On January 27, Citi and Imperial College held their third annual Digital Money Symposium in London. As in previous years, the Symposium convened a group of leaders in their field to explore the state of adoption of digital money and its economic and societal impacts around the world.
Last year’s symposium introduced the Digital Money Readiness Index, a set of global metrics to help quantify digital money adoption based on various measures of socio-economic development. The Readiness Index aimed to answer two important questions:
- What factors affect the adoption of digital money around world, and how do they vary across different countries and regions?, and
- Does digital money adoption really make a difference, and if so, can we quantify the benefit to governments, companies and individuals?
A readiness score was computed for each of the 90 countries in the study based on four key sets of indicators:
- Institutional Environment, a measure of the institutional conditions enabling digital money adoption;
- Enabling Infrastructure, which measures the technological and financial infrastructure needed to support digital money;
- Solution Provisioning, consisting of the industries and functions driving digital money solutions; and
- Propensity to Adopt, which captures the extent to which consumers and businesses embrace digital innovation.
The results were described in Getting Ready for Digital Money: A Roadmap, a report developed by a joint Citi-Imperial team. Based on their scores, countries were clustered into 4 major readiness groups:
- Incipient: Limited ICT and financial services available to the majority of the population.
- Emerging: Challenged by factors including a sizable informal economy, limited enforcement of existing regulations, lack of ICT beyond urban centers, and consumer preference for cash.
- In-Transition: Behind in some of the more advanced digital payment solutions, including e-commerce and transit.
- Materially Ready: Ubiquitous ICT infrastructures and digital solutions and a regulatory environment that encourages private sector investment in innovative digital solutions.
The 2015 Symposium was focused on the role of businesses in driving digital money adoption in their specific markets, including how and when different industries should invest in digital money solutions. The 2015 Digital Money Index was expanded to include industry-specific dimensions.
The results were not surprising. Compared to the 2014 version, the 2015 Index showed marginal progress in readiness across the 90 countries in the study. Digital money adoption is a slow changing, long haul commitment.
A new report, Digital Money: A Pathway to an Experience Economy, was released at the Symposium. In addition to summarizing the key changes in the 2015 Index, the report takes a close look at the crucial role that business plays in the slow but steady march towards digital money. “How and when should industry invest in digitalization of consumer flows and associated solutions?,” it asks. The answers to this question are organized into three main insights.
Insight 1: One-Size-Fits-All Does Not Work
Innovative mobile payment solutions from Starbucks, Apple, Google, Square, and a growing number of startups work nicely in the advanced Materially Ready countries. However, such solutions are not likely to make much headway in Incipient countries, given their significantly less developed ICT and financial infrastructures.
There are also considerable differences in digital money readiness among countries within the same Index category. The report cites the example of M-Pesa, the highly successful mobile-phone based money transfer service launched in Kenya in 2007, which is now used by 83% of the Kenyan population. But mobile money deployments in similar markets, - e.g., South Africa, India, - have not been nearly as successful.
In Kenya, a particularly favorable context contributed to the success of M-Pesa, including a national ID system used for identity validations; a dominant mobile network operator, Safaricom, partly owned by Vodafone, one of the largest and most advanced mobile operators in the world; the significantly higher costs of competing money transfer services; and the fast adoption of M-Pesa, enabling it to take hold before regulators got involved.
Such propitious conditions are hard to replicate. Recent studies by GSMA showed that while 89 countries with a population of 2.7 billion adults have now deployed mobile money services, 70% of these adults live in countries where unfavorable regulations are slowing down adoption.
Culture plays a role as well. The Scandinavian countries have quickly embraced mobile money payments, while similarly advanced Germany and Japan continue to lag behind, because of cultural biases in both countries that favor the use of cash. As the report notes: “Understanding how prepared a market is to accept a particular digital money solution, taking into account the cultural biases and contextual influence, can be an important determinant of success.”
Insight 2: Industries Need to Tailor Their Approach to Markets and Consumers
How can business and government tailor their digital money strategy to the readiness stage of the end-market? The 2015 study found that digital money adoption generally follows three stages of consumer behavior - Need, Value, and Experience (NVE):
Need: “At this stage, consumer adoption is based on the desire to meet basic needs and/ or avoid unreasonable hardship. Consumers desire the need to safely store money and the ability to transact without unreasonable hardship. They also seek affordable access to credit. Services such as savings and interest-bearing accounts, bill payment and access to credit are required. Solutions at this stage tend to be broad-based and even regional or national in nature.”
Value: “The Value stage represents an evolution to an incrementally more sophisticated use case than just satisfying a basic need. Consumers seek sophisticated products such as convenient banking supported across multiple channels and investment and protection products to manage their financial future. They seek more value in purchasing via rewards and access to credit, and move towards greater online choice.”
Experience: “This last stage represents a phase in which incremental consumer adoption is driven by personalized experiences linked to consumer journeys. Consumers enjoy an immersive retail experience with inventory and prices being checked by mobile devices and seek instant gratification via one-touch payments. Consumers hail a cab, book a movie ticket, order groceries or do other tasks they need to do. In this evolving commerce flow, the payment transaction is seamless or at minimum hassle free. Because these solutions seamlessly integrate digital money into the lives of consumers, they tend to be tailored and personal in nature.”
Insight 3: Partnerships are Critical
It’s nearly impossible for any one company or industry to satisfy the widely different requirements at each level of the NVE hierarchy. Telecoms, for example, are in the best position to build out the distribution networks and low cost mobile payment services required at the basic Needs stage. Financial service companies will generally prefer to develop the more sophisticated, and profitable, financial products and services of the Value stage. And retailers, with their closer understanding of customers’ wants and needs, are likely in the best position to offer them a more personalized user Experience.
Thus, to properly support such different consumers needs, it’s important to create cross-industry partnerships that leverage the strengths of each particularly industry. The recent Apple Pay announcement is an excellent example of such a partnership, bringing together the different players in the payments ecosystem, - including banks, credit card networks, merchants and app developers, - around a common Apple Pay platform based on widely supported industry standards.
Finally, the report reminds us that companies, industries and economies will reap significant benefits from the slow and steady adoption of digital money:
- “With greater financial inclusion and higher spending power, it increases the pie for everyone involved”;
- “Handling cash has multiple hidden costs – theft, fraud, cost of securing, storing and transporting cash, etc.). Reducing cash in transaction flows can help lower operating costs for businesses and the government”; and
- “Migration of consumer flows from physical to digital is accompanied with changes in consumer behavior. Businesses that are able to seize the resulting opportunities stand to gain share – sometimes from competitors in the same industry and sometimes cross industry.”