Are Instant Payment Systems Changing the Financial Inclusion Landscape in Emerging Markets?

Despite significant advances in digital financial services, one in four adults (24%) globally still lack access to basic financial accounts and use cash for most retail transactions. In 2021, only 37% of adults in low- and middle-income countries made digital payments to merchants, while just 18% of adults paid utilities through financial institution accounts or mobile money. This continuing low usage of digital finance limits the progress that financial inclusion can make globally. 

Instant payment systems offer a promising solution to expand the usage of digital financial services by creating a compelling alternative to cash.  These systems can reduce the cost of digital payments, invigorate competition in the financial sector and broaden access to credit for micro and small businesses. Recent research provides early evidence of the impact of instant payment systems. In this blog, we summarize key findings from a research synthesis brief produced by the Toulouse School of Economics in partnership with Innovations for Poverty Action.

How instant payment systems replicate key features of cash

Underpinning the promise of instant payment systems is an effective design which replicates three key features that make cash attractive:

1. The instant nature of these payment systems: Individuals can transact with one another on a real-time basis.
2. Faster settlement for payments to merchants, in contrast to most card-based payment systems.
3. Interoperability: This critical characteristic allows users (individuals and businesses) to transact with one another seamlessly, irrespective of their financial institution. Users don’t need to hold multiple accounts (or multiple sim cards) and they don’t need to have multiple intermediation apps (such as Venmo, PayPal, etc.) to make transfers to others, pay for purchases and settle utility bills.

Whether instant payment systems can truly deliver on their potential requires further research, but early evidence indeed points us in that direction. 

Key takeaways from our research brief

In our work synthesizing recent research, we found five key ways that instant payment systems can push forward progress on financial inclusion  (all of the studies mentioned below are referenced in our research synthesis brief). We found that instant payment systems can:

1. Help lower the cost of digital transactions by enabling interoperability. Brunnermeier et al. (2023) found that in sub-Saharan Africa, the introduction of instant or interoperable payment systems reduced digital payment costs by 20 to 35%. The impact was even greater for the small-value transactions which are more commonly used by low-income households. Costs for these transactions decreased by 20 to 45%, making digital payments more affordable and accessible.
2. Improve rates of savings and entrepreneurship. Greenland and Toth (2023) found that users of India’s instant payment system, Unified Payments Interface (UPI), saved more in formal accounts, without reducing their informal savings. Also studying the payments landscape in India, Dubey and Purnanandam (2023) showed that districts which had larger aggregate subscriptions to UPI had higher business ownership rates. Households also saw an increase in income growth of 8%.
3. Improve access to credit and other financial services by reducing payment frictions and thereby improving digital transaction frequency. As more transactions occur digitally, they generate valuable data that can be used in credit scoring algorithms. This data helps financial service providers assess consumers’ and businesses’ ability to repay loans more accurately. As a result, lenders may be more willing to extend credit, especially for those living in areas with less dense financial infrastructure (for example, few and scattered cash-in, cash-out agents) (Greenland and Toth, 2023; Sampaio and Ornelas, 2024; Dubey and Purnanandam, 2023).
4. Enhance competition and innovation in the financial sector. In Brazil, regions with a higher subscription to the country’s instant payment system, Pix, saw a greater increase in deposits at smaller banks relative to larger banks (Sarkisyan, 2023). Interest rates offered on deposits at large and small banks became more aligned as competition in the sector increased. In India, Roessler, Toth, and Tsai (2024) found that financial institutions participating in the UPI system updated their mobile banking apps with new app features more frequently than non-UPI members, indicating that UPI promoted innovation in the banking sector.  
5. Improve the effectiveness of monetary policy: The interoperability of instant payment systems enables consumers to move their deposits more easily to institutions that offer higher deposit rates, increasing competition for deposits. As it becomes easier for customers to switch banks, the larger banks, which would have previously kept rates unchanged, are now more likely to adjust rates in line with the monetary policy rate to avoid losing deposits to smaller banks. (Liang, Sampaio, and Sarkisyan, 2024).

Looking Forward

Our conversations with policymakers, practitioners and other stakeholders reveal that this early evidence is pivotal for creating effective regulation around instant payment systems and ensuring widespread adoption. However, there are still many unanswered questions. 

As we look into 2025 and beyond, we need more research to better understand how instant payment systems can influence economic development in diverse markets, particularly in regions with lower financial inclusion. Gaining a greater understanding of their impact will help us design instant payment systems that maximize benefits and minimize risks.