The financial ecosystem is quickly evolving from a cash-dependent payment system to a digital transaction system. This new system has limitless opportunities for creative business owners to create niches for themselves. Newer industries are making headway into the finance industry, which was entirely run by banks earlier. Nowadays, mobile operators, e-commerce companies, and tech giants are all entering the financial market with their novel and easily accessible payment methods. Their success largely depends on the value a consumer will put on digitally stored money.
How Do Increased Savings Increase Merchant Payments?
Business models that are dependent on digital transactions target customers who can easily replace digital wallets for cash during transactions. This is a very lucrative offer for remote payments, payments involving large sums of money in bulk, or making payments when access to cash is a headache. Unfortunately, this comprises only a small fraction of monthly transactions in developing countries. Real money is the daily transactions carried out between individuals interpersonally and amongst consumers, service providers, and merchants.
Mobile money companies trying to establish themselves as the primary method of the transaction would need virtually every consumer, and subsequently, every merchant, to have a digital wallet to exchange electronic money. Simply having a digital wallet is not enough, consumers need to have money in these wallets in the form of app currency, or bank account linking, to be able to buy products and services.
Steps towards Financial Inclusion
As a result of reasons such as income disparity, unemployment, regulatory discrimination in banking, social and financial illiteracy, etc., a fair chunk of the demography did not have access to credit sources, let alone credit management knowledge. Over the years, positive strides have been taken both by the Government, and other financial institutions to remedy this situation.
In the past, discrimination and credit underwriting, have gone hand-in-hand. Money lenders, to reduce the risk of their investment, use extensive background checks to predict and assess applicant behavior. The background checks were not limited to credit scores and financial transactions, but often included gender, race, medical information, community, caste, etc. for risk assessment.
As a result, minority groups, who were believed to be a risky investment for lenders, were unable to avail of new credit. This prevented them from participating in the market. To prevent such unfair assessments, stricter laws have been instated now. The aim is to ensure that credit underwriters are unable to discriminate against individuals based on their gender, race, ethnicity, age, etc., or other arbitrarily chosen features. Positive steps taken toward financial inclusivity include:
- Easy access to transaction accounts – Individual transaction accounts are an absolute necessity to store, spend, and receive money. Thus, as adults with access to a transaction account increased to 1.2 billion between 2011 and 2017, financial inclusivity has improved.
- Conveniently available financial tools – Banking services that were only accessible in physical banks were accessible to a limited population. With the help of digitization, a lot of these services can be conducted online, making them available to a larger sector.
- Mobile transactions – The introduction of mobile transactions has improved the usage of opened accounts as more and more people are conducting even daily transactions using their mobile phones.
- Developing a national strategy – A nationwide initiative toward financial inclusivity has a larger impact on national morale. Over 60 countries have pledged to improve their conditions.
The success of the implemented policies and new strategies were discussed in the Financial Inclusion Week, conducted annually by the Centre for Financial Inclusion. A global forum of financial, behavioral, and community experts exchange opinions, and comments on innovative ideas and research. In 2022, the financial inclusion week final recap highlights the impact of digitization in the financial community and how it impacts financial inclusivity. The theme for 2022 was “Growth in a Digital Era.” The theme was prompted by the rapid conversion towards digitized financial services catalyzed by the pandemic. The experts exchanged ideas on how this change can be used positively and ethically, to improve the financial conditions of vulnerable and marginalized communities.
Financial institutions have been successful in establishing their customer base. On average, 65.76% of the world’s population has bank accounts. Everyone, from ultra-high-net-worth individuals to salaried individuals, is using banks to store money and manage finances. Depending on the type of account, sources of income, and patterns of expenditure, the balance in every account differs greatly.
Some see value in keeping all their hard-earned money in bank accounts, while others prefer to withdraw their income in entirety. The second group of people is highly unlikely to use digital modes of payment to conduct transactions in their daily lives. Banks are offering management tools along with digital payment options online to encourage consumers to keep all their money in their accounts instead of withdrawing cash. So much so that it becomes the primary usage. Money management is what a bank account is for, and it shows in the different types of bank account options available to customers to help their money management goals.
