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An 113 market perspective on digital money readiness
The adoption of digital money has tangible benefits
for governments, businesses and consumers alike.
To understand these opportunities, Citi and Imperial College London developed a Digital Money Index. Now in its ninth year, our research reminds us that the gains in making the shift to digital money are hard won. They depend on action across all four Index pillars, meaning a supportive institutional environment, financial and ICT infrastructure, digital money solutions from government and private sector, and enthusiasm from consumers and businesses.
Lack of affordable (and basic) ICT infrastructure and expensive/limited financial services
Basic ICT infrastructure and financial services do exist. Relevant regulation is on the books. The challenges here are: the presence and size of the informal economy; (perceived) lack of enforcement of existing regulation; lack of ICT ubiquity and affordability; and consumer preference for cash.
Often, these countries have successfully deployed accelerators such as social disbursements via Digital Money. But they may need to make investments in Solution Provisioning or lower restrictions on financial investments so that private enterprises can take root.
Ubiquitous ICT Diffusion coupled with familiarity with digital solutions. Market friendly business and regulatory environments facilitate private sector investment and innovation. The challenge is in creating compelling use cases and ecosystems to drive usage.
There are three substantial benefits from driving digital money adoption.1
INCREASING THE PIE
A 10% increase in adoption could
help up to 220 million individuals enter the
formal financial sector shifting an additional
USD $1 trillion to the formal economy.
COST REDUCTION
Digitizing a quarter of the identified "flows"
can unlock $350 – 400bn in annual savings
to Public and Retail sectors.
SHARE SHIFT
Potential for up to $1 trillion in share gains
for businesses “in the right place, with
the right product, at the right time.”
Recent technology developments, regulatory mandates, and pandemic induced change in customer behavior towards digital are providing a significant impetus to digital money readiness. On one side, technology availability has accelerated allowing businesses to leverage technology to improve customer engagement, drive efficiency, and explore newer business models. Technology adoption is expected to offer significant benefits to businesses.
Policymakers have continued to focus on initiatives that address three themes - driving innovation while ensuring financial stability, consumer protection & compliance. Regulators have revamped payment systems by launching instant payment systems - around 60 countries already have an instant payment scheme. Regulators have guided the industry towards collaboration by launching open banking initiatives. Started by the UK and then by Europe, today open banking has been launched by a slew of countries. Apart from these, regulators have also started exploring Central Bank Digital Currencies to preserve financial stability as over 70% of the country’s regulators are testing the concept.
Consumer behavior has been significantly altered because of the pandemic. Today’s consumers have sharpened their focus on sustainable products, shop online more than ever, and paid for their necessities online. Clearly, the epidemic has significantly impacted the scope and reach of the digital transformation. Experts predict the habits developed during the epidemic will be irreversible thereby altering what people value, how and where they shop, and how they live and work. This irreversible change in consumer behavior is also predicted to give countries a major boost in driving overall digital money readiness and adoption.
The time is right for countries to drive digital money readiness in their economies by leveraging these favorable trends. However, the road to digital transformation isn’t straight forward. There are numerous challenges such as a lack of critical digital infrastructure, digital skill gap and concerns around trust that have the potential to prevent the digital revolution from unleashing its full economic potential. Driving readiness, thus requires all the economic actors - Governments, Corporates, Financial institutions and Households (the larger society) to rally around a common vision. Governments naturally have a significant role to play in developing and articulating a holistic digital policy to align all these economic actors towards a common digital vision.
A holistic digital policy rests on four pillars, namely: digital infrastructure; digital adoption; service innovation; and digital trust, driven by a clear vision and supported by robust regulations and governance. As a first step, governments must establish a digital vision that aligns with their larger goals, such as promoting growth, improving service delivery, and increasing public involvement, among others. Governments should establish rules to put things in motion after approving the vision and eventually have a solid governance and oversight structure in place. Governments must build a governance framework with a “Digital Tsar” or “Digital Transformation Owner” to ensure coordination and track progress. Regardless of a country's digital maturity, Digital Policy should then focus on these four pillars and governments should collaborate with the private sector and academia to achieve these goals.
