This post originally appeared on the Better than Cash blog. 

In wealthy countries, most people conduct their financial activity in digital form; money and value is stored virtually and transferred instantaneously with a touch of a button, and the system provides an easy access to a wide-range of financial services. In contrast, most poor households operate almost entirely in the informal economy, using cash, physical assets (e.g. jewelry and livestock), or informal institutions to meet their financial needs. This creates two fundamental inequities in the financial lives of poor households. First, it is riskier and costlier for them to send, store, and receive money, and when large problems arise, such as a major illness in the family, the tools often break down completely, leaving households exposed. Second, it marginalizes poor households from the formal economy because it makes it costly for financial service providers and other institutions (e.g. governments, utility companies) to contract with them.

According to the Global Findex survey, of the 2.5 billion people who live on less than $2 per day, three quarters do not have a bank account and most of these also lack credit and insurance.   Financial exclusion is the most severe among women and rural residents: globally, 47 percent of women (vs. 55 percent for men) and 22 percent of rural residents in low income economies have a bank account (vs. 35 percent in urban areas).

Although, poor households lead very active financial lives, the market has failed to serve the poor with formal financial services because building and maintaining the bank branches, ATMs, POS terminals necessary to facilitate access to the formal system is expensive and often not profitable in poor areas.

The best way to reduce the costs of reaching poor people with financial services is to help shift the majority of their cash-based transactions into digital form which will strip the majority of costs out of the system and enable robust commercial efforts.

Communication technology now offers innovative new ways to make payments through mobile phones, smart cards and other electronic means. In fact, instruments like mobile money have the ability to reach poor and rural communities faster than any traditional bank. Since its launch in 2009, the Pakistani mobile money deployment EasyPaisa has quickly penetrated lower income segments with 40 percent of active users living on less that 2.5$ a day.

Today across the world, government institutions, multinational companies and donor agencies make billions of dollars of cash payments to poor households every month.  These payments include salaries, payments to vendors, pensions, social welfare stipends, cash-for-work programs, and emergency relief payments. Not only are cash based payments costly and inefficient, they represent a missed opportunity to bring poor people into the formal, digital financial system.

The Better than Cash Alliance is a partnership of governments, NGOs and businesses that believe there is real value in creating an electronic financial services infrastructure that the world’s poor can use. By joining the Alliance, these organizations agree to convert their payments into digital form, strengthening the digital financial infrastructure and fostering the poor’s access to the formal financial system while benefiting from a wide-range of benefits.

Once poor people are connected to institutions like utility companies, enterprises & governments through an e-payment system, transactions can be made instantly. Social welfare payments could reach households directly without some (or all) of that payment being diverted to unintended beneficiaries. Electricity bills could be paid with a push of a few buttons instead of traveling to an often distant office with a handful of cash and waiting in a long queue.

Read the full article at Better Than Cash.