Chapter 15

Digital Financial Inclusion

Peterson Kitakogelu Ozili

Abstract
Purpose: This chapter revisits digital financial inclusion as an internation-
al development agenda and discusses everything you need to know about
digital financial inclusion.
Methodology: This chapter uses conceptual discourse methodology to
explain digital financial inclusion.
Findings: This chapter identifies the definitions of digital financial inclusion, the
goal of digital financial inclusion, the components of digital financial inclusion,
the types of providers of digital financial services, the instruments for digital
financial inclusion, the benefits of digital financial inclusion, the risks of digital
financial inclusion, and the regulatory issues associated with digital financial in-
clusion. It also proposes suggestions on how to make digital financial inclusion
work for the good of all. This chapter concludes by offering some implications
for policymaking and practice in the digital finance ecosystem.

Keywords: Digital finance; artificial intelligence; financial inclusion; digital

financial inclusion; policymaking; regulatory issues.

JEL Codes: G21

1. Introduction
The purpose of this chapter is to discuss digital financial inclusion. This chapter
presents everything that needs to be known about digital financial inclusion.
Over the years, the number of digital applications that offer financial services
have increased and continue to grow. Many of the digital applications used to offer
financial services are developed by technology companies or financial technology
companies, for themselves or for banks who need digital finance applications to

Big Data: A Game Changer for Insurance Industry, 229–238

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230 Peterson Kitakogelu Ozili

serve their customers better and for digital financial inclusion purposes. Another
recent development is the increase in the number of research studies into digital
financial inclusion. In the year 2021 alone, a lot of studies have examined digi-
tal financial inclusion in relation to economic growth (Ahmad, Majeed, Khan,
Sohaib, & Shehzad, 2021), entrepreneurship (Baker, 2021), urban–rural income
gap (Ji, Wang, Xu, & Li, 2021), poverty reduction (Wang & Fu, 2021), investment
diversification (Lu, Guo, & Zhou, 2021), complex systems (Dai, 2021), research
and development (Sun, Xu, Tang, & Zu, 2021), etc.
Despite the increasing number of studies on digital financial inclusion, digital
financial inclusion – in terms of its meaning, goal, components, instruments, and
regulatory issues – is not generally understood. There is a diversity of views on what
digital financial inclusion is among scholars and researchers in policy and academic
circles. Also, those who do not know the meaning of digital financial inclusion form
their own abstract meanings of digital financial inclusion. Others regard digital
financial inclusion as nothing but a means of digital surveillance by the State. Still,
many others continue to enrol into the digital financial system because their peers
are also in the digital financial system – they have no clue about what they will find
in the digital financial system when they join whether good or bad.
What does this apparent lack of understanding mean for digital financial inclu-
sion and for its future? Is there anything new or special about digital financial
inclusion? Can digital financial inclusion improve the well-being of the poor? And
where is digital financial inclusion going in the future? Is digital financial inclusion
merely a fad that will disappear as other schemes have done in the past? Or, does
digital financial inclusion have a bright future? Is digital financial inclusion a topic
worth investing one’s research career into? Many questions like these have been
raised. This chapter provides answers to some of these questions by highlighting
the meaning of digital financial inclusion, the goal of digital financial inclusion,
the components of digital financial inclusion, the instruments for digital financial
inclusion, and the regulatory issues associated with digital financial inclusion.
The remainder of this chapter is structured as follows: Section 1 presents the
definition of digital financial inclusion. Section 2 presents the definition and goal
of digital financial inclusion. Section 3 presents the components of digital finan-
cial inclusion. Section 4 presents the providers of, and instruments for, digital
financial inclusion. Section 5 presents the important digital financial inclusion
research. Section 6 presents the benefits of digital financial inclusion. Section
7 presents the risks and regulatory issues of digital financial inclusion. Section
8 presents a discussion on how to achieve digital financial inclusion. Section 9
­presents the limitations of digital technology in promoting financial inclusion.
Section 10 presents the conclusion.

2. Definition and Goal of Digital Financial Inclusion

2.1. Definition of Digital Financial Inclusion
Digital financial inclusion involves bringing unbanked adults into the formal
financial sector by offering financial services to unbanked adults using a mobile
 Digital Financial Inclusion 231

phone or other digital technology. Digital financial inclusion involves offering

digital financial services to the financially excluded and underserved populations
using a mobile phone or other digital technology to access these digital finan-
cial services (Ozili, 2018). Digital financial inclusion involves providing access
to affordable formal financial services to the excluded population using existing
digital technologies (Ozili, 2021b). Digital financial inclusion means the sustain-
able provision of affordable digital financial services that bring the poor into the
formal financial sector of the economy.

