Five Risks Associated With the Digital Financial Inclusion in the Developing World and Beyond

Financial inclusion has always been and remains a relevant and important issue that needs to be solved. And although the world is steadily moving towards universal access to affordable financial services in every corner of the world, there is still a large part of the world excluded from the perks of modern technological advancements in financial services.

Recognizing the importance of financial inclusion for the global population, various international structures are investing efforts into developing strategies for facilitating financial inclusion. One of the most recent works published in March 2016 by the Global Partnership for Financial Inclusion (GPFI) emphasizes one of the modern trends important for global economic growth and development – digital financial inclusion.

Digital is undoubtedly a crucial part of any industry nowadays. Increasing digitization across industries signifies the importance to follow the trend with initiatives like financial inclusion for underprivileged populations in remote parts of the world. GPFI illustrates the five pillars of digital financial inclusion and corresponding risks that require attention.

New providers & new combinations of providers

Alternative financial services are an important part of the ecosystem in 2016. Tech-powered nonbank e-money issuers and limited-service banks are gaining traction around the world and handling quite a significant part of the public’s funds. It is equally important to contribute to the prosperity of financial technology companies that are able to reach parts of the global population that have slipped through banks’ hands as it is important to create appropriate regulatory environments for their safe development.

“Although their risk profile is more limited than full-service commercial banks, setting proportionate requirements for licensing and regulation and determining the best approach for supervision is challenging with new institutional types, especially when they are relying on other financial and non-financial firms for important aspects of their business and are potentially expanding and increasing in number rapidly.”

Among the risks that GPFI mentions in regard to partnerships involving multiple providers in the digital delivery of financial services is a lack of transparency, including vis-à-vis treatment of consumers. In addition, partnerships may create “gaps in oversight by the primary provider of its partners and other third parties and by the supervisor of the provider.”

Data privacy and security is a never-ending issue that becomes especially relevant when it comes to partnerships. The higher the complexity of a partnership ‘bundle,’ the more there is to be concerned about in terms of different consumer protection rules or supervision.

Digital technology

The hallmark of digitization (in financial services as well) is that it often leads to the delivery of a service in an almost exclusively digital manner. On one hand, with the speed of global networks’ development and increasing connectivity, it is a great trend that would allow plugging remote locations into the financial services ecosystem. On the other hand, there are constraints to consider like the varying quality of the digital technology, which can have a considerable impact on data privacy and security.

“Hacking risks, including the vulnerability of cheap smartphones to malware, give rise to concerns about data security. In addition, mobile networks and digital transactional platforms that are unreliable due to network vulnerabilities or technology quality can result in an inability to transact—for example, due to lack of connectivity or lost payment instructions due to dropped messages.”

Use of agents

Agents are still an immense part of the financial services industry in developing countries. They serve as a primary connection between remotely located population and basic financial services. However, while it is a way of access to banking, agent-based services carry significant drawbacks.

Due to the physical distance between agents and the provider or the agent network manager, certain challenges are arising in effective training and oversight and recourse mechanisms.

Hence, lack of oversight and effective communication leads to a higher risk of fraud and theft, lack of transparency and may facilitate abusive behavior towards customers. Confidentiality and effective cash management across the agent network become a challenging issue. “In addition, agents may not be well-trained on (or may for other reasons fail to comply with) AML/CFT rules regarding performing customer due diligence, handling records, and reporting suspicious transactions.”

New products and services & their bundling

Bundling is one of the common strategies of monetizing digital financial services and it has its advantages as well as challenges. While it often does offer better terms and affordable price in comparison to paying for services separately, bundling often eliminates the choice and potentially a better option for customers.

Bundled credit, savings and insurance can contain a choice of a particular insurance plan and a particular APR for the credit card, which are not up to the customer to choose. “In addition to lacking choice, customers may not be able to determine the prices of the individual products and may not even be aware that multiple providers are involved.”

Financially excluded and undeserved customers

Digital financial services are often aimed to involve the parts of the global population excluded from the banking ecosystem. And it may often be the case that those part of the global population are not as savvy with digital technology as those often exposed to it. In parts of the world where the use of technology is often limited to old phones that can only make calls and send messages, literacy in the use of digital financial services is a crucial part of their adoption.

One of the problems illiteracy can cause is accidental exposure of sensitive information with all outcomes of it. Added to the negative experience with agents and abusive treatment by services providers, customers may consciously choose to be excluded from formal financial services ecosystem and stagnate their own financial prosperity and growth.


Kate is a staff writer at, , She likes to write about mobile payments and mobile commerce.

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