Investing in payment digitization will drive economic growth

Hind Al Soulia - Riyadh - By Elias Aad

While countries and cultures around the world may differ in many aspects, governments are united in their quest for economic growth.

As we gradually transition into a post-COVID-19 world, this will become even truer. Amid the resurgence of economic activity will be hopes for inclusive growth, an improved standard of living, lower unemployment and movement towards a more equal society. More than ever before, all of these causes now rely on a digital infrastructure to thrive.

Even before this pandemic, emerging markets in particular have been increasingly recognizing the need to digitize their payments economies, and reduce cash dependency as a way to achieve financial inclusion and citizen wellbeing. In this context, I believe payment digitization will undoubtedly not only alleviate many of the downsides of cash, but also create avenues of growth and innovation for people and businesses to thrive.

A recent study I conducted with my team at Mastercard reinforces this statement. The research found that cash still represents 85% to 90% of all consumer transactions globally and often comes with significant direct and indirect costs. Direct cost include lost tax revenues, cash production, handling and transportation.

Cash is also the main currency of a shadow economy, which weighs down governments with indirect costs due to crime, corruption and associated law enforcement operations. A 1% decrease in the shadow economy decreases corruption by 0.81 to 1.14%.

Our study calculated the total cost of excessive cash usage at 3.2% to 4.5% of global GDP. Payments digitization allows governments, businesses and citizens to thrive in an ever-changing, pressurized and complex global economy by, counter intuitively, carrying less cash.

To elaborate, when an unbanked member of the community begins to move from cash transactions to digital payments to become financially included, their future starts to brighten and the whole economy begins to thrive.

Take for instance farmers who are able to sell their produce on a marketplace app that allows their payments and receivables to be recorded digitally, thus enabling them to access credit facilities. This in turn helps them buy more seeds or land, growing their produce and business in the process.

According to a study by Moody’s Analytics, each 1% increase in the use of digital payments produced an average annual increase of $104 billion in the consumption of goods and services. This represents a 0.04% increase in GDP in developed markets and a 0.02% increase in developing ones. Every contribution will count when commercial activities resume in earnest.

At Mastercard, we’re working with governments on digitizing their economies to benefit from the associated economic growth and offer citizens and visitors a seamless digital journey. We partner and work with central banks, cities, ministries and government authorities to advise on and streamline implementation of digitization initiatives, supported by our global network of specialized partners.

We focus on fostering public–private sector collaboration and partnership, as it’s unrealistic to expect governments to pursue economic development alone. We achieve this by understanding their expressed and unexpressed needs, and consequently engage with them to develop their digital payments economy blueprint through our proprietary advisory methodology: Mastercard’s PEDD (Payments Ecosystem Design & Development).

PEDD leads to the development of the strategic initiatives required to develop cashless programs that accelerate digital innovation initiatives and modernize national payment infrastructures. It builds and deploys solutions and digital platforms. Our white paper ‘Cashing Out: Economic Growth through Payment Digitization’ discusses this in detail.

Additionally, we focus on making tech work for people, particularly for events such as Expo2020 Dubai, namely via our Mastercard urban collaboration model, City Possible, and Mastercard Lab for Financial Inclusion. Such initiatives are also starting blocks for future Smart Cities as they digitize the citizen journey within the payments value chain, thereby creating a seamless experience.

Take for example Mastercard’s active role in supporting the Central Bank of Egypt develop its strategy for the digital payments economy, coupled with the Egyptian government digital payroll solution. This initiative has financially included millions of citizens and blue-collar workers, and has grown into one of the largest such programs in the world.

Also in Egypt, we built an interoperable mobile ecosystem and digital wallet — the first of its kind globally. Launched in partnership with the Central Bank, it serves more than 13 million users in the country, enabling more than 30% of the Egyptian population to engage with electronic financial services.

Earlier this year, we also launched phase one of our Smart City vision that we developed for the city of Beirut, enabling inhabitants to pay their municipal fees digitally and seamlessly.

A digital future provides a range of choices in a competitive society, usually leading to a happy nation. One of the choices to make is to be digitally and financially included in an economy. This gives consumers and businesses, banked or unbanked, a choice in payment methods, as well as easy ways to retrieve and view their funds.

They will have better access to credit, the ability to seed capital for the launching of a small enterprise, and the opportunity to conduct business in the palm of their hands.

It is the right time to focus on digital inclusion. Through partnerships, we can achieve a digital payments economy that includes the economically disadvantaged, mitigates the costs of cash, and achieves the economic growth and wellbeing that we want for our societies.

— The writer is head of MENA government business at Mastercard