2.2. Goal of Digital Financial Inclusion

The goal of digital financial inclusion is to offer financial services via digital
means to all individuals, households, firms, and governments, thereby contribut-
ing to poverty reduction, increase in financial intermediation, and contributing
to the attainment of the sustainable development goals. Digital financial inclu-
sion seeks to provide a range of digital financial services that provide opportuni-
ties for accessing funds, transferring funds, growing capital, saving funds, and
reducing risk.

3. Components of Digital Financial Inclusion

Digital financial services may be provided by banks, non-bank financial institu-
tions, financial technology companies, and technology companies. The compo-
nents of digital financial inclusion include the following:

⦁⦁ Digital devices. Customers, or users of digital financial services, must have a

digital device which can be a mobile phone, a smartphone, a laptop, or a com-
puter that permits the transmission of information or instruments, such as a
payment card, that connect to a digital device such as a point-of-sale (POS)
terminal.
⦁⦁ Retail agents. Retail agents are vendors or agents that have a digital device that
is connected to a communications infrastructure. The retail agents are able to
transmit and receive financial transaction details which enable customers to
convert cash into electronically stored value and to transform stored electronic
value back into cash.
⦁⦁ Additional financial services. This refers to the add-on financial services offered
to customers by banks, non-banks, or financial technology companies. They
include credit products, savings products, insurance products, investment prod-
ucts, mortgage products, and risk management services.
⦁⦁ A digital transactional platform. This refers to the interface that connects the
customer with the financial institution offering specific financial services. The
digital transactional platform may be a bank application, a digital software, an
internet website, or a retail agent.
⦁⦁ The back-end server. This refers to the digital telecommunications infrastruc-
ture that stores data and electronically validates customers’ details held with
financial institutions before permitting digital financial transactions to take
232 Peterson Kitakogelu Ozili

place. It is responsible for storing and organising data and ensuring everything
on the front-end interface works well for users. The back-end server commu-
nicates with the front-end. It sends and receives information to be displayed
on the front-end user interface. When customers fill in their login details or
want to make a digital transfer, the front-end application sends a request to the
back-end server, which returns information in the form of front-end code that
the front-end application can interpret and display.
⦁⦁ The customers. The customers in a digital financial inclusion programmes are
mainly individuals, corporations, and governments. The individuals include
young adults, older adults, households, poor individuals, low-income individu-
als, middle-income individuals, and high-income individuals. The corporations
include small business, small- and medium-scale enterprises (SMEs), and large
corporations. Governments include municipal agencies, boroughs, and other
government agencies.

4. Providers and Instruments for Digital Financial Inclusion

4.1. Types of Digital Financial Service Providers for Digital Financial Inclusion
There are four broad types of providers of digital financial services for digital
financial inclusion. The first provider is a full-service bank that offers a basic trans-
actional account for digital payments, digital transfers, and digital value storage
through digital devices such as a mobile device, payment card, or POS terminal.
A full-service bank provides an unlimited range of digital financial services. The
second provider is a limited-service bank that offers financial services through a
mobile device, a payment card, or via a POS terminal. A limited-service bank pro-
vides a very limited set of digital financial services such as providing digital finan-
cial services to a region. The third provider is a mobile network operator (MNO)
e-money issuer. The fourth provider is a non-bank (non-MNO) e-money issuer.
These four providers of digital financial services for digital financial inclusion
require three components to function effectively, namely (i) a digital transactional
platform, (ii) an agent network, and (iii) the customer’s access device. With these
three components in place, digital financial services can be offered to excluded
and underserved customers.

4.2. Instruments for digital financial inclusion

Some tools or instruments for digital financial inclusion include

i. e-money accounts
ii. debit cards
iii. credit cards
iv. mobile money
v. internet banking
vi. retail POS terminals
vii. agent networks
 Digital Financial Inclusion 233

