‘Digital finance is $700 billion opportunity for India’

Digital finance — financial services delivered via mobile phones, the Internet or cards linked to a digital payment system — could be a boon to individuals, businesses, and governments across the developing world, boosting GDP and making the aspiration of financial inclusion a reality, it said. “Nearly two-thirds of the GDP increase will come from improved productivity of businesses and governments as a result of digital payments. One-third is from the additional investment that broader financial inclusion of people and micro, small, and medium-sized businesses would bring,” it said. The small remainder comes from time savings by individuals which enables additional hours to be spent on work.

McKinsey has estimated that Indians lose more than $2 billion a year in forgone income simply because of the time it takes travelling to and from a bank. “Bring vital banking services to an additional 1.6 billion people, more than half of them women — and many in the middle class. In India, 344 million people could gain access to financial services for the first time. For all individuals, convenience, cost, and the range of financial products would dramatically improve,” it said.

Globally, it could sustainably unleash $2.1 trillion in new loans to individuals and small businesses with $689 billion in India. “Governments could gain $110 billion by reducing “leakage” in expenditure and tax collection. Financial services providers would also benefit from the shift from cash to digital payments, expanding their balance sheets by as much as $4.2 trillion ($799 billion in India). For financial service providers, the cost of offering customers digital accounts can be 80 to 90 per cent lower than using physical branches,” it said.

Two billion people in emerging economies don’t have a bank account, while nearly half of all micro, small, and mid-sized businesses don’t have the credit they need to grow. Even those with access must often pay high fees for limited product choice. Economic growth suffers. But a solution is literally at hand.

According to McKinsey, the economic potential varies significantly depending on a country’s starting position. Lower-income countries such as Ethiopia, India, and Nigeria have the largest potential, with the opportunity to add 10 to 12 per cent to their GDP, given low levels of financial inclusion and digital payments today. In comparison, middle-income countries such as China and Brazil could add 4 to 5 per cent to GDP — still a substantial boost.

The economic gains in fact could exceed the report’s estimates, as the analysis does not quantify many long-term benefits including the formalization of informal economies that tends to boost productivity, and the fact that women with access to finance are more likely to spend household income on food, education, and health care, building the human capital of the future, it said. “Using traditional brick-and-mortar banks, we’ve seen financial inclusion improve slowly as a country’s income rises. But we don’t find any correlation between mobile-money usage and income. Rather than waiting a generation for incomes to rise to close the financial inclusion gap, developing countries can use phones to provide digital financial services for the vast majority of its citizens within a decade,” said Susan Lund, a partner at the McKinsey Global Institute.

“The rapid spread of mobile phones is the game changer that makes the economic benefits from digital finance possible. Today, 62 per cent of people in emerging economies have a mobile phone, while only 54 per cent have financial accounts—and mobile phone penetration is growing far more quickly than access to financial services,” it said.