With 60-70% of the population in Southeast Asia still underbanked or remained underserved by traditional financial institutions, digital financial services (DFS) holds great promise for financial inclusion. However, DFS usage in Southeast Asia still trails behind other regions and one frequently cited barrier is trust. To better comprehend the role of trust in DFS usage, the Tech for Good Institute (TFGI) conducted a six-country study in ASEAN to assess consumers’ trust in traditional banks and non-bank DFS providers, tested different factors that could predict trust, and investigated the role of trust in DFS usage.
We were delighted to share preliminary results of this research at TFGI’s inaugural Working Paper Seminar, co-hosted with the Puey Ungphakorn Institute for Economic Research (PIER). As the Bank of Thailand’s think tank for producing, discussing and disseminating policy-relevant research, PIER provided a lively platform for research exchange in the context of the Bank of Thailand’s Consultation Paper on “Repositioning Thailand’s Financial Sector for a Sustainable Digital Economy”, released in February 2022.
Key insights from the discussion:
- Expanding accessibility is a key component when it comes to accelerating usage of DFS. Democratizing DFS and expanding accessibility for marginalized, underserved individuals requires appropriate risk mitigation and management. Safeguards designed for financial products should strike a balance between reducing risks and expanding access. One-size-fits-all know-your-customer (KYC) process could potentially alienate a large segment of customers but innovative, customized solutions like alternative credit scoring or limits on investment amounts could both manage risks and expand access to typically underserved consumers.
- DFS usage is shaped by many factors. In addition to trust and demographic factors analyzed in the study, other factors such as the cost of adopting technology, access to the internet, and design interface of the financial applications all shape the user’s experience and actual usage of DFS.
- System-level trust and individual-level trust work together to achieve overall positive impact. The model measuring trust in the study is designed to capture individual-level trust in providers but not system-level trust like trust in governments or regulators. However, system-level trust can strengthen and contribute to individual-level trust in providers, leading to increased usage of DFS.
- Trust predicts usage but the reverse is also possible. The study analyzed how trust in providers predicts DFS usage but since the model used to measure and predict trust is correlational and not causal, there could be reverse causality where usage predicts trust. The latter would explain the results seen in Thailand where trust in providers is negatively correlated with usage, i.e. the more users use DFS products, the less they trust the providers. To test this hypothesis, we could run an alternative model and flip the variables where we test if usage predicts trust.
- Solutions to increase DFS usage should focus on transforming the entire supply chain instead of addressing consumer-driven pain points. Removing adoption barriers that directly concern the consumers like improving literacy rates can have an effect on DFS usage but the impact would be stronger if we employ a whole-system approach. The digitalization of micro, small, and medium enterprises (MSMEs) is a crucial aspect as it allows small businesses to participate in the digital economy and further promote the use of DFS among its customers. Consumers may be interested and ready to use DFS products but if the system is not equipped or ready to overhaul and integrate DFS into its existing systems, growth will be stunted.
Thailand’s financial sector is undergoing a transformation and it is imperative that policymakers strike a careful balance between promoting innovation and managing risks to improve access to financial services for all.
Thank you to PIER for the hospitality. Such exchange of research and perspectives are critical to understanding and shaping Southeast Asia’s trajectory in the digital economy through safe, inclusive and responsible digital financial participation.
A summary of key insights from the working paper can be accessed here
Photo by Tech for Good Institute