Unidentified Senegalese woman in yellow clothes speaks on the phone in the middle of the street.

Digital finance doesn’t reduce inequality but perpetuates it, says study

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While governments often propose digital financial services as a way of tackling social inequality, the cost and infrastructure barriers to accessing mobile phones may amplify economic disparities among women in developing countries, a new study suggests.

Previous research has suggested that digital financial services have the potential to improve access to money and reduce income inequalities.

During the Covid-19 pandemic, many administrations have moved to mobile money or digital payments. For example, the government of Rwanda has increased the use of digital cash transfers, while Senegal has expanded the use of mobile money and lowered fees for these services.

But who takes part in these programmes and whether they have the potential to reach the most vulnerable depends on the distribution of digital financial services, according to a recent paper in Oxford Open Economics.

The research addresses this topic by studying how physical infrastructure and mobile phone network quality, as well as individual characteristics like education, affect the ability to access and use such services.

Using demographic and health surveys, and several geocoded databases, in Nepal, the Philippines, Senegal and Tanzania, the study explored the distribution of digital finance use among women and its enabling infrastructure, including mobile phone towers, compared to traditional finance.

The study found that the same inequalities behind traditional finance may have serious consequences for access to digital financial services. Living in urban centres is associated with both traditional finance and digital use, and is significant in the Philippines, Senegal, and Tanzania. These results suggest that women living in urban areas are 3.4-15.7 per cent more likely to use traditional finance and 0.4-13 per cent more likely to use digital financial services.

In all countries studied, inequalities in wealth and education are also carried through in mobile banking use even more strongly than in traditional finance. In all countries, the experts strongly associated higher wealth with a higher likelihood of mobile phone use.

Those in the richest wealth quintile are 9.3-27.2 per cent more likely to own a mobile phone. For example, in Tanzania the cheapest handsets cost 5 per cent of annual income for those at the bottom quintile of the wealth distribution, even before paying for a mobile phone plan.

Meanwhile, costs for broadband access are even higher: in Nepal, the Philippines, Senegal and Tanzania, one gigabyte of mobile broadband costs 9.1 per cent, 3.8 per cent, 10.2 per cent, and 8.7 per cent of average monthly income, respectively.

The average marginal effect associated with one year of education is also significant, with each year of education being associated with 1.2-2 per cent higher likelihood of using mobile banking, compared with 0.9-3.1 per cent higher likelihood of using traditional finance.

The analysis found that mobile-banking use is still highly unequal and that relevant physical infrastructure like mobile phone towers follows the same patterns as traditional financial institutions. It thus seems that mobile banking may still leave large inequalities in access to financial services among women in developing countries.

Author Laura Caron said: “Digital technologies hold so much promise for improving the way we access financial services. However, we must make sure there is the proper infrastructure in place for this to function.

“We also must support digital literacy and work to make digital technologies affordable if we hope to reach those who have been excluded from traditional finance. New technologies alone won’t solve the problem of inequality if we don’t make sure people have access to them.”

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