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How digital finance could boost growth in emerging economies: McKinsey Report

Posted on September 24, 2016 by Sumita Kale

 Digital finance for all: Powering inclusive growth in emerging economies, a McKinsey Report was released on 22nd September 2016. The report makes for a comprehensive quantification of the economic and social impact to emerging economies of digital finance, or financial services delivered via digital technologies-- mobile phones or the Internet--with less use of cash and traditional bank branches. Apart from econometric modeling, the report draws on findings from seven country visits that cover a range of geographies and income levels (Brazil, China, Ethiopia, India, Mexico, Nigeria, and Pakistan) and more than 150 expert interviews. Inputs from the Indicus Centre for Financial Inclusion have been included in the report. 

Summary:

Today, two billion individuals and 200 million small and mid-sized businesses in emerging economies lack access to savings and credit. Even those with access must often pay high fees for limited product choice. Economic growth suffers. But a solution is literally at hand. Digital tools - mobile phones and the internet - dramatically reduce the cost for finance providers to reach and serve customers, thereby raising productivity and investment in the economy and making financial inclusion a reality.

MGI finds that widespread adoption of digital finance in emerging economies could:

  • Boost the GDP of the emerging economies by as much as 6 percent versus a business-as-usual scenario, or $3.7 trillion by 2025. This is equivalent to the size of Germany's GDP today, or 1.5 times that of Africa. This additional GDP could create up to 95 million new jobs across all sectors of the economy.
  • Bring vital financial services for the first time to an additional 1.6 billion people, more than half of them women—and many in the middle class. For all individuals, convenience, cost, and the range of financial products available could dramatically improve.
  • Unleash $2.1 trillion in new loans to individuals and small businesses.
  • Enable governments to potentially gain $110 billion annually by reducing leakage in expenditure and tax collection.
  • Reduce direct costs to financial service providers by over $400 billion, enable these providers to expand their balance sheets by as much as $4.2 trillion, and create additional profitable fee-generating new business opportunities.

The report explores the three building blocks that need to be in place for developing countries to capture the digital finance opportunity:

  • Widespread mobile and digital infrastructure.
  • Dynamic business environment for financial services that allows space for competition and innovation at the same time as limiting risk.
  • Digital finance products that individuals and small businesses will prefer to existing alternatives.

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