Adoption of digital financial solutions could significantly enhance financial inclusion and push growth in emerging economies, a new report by the McKinsey Global Institute (MGI).
Transition to digital financial solutions is likely to add 6% or 3.7 trillion to GDP, benefiting billions of people, the report said.
Two billion individuals and 200 million micro, small, and mid-sized businesses in emerging economies lack access to savings and credit, according to the MGI, and even those with access must often pay high fees for limited product choice.
Digital financial services that are 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, the report stated.
Rather than waiting for 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, said Susan Lund, a partner at the McKinsey Global Institute and co-author of the report.
The study found that digital finance could boost the GDP of all emerging economies by as much as 6% by 2025. 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, according to the study.
One-third is from the additional investment that broader financial inclusion of people and micro, small, and medium-sized businesses would bring. The remainder comes from time savings by individuals that enable additional hours to be spent on work, the study found.
According to the study, 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.
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.
For financial service providers, the cost of offering customers digital accounts can be 80 to 9% lower than using physical branches, the report said.
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.
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, said Olivia White, a partner in McKinsey’s Global Banking Practice and co-author.