Intermediated use of digital finance: cause for concern or celebration?

Annabel Schiff

Snapshot 7: “What are the roles of intermediated and shared use?” is one of 16 learning themes designed to address a range of questions within the digital finance space. The FiDA Partnership synthesizes and disseminates the digital finance community’s knowledge of each of these learning themes into “Snapshots” that cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What We (in the digital finance community) Know” about the topic in question, highlight “Notable New Learning,” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

Not everyone uses digital finance as it was originally intended; digital financial services (DFS) have been repurposed to fit individuals’ specific needs. A prime example is M-PESA in Kenya’s shift — as influenced by customer behavior — from a tool to help microfinance clients repay their loans via SMS to a person-to-person “send money home” transfer service.

Individuals also access digital finance platforms in so-called “non-conventional” ways. By “non-conventional”  we mean that an individual shares either a mobile phone and/or digital finance account to access DFS or uses an intermediary who  conducts transactions on their behalf. Shared and intermediated use of technology are common in less developed economies. In Snapshot 7 we wanted to delve deeper into the shared and intermediated use of digital financial services to better understand the role they play within the digital ecosystem.  

When it comes to shared use, either multiple users  share a digital finance account—with one SIM card, and therefore one account shared between multiple users — or sharing happens at the level of the mobile device; that is, users may have their own SIM cards, and therefore their own digital finance account, but rely on a shared mobile phone to access their digital finance network. Intermediated use is more or less synonymous with over-the-counter (OTC) transactions and direct deposits in which an intermediary (usually an agent) conducts a transaction on behalf of a sender and/or receiver either from the client’s own account or the agent’s account.

Although globally the number of OTC customers is decreasing, more than 44.3 million unregistered customers performed an OTC transaction in June 2016, up from 37.4 million in June 2015 (GSMA). This indicates the prevalence and success of OTC transactions in some digital finance markets. In Pakistan, for example, Finclusion data from 2016 reported that 93% of digital finance users conduct OTC transactions while only 7% of users have a registered account. While we wanted to more fully investigate the incentives and impact of shared use, there is limited analysis of shared use on which to draw. We therefore focus primarily on intermediated, OTC use.

Key findings

In Snapshot 7, we discuss the benefits of intermediated digital finance use as well as the risks involved in such  transactions. OTC transactions benefit clients by allowing individuals  that lack the capacity or capability to use digital finance by themselves, to access the array of services on offer. By using an intermediary, those intimidated by technology; who lack literacy, numeracy, or digital operational skills; or who face issues surrounding registration can access financial services from which they would have been otherwise excluded. From a wider, ecosystem perspective, providers in markets such as Bangladesh and Pakistan continue to support OTC transactions due to the success they have had in driving digital finance in these markets. Agents are also keen to continue to push OTC transactions thanks to the healthy revenues they earn from the power to choose which provider a customer uses, thus ensuring they always benefit from the highest available commissions.

The risks of intermediated transactions include challenges at a range of levels. On the client side there is the risk of being defrauded by agents and a lack of personal agency that prevents clients from moving beyond simple remittance and payment products. On the provider side OTC has been linked to money laundering and terrorism financing. OTC has also been shown to have a negative impact on revenue streams and product growth due to the high operating costs associated with  agents and a lack of focus on product development.

While the question of intermediated use now seems more important, interesting insights may emerge around shared use as smartphone penetration grows and there are cases in which people access more than one “virtual” wallet through a single SIM or device.

Read Snapshot 7 for more details on our findings and a list of the top-10 reads in the space, this year.