Digital Finance Could Add The Equivalent Of US$3.7 Trillion To The GDPs Of Emerging Economies By 2025

Digital finance will account for 6 percent of the annual economic output of developing nations over the next 10 years according to a new report from the McKinsey Global Institute.

The Digital Finance For All: Powering Inclusive Growth In Emerging Economies report notes that delivering financial services through mobile services could benefit billions of people by spurring inclusive growth equivalent to US$3.7 trillion, or an economy the size of Germany, to the GDP of emerging economies within a decade.

This additional GDP could create up to 95 million new jobs across all sectors of the economy.

In addition to extensive economic modeling, the report draws on the findings of field visits to seven countries — Brazil, China, Ethiopia, India, Mexico, Nigeria, and Pakistan — and more than 150 expert interviews. It also lays out the key conditions that will need to be met to capture the benefits.

Using digital channels rather than brick-and-mortar branches dramatically reduces costs for providers and increases convenience for users, opening access to finance for people at all income levels and in far-flung rural areas. For businesses, financial service providers, and governments, digital payments and digital financial services can erase huge inefficiencies and unlock significant productivity gains. McKinsey Global Institute

Developing countries lose enormous amounts of economic potential from the continuing reliance on cash, and the difficulty many businesses and individuals encounter when trying to gain access to the financial system.

Using digital payments instead of cash and using electronic record-keeping instead of paper could spur an increase in productivity of up to 67% according to the report. With more GDP gains coming from continued investment, tapping into the digital finance ecosystem could bring more businesses into the formal economy, meaning that they would be more able to participate in the formal financial ecosystem, with the added advantage of easier access to credit.

A number of startups are already providing financial services through mobile without the involvement of banks. In Kenya, for example, more than 70 percent of the population is using M-Pesa, which has revolutionized remittances and payment services.

Susan Lund, one of the co-authors of the McKinsey report, said that as her team crunched the numbers on the impact of digital finance, even she was surprised by the impact it could have on the broader economy — adding almost US$4 trillion in annual economic activity by 2025.

“I thought this was about financial services,” Ms. Lund said. “I now think of this more like basic infrastructure for a modern economy, as opposed to just something that banks do.”

Any effort to provide more financial services to the developing world is likely to encounter both resistance and skepticism, given the somewhat spotty record of past financial projects aimed at helping the poor.

The flow of financial investments into emerging economies has, in the past, contributed to and worsened currency and financial crises around the world. Economic development is a long and complex journey, but digital finance solutions can radically speed the progress, and at a relatively affordable cost. Mobile payments, for example, lower the cost of providing financial services by as much as 90%. This would let providers serve low-income customers and still make a profit.