Cash vs. Digital? Unleashing the Power of DFS through Agent Networks


Digital financial services (DFS) have been on the rise, leading to debates on whether cash infrastructure has a future, and whether cash will disappear along with DFS agent networks. Such scenarios have raised concerns about the effects this would have on low-income and vulnerable populations in developing economies who have less access to smartphones and internet. For example, many people who are unbanked or lack access to a mobile phone will see an increase in the cost of accessing and using cash as it becomes more scarce and less accepted in a given economy.

However, recent global evidence post-pandemic and CGAP’s recent work in emerging DFS markets casts doubts on the disappearance of cash and shows how agent networks will continue to play a key role in serving low-income customers in developing countries.

Cash is still king in most economies worldwide

While digital payments have seen widespread adoption, with mobile money being a prime example, there is ample evidence that digital financial services are still primarily used to get money from point A to B. This has yet, however, to translate into more digitized/cashless societies. From this perspective, we can see DFS as an enabler of the cash infrastructure rather than a disruptor, making agents a crucial part of the financial ecosystem. To achieve a complete digitalization of financial services, a significant investment in digital and financial infrastructure and a profound behavioral change in societies are needed, as cash is still more convenient and trusted than DFS by a considerable portion of the population worldwide. In fact, research finds that only a handful of countries, mainly Nordic countries, have reached the closest to a cashless society where cash has been diminished to around 1-2% of all transactions.

Cash is even more salient in periods of economic uncertainty

Although research on the relationship between cash and DFS is typically focused on the U.S. and Europe (leaving a wide knowledge gap of this phenomenon in less financially developed countries), there are interesting trends that still allow us to learn about human behavior and cash, even in the presence of highly digitized ecosystems. Recent research has found that the increase in DFS has indeed been accompanied by a reduction of cash as a means of payment. However, cash is still highly trusted as a store of value in periods of increased uncertainty, like the Financial Crisis of 2008 and the COVID-19 pandemic, which resulted in a spike in demand for high-value banknotes. In this context, people store cash as a precautionary measure due to the uncertainty of financial providers and future needs.

Cash is stickier in economies with bigger informal labor markets

There are two sides to the equation regarding the true digitalization of an economy: income and expenses. Countries have generally found more success in digitizing expenses (like merchant and bill payments, and e-commerce); however, digitizing income (mainly salaries and Government-to-person (G2P) payments) has proven more challenging, especially in countries with large informal labor markets. This last part is important, as informal workers, which represent 61% of the world’s labor force, receive most of their income in cash, making these customers particularly stubborn to full digitalization. For example, Nigeria and Bolivia are the countries with the largest informal economies worldwide, and their digital transactions per capita are 1.7 and 7.8, respectively (in contrast, Singapore and Hong Kong have the smallest informal sectors, and digital transactions per capita exceed 700).

Agent networks are strong and expanding in remote areas

Furthermore, despite concerns to the contrary, agent networks continue to report healthy growth in terms of the number, volume, and value of transactions worldwide. For example, recent articles from The Economist and GSMA (Global System for Mobile Communication Association) have suggested that agents’ business is declining due to digitalization. However, their main argument relies on the fact that the number of agents is growing faster than the volumes of CICO (cash in and cash out) transactions, implying that the average agent receives less revenue and, therefore, jeopardizes its livelihood.

We argue that the fact that the number of agents is growing faster than the volumes of CICO transactions needs to be interpreted using a customer segmentation lens and the trends observed for cash in circulation. When we do so, we argue that the number of agents is growing where demand for such channels still exists, giving some credit to individual agent’s business acumen. Additionally, demand for CICO transactions at the agent is stronger among low-income customers employed by informal sectors that pay in cash. This type of customer tends to live in peri-urban and rural areas and the value of their transactions tends to be lower than their wealthier urban counterparts, engaged in formal economic sectors. Therefore, the agent channel is becoming the primary channel for low-income customers using DFS, which represents the bulk of customers in emerging markets, but not the bulk of CICO volume transacted. The lower revenue per capita captured by agents that the above studies point to also needs to consider that agent management models are becoming more efficient in most financial markets, as pointed out by CGAP in 2022.

Agents are diversifying their businesses

Additionally, GSMA data focuses solely on mobile money operations performed by mobile agents; however, we don’t know the whole picture of these agents’ businesses. CGAP has observed an increasing trend of agents diversifying their businesses by offering DFS from non-mobile companies (like banks or fintech) or other non-financial services like e-commerce, agribusiness, and fast-moving consumer goods. This provides evidence that agents are dynamic and are adapting to the changing landscape by diversifying their business offerings, allowing them to remain profitable despite declining revenues from mobile money services.

Keep calm, and carry on with digitizing financial services

In sum, even though there is a possibility that simultaneous adoption of DFS for income and expense transactions becomes widespread in the future, thereby reducing drastically cash in circulation and agent networks; it is unlikely that this will occur in the medium-term, as the evidence for the past 15 years suggests. This would require not only technology but a complete transformation of current economic structures that make informal sectors so widespread in the developing world.

Also, trust in DFS needs to be built among first-time users, and agents have shown to be the most effective means to do so. We are confident that, in the very long run, the benefits of digitization will permeate all sectors of society, proving to be more advantageous and cost-effective than cash systems. However, we need to be conscious of the need for agents if we are to avoid excluding low-income customers from digital financial markets in the meantime.

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