5. Important Digital Financial Inclusion Research

Shen, Hueng, and Hu (2020) investigate the channels through which financial
inclusion can be achieved in China. They find that the level of financial literacy
and the use of digital financial products, which are advanced by popularity of the
internet, greatly increased the level of financial inclusion in China.
Ozili (2021a) examines whether high levels of financial inclusion are associ-
ated with greater financial risk using a diverse global sample of 79 countries. In
the study, Ozili (2021a) controlled for the use of digital financial services such as
debit cards and credit cards and electronic payment channels. The study finds that
the increase in the use of debit cards, credit cards, and digital finance products
helped to reduce risk in the financial sector of developed countries but not for
transition economies and developing countries. Also, the combined use of digi-
tal finance products with increased formal account ownership improved financial
sector efficiency in developing countries. The implication of the findings is that
digital financial inclusion also benefits the financial system not only the excluded
population.
Bachas, Gertler, Higgins, and Seira (2018) examine how a specific digital
financial product – a debit card – affects financial inclusion. They study a natural
experiment in which debit cards tied to existing savings accounts were rolled out
geographically over time to beneficiaries of the Mexican cash transfer programme
‘Oportunidades’. After receiving the debit cards, beneficiaries continue to receive
their benefits in the savings account but can access their transfers and savings at
any bank’s ATM. They can also check their balances at any bank’s ATM or use
the card to make purchases at POS terminals. During the natural experiment,
they observed that debit cards lower transaction costs by reducing the distance
to access bank accounts. They find that account holders respond to the reduction
in transaction costs by changing the method of transport they use to access their
account, with a decrease in transportation by bus and an increase in walking.
Senou, Ouattara, and Acclassato Houensou (2019) assess the role of digital
technologies using mobile phone penetration and internet usage in promoting
financial inclusion. They use data collected from the Central Bank of West Afri-
can States (BCEAO) and the International Telecommunication Union (ITU)
from 2006 to 2017. They find that the joint use of mobile phones and the internet
is a significant determinant of financial inclusion for countries in the West Afri-
can Economic and Monetary Union.

6. Benefits of Digital Financial Inclusion

Digital financial inclusion offers a wide range of benefits. They include:

i. Providing access to all kinds of formal financial services – payments, trans-

fers, savings, credit, insurance, securities, etc.;
ii. Encouraging digital payments, transfers, savings, credit, insurance, and
investments;
iii. Encouraging government-to-person digital payments, such as conditional
cash transfers and unconditional cash transfers;
234 Peterson Kitakogelu Ozili

iv. Lower cost of digital transactions for customers and providers of digital
financial services;
v. Permitting financial services that are tailored to meet poor customers’ needs
and their financial circumstances (Ozili, 2020). For instance, permitting
digital transfer of tiny amounts of money (e.g. $1.86 cents) and saving tiny
amounts of money ($3.28 cent), which would not be possible using cash;
vi. Reduced risks of loss, theft, and other financial crimes posed by cash-based
transactions;
vii. Reduced cost associated with transacting in cash and using informal
providers;
viii. A reduction in counterfeit money being circulated to poor individuals and
households;
ix. It promotes economic empowerment by enabling asset ownership and
accumulation;
x. It increases economic participation for women;
xi. It promotes growth and stability for the economy through increase in aggre-
gate spending and increase in tax revenue collections.

7. Risks and Regulatory Issues of Digital Financial

Inclusion
7.1. Risks of Digital Financial Inclusion
Digital financial inclusion poses some risks. They include:

i. The rising cost of digital devices (e.g. mobile phone, laptops, etc.) and the ris-
ing cost of internet connectivity in developing and poor countries can make
it difficult for people to remain in the digital financial system for a long time;
ii. Permitting non-financial firms to offer financial services may give rise to new
problems;
iii. New digital financial services will require different regulatory treatment and
could make the regulatory ecosystem become too complex;
iv. Increase in digital transaction costs will affect poor customers who have very
low income;
v. Data privacy and data security issues will arise due to the use of new kinds
of data;
vi. Customers who are not familiar with digital financial services are susceptible
to exploitation and abuse;
vii. There may be agent-related risks arising from rogue agents that offer digital
financial services that are not subject to existing consumer protection laws
that apply to banks and other traditional financial institutions;
viii. There are digital technology-related risks arising from unexplained loss of
internet connectivity, breakdown of telecommunications infrastructure, pri-
vacy, or security breach which can be a major disruption in the use of digital
technology;
ix. Risks associated with the digital transactional platform being used.
 Digital Financial Inclusion 235

7.2. Regulatory Issues

Digital financial inclusion will present many issues to regulators, particularly the
bank regulator and telecoms regulator. They will face new challenges when pro-
moting digital financial inclusion. Multiple regulators will need to communicate
and collaborate with one another to find solutions to the regulatory issues. Some
regulatory issues include the following:

i. Ensuring that digital agent networks do not exploit customers seeking retail
digital financial services in remote locations;
ii. Challenges in developing strong anti-money laundering (AML) laws;
iii. Challenges in developing countering financing of terrorism (CFT) rules;
iv. Regulatory loopholes in the regulation of e-money;
v. Consumer protection issues;
vi. Weak payment system regulation;
vii. Dealing with unfair competitive practices between banks and non-bank
players in the digital finance ecosystem.
viii. The presence of rogue and unregulated digital players in the market for digi-
tal financial services.