Ways to Efficiently Manage Finances
It is a simple rule; you need to save more in order to spend more. In fact, the entire nation’s economy benefits when individuals are better equipped to efficiently handle their expenses. Having a transaction account is only the first step in fiscal responsibility. Without proper management, the poor get poorer even after implementing various policies and offering financial aid. There is a vast and rapidly diversifying body of literature on the matter where experts comment on how to handle money to rise up the economic scale.
One very interesting concept is put forth by the authors of Scarcity why having too little means so much book. Sendil Mullainathan and Eldar Shafir are behavioral scientists who observed curious patterns of human behavior when faced with scarcity. Whether it is a scarcity of money, time, or anything else. They argued that, during times of scarcity, people should build boundaries, and do damage control.
Individuals with poor credit take loans, then invest them poorly. This spirals them further into indebtedness. As the number of debtors and individuals with poor credit increases, the threat of creditors refusing to lend to individuals with poor credit scores, and thereby reducing the overall flow of money in the market, also increases. This has caused anxiety among creditors and investors. In the analysis of both 2012 and 2014 surveys, Banana Skins reports reveal overindebtedness, as a major factor causing instability within the market.
Following simple guidelines can help enhance your personal investment portfolios and reduce the risk of indebtedness.
- Allocating Income: Everyone has monthly and yearly expenditures to take care of with their income. Apart from necessary payments, there are variable payments such as emergencies, savings, luxuries, and investments. It is best to calculate beforehand and allocate resources for each category based on priority. This promotes preparedness to handle emergencies and rationing your resources.
- Creating Sub-accounts – Many banks nowadays provide several options for managing your bank accounts. Budgeting combined with creating sub-accounts within your main account helps subscribers to stick to their budgets by helping them visualize their various payment responsibilities as the labels of their sub-accounts.
- Enabling Balance Alerts – Increasing popularity of online transactions sometimes causes users to have an out-of-sight-out-of-mind effect on their bank balance. It is very easy to overdraw at this point. Overdrawing on your account costs you money to reset it, sometimes more than the amount overdrawn. It is better to avoid overdrawing in the first place. Banks have an option that sends you alerts via mail, call, or messages warning you that the balance in your account has fallen below a previously determined limit.
- Making your bill payments online and automatically – Using a mobile wallet or banking features to pay your bills automatically ensures that bills are paid on time, avoiding late fees. But make sure that the automatic payments are made near the date when your salary is credited to avoid overdrawing your account.
- Automatic Savings Payments – Following automatic bill payments, saving deposits should also be made automatically to ensure payments are made regularly and on time. Make sure you choose the amount and timing of these deposits judiciously. A nominal amount will continue contributing towards your future without affecting your spending ability in the present.
- Utilizing available digital budgeting tools – Mobile banking and third-party software allow you to budget your money by helping you set and track your savings goals, track your expenses, and visualize budgeting plans.
- Alternative transaction accounts – Cash Management accounts or CMA are a convenient alternative to traditional bank accounts. They are offered by brokerages and can be used for both checking and saving purposes. It is superior to bank accounts in the sense that it provides low-cost or even free accounts for the lower-income population allowing a more inclusive financial scenario where larger groups of people can participate.
Digital Money Posing a Threat to Traditional Banking
With most financial operations now being conducted over the internet, are banks a thing of the past? The group of banking professionals of Africa, who are fellows of the esteemed Africa Board Fellowship Programme, does not see much hope for banking. The Africa Board Fellows deliberate on the matter and commented that fintech startups who are more flexible in filling the market gaps can, and eventually will, outperform banking systems if they can gather enough funding and build a strong business model.
Frequently Asked Questions
Q1. What are merchants in payments?
Merchants, including small-business owners and large-scale companies, are both now favoring digital payments. Between individual and merchant transactions, the merchant usually refers to local shops and regular service providers like restaurants, public transport services, etc, and the authority/agency mediating the process of the transaction.
Q2. What is the payment system of a country?
The payment system of a country refers to the preferred mode of transaction between merchants and individuals and between merchants within the larger network of merchants. The prevalence of digital transactions demands the development of a new framework for aggregating new merchant payment services.
Q3. What is financial inclusion?
Financial Inclusion refers to the inclusion of marginal and vulnerable communities in the financial landscape and ensuring conveniently available financial products and services that are both affordable and useful for all individuals and businesses. Transactions, payments, savings, credits, and insurance are some examples of financial services that need to be made available.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.