This paper presents research on digital financial services (DFS) analysing its potential to connect low income economies to financial services through appropriate policy frameworks and regulations. It is supported by case studies on developing economies that have successfully implemented DFS through financial technology (fintech) innovations. 

What are digital financial services and why do they matter for the poor?

DFS are financial services that rely on digital technologies for their delivery and use by consumers. Financial inclusion is defined as the access and usage of basic financial services. Data reveals that around one-third of adults in households do not have access to a basic transaction account and around US$8.1 trillion in credit is required to meet the needs of micro, small, medium-sized enterprises (MSMEs) in developing economies. DFS is able to reduce costs, increase transparency and security and improve access to financial services. Examples of DFS include mobile money, platform ecosystems and open application programming interfaces (APIs). 

DFS can mitigate long-standing supply and demand constraints on financial inclusion on both a micro and macro-economic scale. The full benefits of DFS implementation can be realised through a regulatory framework that enables financial innovation and facilitates the incorporation of DFS into traditional infrastructures. The new business models will present new opportunities and a new set of risks that create challenges and inhibits financial inclusion.

What are the binding constraints that policy-makers can address to promote the development and growth of DFS?

The main policy foundations to focus on facilitating growth and development are:

• Conducive legal and regulatory frameworks: regulatory reforms that open the market to non-banking institutions, facilitates fair competition, protects consumer data and privacy and generates demand for DFS and consumer trust.
• Enabling financial and digital infrastructure: implementing a payment system, credit infrastructure and digital connectivity infrastructure will promote fair competition and enable interoperability, decrease lending costs and improve delivery efficiency and provide a foundation for a digital financial infrastructure respectively. Interoperability is the ability of the customer to make and receive payments and transfers from different DFS providers.
• Ancillary government support systems: accessibility to government data, establishing customer identification through a digital ID and adopting digital payments for government fees can reduce the constraints on DFS.

Different approaches at the country level in emerging markets and developing economies (EMDEs)

Several case studies on government and financial infrastructure reforms and new approaches by EMDEs are analysed to identify the major success, the key enablers and key lessons that can be learned from developing economies. These case studies are on Ghana, India, Kenya and Tanzania and explore imbalanced regulation and lack of government investments, technology-led approaches and government commitment to financial inclusion, risk-based regulatory approaches and market development through the cooperation of DFS providers respectively.

Further case studies are presented to identify changes in the private sector of varying countries that have leveraged DFS and the resulting outcomes. These case studies on India, Bangladesh, Kenya, Tanzania and Thailand explore fintech start-ups, mobile banking services, digital proxy services and QR code systems and analyse key companies.

1. Investments into DFS are not efficient without the necessary legal and regulatory reforms which allow stakeholders to benefit from the services and also promote a competitive market. A regulatory framework that allows for innovation is more important in the short-term.
2. While DFS can promote growth and development, the lack of access to technology and the 'digital divide' can exclude groups such as low-income regions from realising the benefits.
3. Without access to digital payments, customers in low-income economies are forced to rely on the accessibility of cash. This is less efficient, presents more risks to customers and requires in-person interactions to process transactions.
4. New forms of data generated from digital transactions are being used in conjunction with non-traditional data such as information sourced from social media to determine credit scores. This develops 'reputation collateral' and can hinder future financial transactions such as bank loans.
5. To continuously monitor, assess and benchmark the provision of DFS in a country, it requires high quality data from other countries. However, relevant databases contain large gaps as a result of multiple providers and regulators.
6. Financial services help boost earning capacity by enabling investments in their education, health, housing, and businesses and smooth consumption and bolster resilience to shocks such as disease, job loss, or a weak harvest through remittances and basic savings, lending, and insurance products.
7. Examples of DFS models that have proven to advance financial inclusion at scale, include mobile (phone) money, platform eco-systems such as social media and open application programming interfaces (APIs) such as India's Aadhaar biometric identification system.
8. DFS also pose various risks and challenges, including data governance and privacy, cyber security and operational risks, financial integrity, regulatory arbitrage, macro-financial risks and fair competition due to dominance of bigtech.
9. DFS comes with risks that can inhibit financial inclusion Including exclusion due to the digital divide, over-indebtedness, discrimination, unfair practices and data-protection related risks.