8. Digital Financial Inclusion: Making it Work

Some steps can be taken to achieve digital financial inclusion:

i. There is a need to ensure that digital payment is accepted by merchants and

their customers;
ii. Develop some reliable identification systems for the purpose of digital finan-
cial inclusion;
iii. Increase the security of, and trust in, digital financial services;
iv. Financial sector regulators should be supportive of the growth of FinTech
companies to help increase digital financial inclusion;
v. Reduce barriers to entry in the FinTech industry. Reduce the licensing
requirements for entry into the digital finance ecosystem for FinTech firms;
vi. Reduce the cost of digital services. Compared to traditional banking, digital
banking services are cheaper to manufacture and distribute. These savings
can make digital banking services more cost-effective and affordable to those
who need them;
vii. Renegotiate the fee structures for using a digital transactional platform as
this will go a long way to make more people willing to use digital financial
services;
viii. Use artificial intelligence to remove the systemic biases that are largely
responsible for financial exclusion in the financial system. With proper scru-
tiny and oversight, artificial intelligence tools can be used to remove biases
from processes and systems and decisions that marginalise unbanked adults
based on their low incomes, ethnic origin, or race;
236 Peterson Kitakogelu Ozili

ix. Agents of digital financial inclusion must provide digital financial services
that are easy to access and easy to use;
x. Providers of digital financial services should have internal security measures
that mitigate against data theft, identity theft, or loss of money perpetrated
by bad actors and cybercriminals;
xi. Providers of digital financial services should offer data-driven insights to
customers. Providers of digital financial services should use the large volume
of digital data at their disposal, and with permission, to educate and advise
customers on the need to improve their saving habits, and the affordability
of purchases before they are made;
xii. Regulators should embrace open banking and new payment models as it can
expand the breadth and depth of digital financial services in ways that sup-
port digital financial inclusion.

9. Limitations of Digital Technology in Promoting Financial

Inclusion
9.1. It Lacks the Human Touch
Digital financial inclusion removes the front-end human intermediary, or the
human touch, between the customer and the provider of financial services.
Rather than talking to a real person when performing financial transactions,
people will interact with an app that offers very limited options and may not
have the options that customers want. This will reinforce their desire to speak
to a human representative of financial institutions as a lot of people value and
cherish the opportunity to speak with a customer care representative who can
guide them when performing financial transactions, and who can help them
resolve their complaints. A fully digitalised financial system will completely
remove the human touch using artificial intelligence, and the implication for
digital financial inclusion is that poor households may not get the human assis-
tance they need.

9.2. A Garbage-in-garbage-out (GIGO) Approach to Financial

Inclusion
Many digital finance applications adopt a GIGO system in promoting financial
inclusion. Households using digital financial services can make a mistake in the
input data by adding extra zeros, e.g. making a digital transfer of $100,000 when
the intention was to transfer only $1,000. Due to the GIGO nature of digital
transactional platforms, such errors can be very costly as individuals or busi-
nesses may be required to pay a fee to reverse transactions made in error, thereby
imposing additional costs to individuals and businesses.
 Digital Financial Inclusion 237

10. Conclusion
This chapter revisited the digital financial inclusion agenda with a view to provide
extensive insights into what digital financial inclusion is all about. This chapter
defined digital financial inclusion and then highlighted the goal of digital finan-
cial inclusion, the components of digital financial inclusion, the types of provid-
ers of digital financial services, the instruments for digital financial inclusion, the
benefits of digital financial inclusion, the risks of digital financial inclusion, and
the regulatory issues associated with digital financial inclusion, among others.
The implication of the discussion in this chapter is that digital financial inclu-
sion is more of a journey than a destination. A great deal of progress needs to
be made, and it will require the use of existing and new innovation and digital
technologies to adapt financial services to meet the needs of everyone towards
financial inclusion. Policymakers should be careful to choose an effective strategy
for digital financial inclusion and evaluate the effectiveness of the strategy on a
continuous basis. Also, seeing that digital financial inclusion is not without prob-
lems, policymakers must understand the challenges of digital financial inclusion
and the limits of digital technologies in promoting financial inclusion.

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