March 31, 2016
With the fast pace of technology development and improving digital experience, electronic transfers globally are being adopted at a rapid pace. Even with increasing concerns over data privacy and security, the trend is expected to continue. National regulatory bodies and research centers are paying closer attention to the digitization trend to understand the impact and make sure the trend brings positive outcomes for the developing world as well as for most prosperous economies. Thus, the Consultative Group to Assist the Poor (CGAP), an independent policy and research center dedicated to advancing financial access for the world's poor, has taken a closer look at increasing electronic transfers and risks it creates for financial inclusion in the developing world.
According to a CGAP brief published earlier this month, the value of electronic transfers that are delivered into store-of-value accounts and accessible via debit cards or mobile money wallets is expected to more than triple between 2010 and 2017 to over $194 billion.
Electronic transfers certainly have a range of advantages over traditional vehicles. Among the ones mentioned most often are higher efficiency, reduced leakage, and faster, more convenient and more secure payments to recipients. Electronic transactions have a potential to foster financial inclusion when they are linked to bank accounts or mobile wallets. They allow users to create savings and have a better chance to sustain well-being in rough times. However, the actual data demonstrates that most recipients withdraw 100% of their payment at once and do not use the account again until the next transfer takes place. Hence, a logical question was raised: whether electronic payments can actually deepen financial inclusion. In fact, electronic transfers carry certain risks that could seriously undermine the benefit of the service.
The risks associated with electronic transfers outlined by the organization include:
-Transaction failure due to network/service unreliability -Insufficient agent or ATM liquidity -Complex user interfaces and payment processes -Poor or no recourse mechanism -Recipient-targeted fraud
Transaction failure due to network/service unreliability
Electronic transfers in developing countries are mostly targeted to the part of population that lives in remote locations. In those locations, however, the mobile networks may be quite weak and experience failures. Network connectivity problems result in failure to perform transactions at points of access and points-of-sale. Unreliable connections and errors in transactions create unsatisfying experiences and are likely to turn away users seeing more problems caused by the use of the service than benefits.
Insufficient agent of ATM liquidity
Usually, funds are transferred in bulk, which means that a certain number of recipients will receive money in one day. A bulk settlement creates heavy pressure on the access point to meet liquidity demands, which is a particular challenge in remote and less secure areas. As a result, recipients are forced to wait for a significant amount of time to receive their funds. They have to often come back the next day if the point of access is overwhelmed and doesn’t have sufficient funds. CGAP sees the process as a vicious cycle because the shortage of liquidity undermines the trust in the system and creates uncertainty in the ability to access funds any time. Out of fear, users want to withdraw all of a payment at once and as soon as it’s deposited, which thereby facilitates liquidity issues at cash-out points.
WFP Kenya’s Cash for Assets Program study this year has demonstrated that 21% of the recipients are unable to cash-out the desired amount of their transfers due to insufficient agent liquidity. Another study by the same organization indicated that the recipients perceived liquidity constraints as a cost factor that made the digital payments useless.
Complex user interfaces and payment processes
Poor user experience has always been a plague even for great services. User experience is especially important when the general population lacks financial literacy, which – unfortunately – is often the case in the developing world where the vast majority is not served by the formal financial services industry. Complex interfaces and complicated processes can result in errors and losses from either incorrect transactions or recurring timeouts due to limited transaction times, providing an overall poor experience with electronic transfers and negative attitude towards the service.
Electronic payments users in the developing world are often new to digital interfaces and may be uncomfortable with multistep processes of accessing funds. In addition, because of errors that may occur due to the lack of knowledge on how to use the service or network problems, recipients may end up paying extra fees for frequent transaction failures and repetition. The necessity to ask a professional for assistance, the risk to be charged for fraud and errors can reduce trust and make the system seem inconvenient to the recipient. It is likely that as a result of inconvenient experiences with electronic payments, people will develop similar opinions for formal (digital) financial services overall.
Poor customer service
It often is the case that users are not confident in the support system, which leads to confusion when problems occur. The confusion leads to a difficulty in solving problems they may have with their transfer. In addition, recipients that use different providers are reported to experience fear that in case of a filed complaint, they may lose the funds. As a result, they fail to ask and report the problems they face.
However, even when customer support is available, recipients are often not aware of it or have had a negative previous experience with it like lost funds, long waiting time, etc. As a result, recipients feel frustrated and exhausted to bother with the service. It is tightly connected with the previous point on user experience, but this time, it's related to customer service rather than the system interface.
Recipient-targeted fraud Recipients often don’t know about the extra charges and fees associated with fund transfers. As a result, they are vulnerable to unfair treatment and fraud. According to CGAP and WFP Kenya, recipients for 62% of cash for the Assets Program did not know that there were transaction fees despite paying a transaction fee of at least KSH 50 for each withdrawal. The same statistic for Fiji is as high as 68%. And in Ghana’s LEAP Program, 80% were unaware of their payment amount. The data demonstrates that there is a vast opportunity for mistreatment and fraud with electronic payments users in developing countries. Since users are not aware of charges and fees, agents can freely take advantage of them and hence, increase the costs associated with electronic payments services. As a result, users may turn away from digital payments as they would see them as expensive and risky.