To begin, governments should ensure that everyone has access to safe, affordable infrastructure. Once the infrastructure is in place, the government should focus on encouraging consumers and businesses to adopt digital technologies through incentives and the development of digital skills. Governments should thereafter concentrate their efforts on service innovation and take the lead by building eGovernment solutions. Furthermore, they must foster an environment that encourages technical innovation. Governments should work on boosting customer comfort and confidence in technology as novel solutions emerge. Data protection and cybersecurity laws can be useful instruments. Governments should pursue collaboration with the private sector to help accelerate the transformation path and achieve the above goals.
While it is a must to have a holistic digital policy to take advantage of these emerging trends, policymakers that played an active role beyond enacting policies have made even more considerable progress compared to their peers. A close observation of some such emerging markets indicates a superior performance on par with that of developed economies and well ahead of their peer emerging markets.
Malaysia:
Malaysia's digital journey began with the establishment of the Multimedia Super Corridor, a special economic zone designed to boost the country's digital economy. However, the first initiative aimed at driving digital adoption was announced in 2007, when the government launched a US $4.5 billion broadband project, promising to fund 30% of the initiative. Extending on this, the government in 2010 launched the National Broadband Initiative to ensure that all residents have access to high-speed Internet, with a particular focus on the underprivileged. Recently in 2019, the government also set aside US $11 billion for the National Fibre Connectivity Plan (NFCP). The 5-year NFCP initiative is expected to increase the availability of high-speed, high-quality digital connectivity across the country.
The government now has unveiled a comprehensive digital policy - dubbed MyDigital program that includes several specific initiatives. The overall goal is for the digital economy to contribute 23% of GDP by 2025. The government has released "Digital Investments Future 5 Strategy," which focuses on five key thrusts aimed at advancing Malaysia's digital economy in accordance with MyDIGITAL.
To facilitate this transformation, the government has enacted several policy initiatives, including:
To help lead this transformation, the Malaysian government is also investing US $12 billion in the digital economy. These investments are expected to lay the foundation for the country’s transformation towards a digital economy.
With the acceleration of digital money adoption, several new indicators are getting tracked and reported on a regular basis, providing us an opportunity to strengthen our Digital Money Index with these newer indicators as well as include new countries to the index. Further, recognizing the importance of governments in advancing digital readiness, Citi and Imperial College have revamped the DMI to give the government and support pillar more importance.
The updated index assesses digital money readiness in 110 countries, up from 84 countries in the previous iteration. The index continues to classify countries into 4 clusters – Incipient, Emerging, In-transition and Materially Ready - according to their levels of digital readiness. Digital Money index 2022 has 29 countries in the materially ready cluster, 26 countries in In-transition cluster, 25 in Emerging, and 30 countries in Incipient cluster.
The revamped index, with the addition of new indicators, acknowledges the progress made by several developing economies in driving digital money readiness with several of these countries entering the materially ready and in-transition clusters, to be classified on par with several developed economies and well ahead of their peers.
A holistic digital policy is required to promote digital money readiness and adoption. Countries that have augmented a holistic digital policy with targeted investments have performed well on digital money readiness as measured by our Digital Money Index. This is evident from the case studies of Malaysia, the United Arab Emirates, Estonia, and Uruguay that have all outperformed their peers on the Digital Money Index. Citi's holistic digital policy research report released last year articulates how a holistic digital policy combined with focused investments can drive not just digital readiness, but also overall economic growth. The need for a holistic digital policy, targeted investments, and collaboration across all economic actors to drive progress are very clear. The time to act is now.
Would you like to know more?
The Digital Money Index is a statistically complex and analytically rigorous measure of digital money readiness.
To gain a deeper understanding of which factors contribute to digital money readiness.
To enable countries and industry sectors to develop strategies to improve digital money readiness.
To quantify the benefits of higher digital money adoption for governments, businesses and consumers.
We believe our four pillars explain how ready a
given country is to adopt digital money.
Underpinning these pillars are around 70+ indicators that are interrelated and work together
to provide a measure of overall readiness for digital money adoption.
It is important to note that the index measures "readiness" and not "adoption".
Adoption is likely to lag readiness as benefits from investment in improving readiness may have not accrued yet. Further,
cultural and environmental factors unique to each country also influence the extent to which a country fully realizes, lags or
at times exceeds, its readiness potential.
1 Based on regression of the Citi-Imperial Digital Money Index against GNI. Estimate based on a 10% increase in digital money readiness score and commensurate increase in adoption.
Digital money is distinct from crypto currency. Digital money referred here is the migration from cash and checks to credit/debit cards, stored value instruments and other non-paper based mechanisms
