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While digital financial services (DFS) are widely lauded for their ability to expand access to financial services among un(der)served market segments, their application to development challenges spans multiple sectors. Known as Digital Finance Plus (DF+), the use of DFS to address service gaps leverages these platforms to enable households to make small and unpredictable payments without incurring immense transaction costs. Households, therefore, can make payments aligning with their cash flow and providers can profitably serve this market. Although DF+ assumes various iterations depending on the context, it is considered a promising solution to various global issues including abysmal access to water and sanitation services.
The exact application of DF+ to the water sector varies greatly, largely depending upon existing water provision or the lack thereof; it cannot generally be used to build the underlying infrastructure for centralized water systems—i.e. piping—that requires large upfront investment, however. Rather, it facilitates “last mile connections”, enabling individual households to build connections to existing grids or access water on a pay-for-use basis. In this context, a recent CGAP focus note identified four primary use cases: water bill payments; pay-as-you-go; digital credit; and digital government transfers.
By making water bill payments via DFS, households and providers can reduce both time and financial costs associated with utility bill payments and collections. In Kenya, for example, households reduced time spent paying bills by as much as 82%. Similarly, providers benefit from a sharp reduction in costs as well as simplified collection processes, which will be crucial if the sector intends to reach its stated goal of increasing investment by 300% over the next 15 years. Such a drastic increase will require the use of innovative financing mechanisms including water bonds, which demand transparent and efficient processes throughout the industry.
In communities without immediate access to existing water services, DFS allows for the installation of pay-as-you-go or prepaid water services. Pay-as-you-go schemes enable poor households to pay for water in miniscule quantities making payments via mobile money or depositing funds onto a stored-value card and retrieving water as per the available funds. Not only does this allow small households to make payments aligning with their cash flow, but it also enhances the business case for serving low-income communities by reducing the likelihood that water bills will not be settled.
While pay-as-you-go water provision largely relies on public water points for disbursal, many families strive to build a household connection, thus requiring access to finance to cover high upfront costs. Digital credit reduces costs associated with loan provision and collections, allowing financial institutions to better serve low-income households. As such, under-resourced households will have enhanced access to the credit requisite for initial costs associated with building a connection.
These three use cases assume households have the means to pay for water provision, but many families cannot afford to purchase even a minimum quantity of it, requiring government subsidies. By digitizing government transfers for water, governments can enhance efficiency, ensuring that households receive the funds in a timely manner. They can also earmark the funds for water via a closed-loop system as a means of guaranteeing that the money will be used for water purchases.
By highlighting these four use cases, the CGAP focus note showcases possible applications of DFS to the water sector. Yet, the opportunities extend beyond these iterations; in a recent engagement, Enclude identified additional use cases within the sector including earmarked remittances for water and sanitation as well as bundled water products. These opportunities only represent a fraction of potential for DF+ within the water sector and the development space. As we move forward, we look forward to exploring the application of DF+ to overcome challenges ranging from water provision to healthcare access.
We also recommend reading Tricia Cuna Weaver’s blog: Beyond Financial Services: A Focus on Consumer Needs.
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