its growth governed by a set of complex rules which determine the way in which it may behave. Yet despite this the outcomes are never completely predictable and, furthermore; a commitment to social justice and an aversion to moral turpitude is not a requirement of its use.

In order for a currency to effectively perform the financial functions required of it, the intrinsic-value of money has to be a commonly held belief by those who use it. In November 2013 the US Senate Committee on Homeland Security & Governmental Affairs acknowledged that virtual currencies are a legitimate means of payment, an example of such is Bitcoin. Due to the very low transaction fees charged by the ‘Bitcoin network’ it offers a very real way to allow the transfer of funds from migrant workers sending money back to their families without having to pay high transfer fees currently charged by companies. A European Commission calculated that if the global average remittance of 10% were reduced to 5% (the ‘5×5’ initiative endorsed by the G20 in 2011), this could result in an additional US$ 17 billion flowing into developing countries; the use of the blockchain would reduce these fees near to zero. These money transfer companies who extract wealth from the system may become dis-intermediated through the use of such an infrastructure.

Probably the most important point to note about cryptocurrencies is the distributed and decentralised nature of their networks. With the growth of the Internet, we are perhaps just seeing the ‘tip of the iceberg’ in respect of future innovations which may exploit undiscovered potential for allowing decentralisation but at a hitherto unseen or unimaginable scale. Thus, whereas in the past, when there was a need for a large network it was only achievable using a hierarchical structure; with the consequence of the necessity of surrendering the ‘power’ of that network to a small number of individuals with a controlling interest. It might be said that Bitcoin represents the decentralisation of money and the move to a simple system approach. Bitcoin represents as significant an advancement as peer-to-peer file sharing and internet telephony (Skype for example).

There is very little explicitly produced legal regulation for digital or virtual currencies, however there are a wide range of existing laws which may apply depending on the country’s legal financial framework for: Taxation, Banking and Money Transmitting Regulation, Securities Regulation, Criminal and/or civil law, Consumer Rights/Protection, Pensions Regulation, Commodities and stocks regulation, and others. So the two key issues facing bitcoin are whether it can be considered as legal tender, and if as an asset then it is classed as property. It is common practice for nation-states to explicitly define currency as legal tender of another nation-state (e.g. US$), preventing them from recognising other ‘currencies’ formally as currency. A notable exception to this is Germany which allows for the concept of a ‘unit of account’ that can therefore be used as a form of ‘private money’ and can be used in ‘multilateral clearing circles. In the other circumstance of being considered as property the obvious discrepancy here is that, unlike property, digital currencies have the capacity of divisibility into much smaller amounts. Developed, open economies are generally permissive to digital currencies. The USA has issued the most guidance and is highly represented on the map below. Capital controlled economies are effectively by definition contentious or hostile. As for many African and a few other countries the topic has not yet been addressed.

Starting from the principles of democratic participation it is immediately apparent that bitcoin does not satisfy the positive social impact component of such an objective in so far as its value is not one it can exert influence over but is subject to market-forces. However any ‘new’ crypto-currency may offer democratic participation when the virtual currency has different rules of governance and issuance based upon more socially based democratic principles.

So what if a “digital” currency could provide a valid alternative to existing forms of money in performing the role of contributing positively to: the goals of promoting a socially inclusive culture, the equality of opportunity and the promotion of mutualism; which as their very name implies are alternative and/or complementary to an official or national sovereign currency? Virtual cryptocurrencies such as bitcoin are a new and emerging dynamic in the system; though in their infancy, the pace of innovation in the field of cryptocurrencies had been dramatic.

There are many factors which determine the ‘effectiveness’ of money to bring about positive social and environmental change; pervading political ideology, economic environment, the desire of local communities and individuals to pursue alternative social outcomes whilst seeking to maximise economic opportunity, building of social capital, and many others. If a local digital currency could be designed to build extra resilience into a local economy and improve economic outcomes then introduction on a more widespread basis merits investigation. When the current economic system fails to deliver it is manifested in such ways as: increased social isolation, higher crime rates, physical dereliction, poor health, a lack of a sense of community, amongst other undesirable social impacts.

The future is digital?