On January 29 I attended the 2014 Digital Money Symposium in London, co-sponsored by Citi and Imperial College. The Symposium convened a group of leaders in their fields to explore the state of adoption of digital money and its economic and societal impacts around the world. This is the second such Digital Money Symposium, the first one having taken place in London in January of 2013.
I was a part of the Citi-Imperial team that organized the event. For this year’s Symposium, we developed a framework that would enable us to discuss the state of adoption of digital money on a more data-driven, scientific basis. We looked at digital money as a highly complex sociotechnical ecosystem, that is, a technology-intensive system that has major societal, economic and political implications, like cities, healthcare and education. To help us begin to quantify and understand this ecosystem, we developed the Digital Money Readiness Index, a set of global metrics that enables us to link digital money adoption to various measures of socio-economic development.
The Index is a multi-functional tool, encompassing publicly available data from 90 countries around the world. By analyzing its various interdependent components, the team computed a measure of how ready a country is to adopt digital money. Quantifying the progress being made by each country along the digital money roadmap should help understand the key obstacles the country faces, as well as the potential actions it could take to overcome them.
Overall, the Index aims to help answer two fundamental sets of questions:
What Matters?: What factors affect the adoption of digital money around world, and how do they vary across different countries and regions?
Why Bother?: Does digital money adoption really make a difference, and if so, can we quantify the benefit to governments, companies and individuals?
The initial answers to these questions are described in Getting Ready for Digital Money: A Roadmap, a report developed by the Citi-Imperial team for the 2014 Symposium.
The Readiness Index is composed of four key pillars:
- Institutional Environment, a measure of the institutional conditions enabling digital money adoption, including property rights, market efficiency, regulatory quality, R&D spending and patents.
- Enabling Infrastructure, which measures the technological and financial infrastructure needed to support digital money, including availability and affordability of financial services, financial regulation, and ICT infrastructure and skills.
- Solution Provisioning, consisting of the industries and functions driving digital money solutions, including electronic payments, e-commerce and e-government.
- Propensity to Adopt, which captures the extent to which consumers and businesses embrace digital innovation, including ICT usage, technology diffusion rates, quality of business sophistication and perceived corruption.
Using these various indicators, a readiness score was computed for each of the 90 countries in the study. Based on their scores, the countries were then clustered into 4 major readiness groups:
- Incipient (30 countries): Limited ICT and financial services are available to the majority of the population.
- Emerging (20 countries): These countries have basic ICT infrastructures, financial services and regulatory regimes. However, they are challenged by a number of factors, including a sizable informal economy, limited enforcement of existing regulations, lack of ICT beyond urban centers, and consumer preference for cash.
- In-Transition (20 countries): These countries have overcome most of the challenges of the earlier stages, but they are behind in some of the more advanced digital payment solutions, including e-commerce and transit.
- Materially Ready (20 countries): ICT infrastructures and digital solutions are ubiquitous. The regulatory environment encourages private sector investment and innovation in new digital solutions. But there is still a need to continue the development of the digital money ecosystem and to drive toward its near-universal adoption.
Each country has its own unique history and culture, so its progress along the readiness roadmap must be tailored to its unique circumstances. The Roadmap report includes a few such concrete examples. But, an analysis of the data at each stage reveals the most likely bottlenecks whose resolutions will increase the likelihood that a country will transition to the next readiness stage.
To move from the incipient to the emerging stage, countries need to develop their ICT infrastructures, provide affordable financial services and address their regulatory regimes. Moving from the emerging to the in-transition stages requires improving the ease of doing business and educating consumers on the benefits of digital money. Finally, to reach the materially ready stage, in-transition countries need to foster the development of innovative digital money solutions by both the private and public sectors.
But, why should countries try to improve their readiness index? Does digital money adoption benefit a country’s overall economic and social conditions? If so, what are some of those key benefits?
While there is ample anecdotal evidence of the value of digital money adoption, the Citi-Imperial study attempted to quantify some of those economic benefits to government, business and consumers. Improved tax collections is one such benefit:
“According to our estimates, a 10% increase in the digital money readiness score and commensurate increase in adoption for the countries included in the index, can translate to USD $1 trillion moving from the informal economy to the formal economy. This can translate to USD ~$100 billion in increase tax collections for the government.”
For business, digital money improves productivity by reducing the costs of handling cash, as well as providing the opportunity of revenue growth from existing customers and access to new customers. The report cites a study by by The Fletcher School at Tufts University which estimates the cost of handling cash to US business at ~ $55 billion. For financial service institutions in particular, the report writes:
“According to our estimates, a 10% increase in digital money readiness score and commensurate increase in adoption for the countries included in the index, can help up to an estimated 220 million individuals enter the formal financial sector. As these individuals start to formulate banking relationships, we estimate that the financial services industry stands to witness an USD $80-$100 billion increase in deposits and a USD ~$70-$90 billion increase in loans. . . [in addition,] the ~220 million individuals that enter the formal economy could lower their cost of financing by USD ~$600 annually. For many, this amounts to a substantial proportion of their income.”
A number of organizations have been studying the impact of digital money and the resulting economic inclusiveness on reducing poverty around the world. In June of 2012, the US Agency for International Development (USAID) and Citi announced a partnership aimed at accelerating mobile money adoption in developing countries. Their joint press release said:
“Of the five billion mobile phone users worldwide, nearly two billion lack access to banking services, instead relying on cash transactions that expose them to potential theft, fraud or loss, and high-cost lending and remittance providers that leave them vulnerable to endless debt and high fees. . . . [E]xpanding the adoption of mobile financial solutions is a critical economic development strategy with the potential to drive growth and increase financial access and security for the developing world’s poor population. The effort seeks to strengthen alternatives to a cash-based system that is inefficient, costly, and prone to corruption.”
Similarly, in Digital Currency Improves Financial Access, Roger Voorhies of the Gates Foundation writes that “Shifting the bulk of the poor’s financial transactions into digital form is the catalytic change that can strip the majority of cash processing costs out of the system and make ongoing costs predictable. This means that the shift to digital can pave the way for affordable and far-reaching services that directly address poor people’s needs.”
The development of a global digital money ecosystem is among the most exciting and important societal challenges in the coming decades. But, as with other, highly complex sociotechnical ecosystems, there are many stakeholders who must work together to embrace the new technologies and innovations, including huge numbers of individuals, merchants of all sizes, a variety of financial institutions, new digital payment companies, and government regulators in every country in the world.
As a result, this evolution will take time. And, to help it along, it’s important that we understand and quantify the benefits, obstacles and actions necessary to accelerate digital money adoption around the world. The Citi-Imperial Digital Money Readiness Index initiative is an important step in this direction.