Something has indeed changed, almost without notice

The financial services sector was ideally suited for the digital revolution. A large segment of banking and insurance¹ went digital several years ago, even in developing countries. For example: credit-card issuers and banks had been using private networks to transfer funds, well before Internet through service providers such as VisaNet, SWIFT and FedWire.

At present, several financial and insurance products are being re-designed to adapt them to customers’ needs. The services go beyond payments and transfer of documents²: Loan requests, credit insurance, L/C confirmation, etc., can now be submitted in electronic forms. This is changing the traditional bank client relationship.

Internet has given an added boost to digitalization by keeping down costs: UNCTAD has pointed out: traditional bank-to-branch transactions cost at least US$ 1; Automatic Teller Machines (ATM) reduce the cost to US$ 0.20. Online, a transaction costs only US$ 0.01. Digital e-payment appears therefore ideal not only for large deals but also for small, non-cash transactions.

The silent revolution is bound to affect also developing countries and for many services faster than expected. Rather than adding to the difficulties of "going global", it will provide developing countries with a strong and comparatively cheap support to their integration in world trade.

Constraints can be lifted, even in developing countries

Many developing countries report major infrastructure difficulties, such as a low level of telecommunication services. This should not be taken as an excuse for slow action. First of all, major improvements are being introduced almost everywhere as a result of increased donors’ attention and healthy privatization processes. Secondly, technical jumps are still frequent. Internet can travel via electricity lines and TV cables, in addition to phone lines. The adoption of this technology can further increase global reach, even in remote areas. There are other temporary solutions, such as grouping a few users in order to share a satellite connection. This seems a little far fetched but the possibility do exist. In reality, in any country, the pace of change is determined by political vision. And an encouraging progressive vision has been adopted by many developing countries, both in the public and private sectors, enabling giant steps to be achieved in financing business-to-business (B2B) and business-to-consumer (B2C) trade.

The e-payment paradox solved

E-payment, which is an important part of the e-trade cycle, represents the ultimate goal. The transaction remains at risk until money is received. Interestingly, e-payment provides a paradox totally in opposition to the concept of free information-sharing: While the very structure of the Web was created to provide free access to information sharing, e-payment and many other financial service applications require state-of-the-art security and encryption,. Highly sophisticated encryption programmes can now provide the required security, at a nominal cost, for both developed and developing countries. The paradox is solved and e-payments offer an ideal tool, permitting the rapid, cheap and secure settlement of transactions.

Turning drawbacks into advantages: an opportunity for banks

Some bankers feel that their role is being reduced to that of a simple intermediary. They are moving further away from clients as settlements are completed directly between trading parties. Personal contact between banker and client is diminished and it is hard for a bank to relinquish its traditional power. However, there are many immediate advantages. First of all, digitalization offers, for standard and repeat transactions, a reduction in repetitive administrative tasks, decrease in related human errors and considerable cost savings. The savings can be passed on to the enterprises. Even international micro-payments become worthwhile. Secondly, bankers have more time to concentrate on more important issues and transactions.

Digitalization also creates new opportunities for the banks. Instead of passively processing low-margin transactions, banks can utilize the wide access to e-banking enjoyed by consumers (at home) and entrepreneurs (in the office) to develop entirely new products. By setting up bank portals, products and services such as insurance can be offered. One Swiss bank offers all the services needed when buying a new home, including mortgage, insurance, construction and utilities. Other banks are looking at new areas of development to make a better use of their clients’ portfolio, such as short-term credit handling, cash and payroll payment services, collection services, and export credits linked to credit insurance. More important, banks can help in subcontracting and shifting workloads from industrial to developing countries.

The next generation of financial products will probably be combined to bring in life insurance, which can be separate or linked with credit, as with "Banque Assurance" in France; financial trading in all sorts of instruments; portals assisting in the setting up of new enterprises; and finally -- at the consumer level -- portals providing a series of financial and non financial products around a theme, as in the Swiss private homes example.

Overall, still a few problems to solve

The rapid development of digital cash raises some concerns. Although the substitution of traditional bank notes, dollars or euros with less reassuring digital cash will take some time and may never happen, the new cash can be considered as a proxy to real currency. In this sense, it affects money supply and can have a multiplier effect. Governments will surely monitor developments and a few of them be tempted to re-introduce controls. In addition, at macro-economic level, a rapid development of international e-payment could introduce exchange rate instability and likewise require some form of additional supervision.

Many developing countries still have to settle legal issues, such as adaptation of the legal framework, digital signatures and encryption, and the questions mentioned already, such as improved banking procedures and telecommunications. Industrial countries have faced the same problems, but, on the positive note, the changes do not require costly changes. The difficulty may lie rather in the fact that emerging economies are not used to think in terms of global procedures.

But when there is a will, there is a way. In India, for example, neither credit cards nor digital cash are standard ways to make payments. Companies have used their natural creativity to successfully develop e-commerce in different ways: One company, for example, is introducing a complete e-service where payment is cash on delivery. Another, a milk co-operative, has created its own electronic card payment system among its members who are the clients of the co-operative.

Strategic hints for developing countries

Trade development strategists have to fully understand the e-finance revolution to participate in global trade. Not adopting a new approach or refusing to lift restrictions that were first imposed many years ago will force countries to continue at the level of exchanging salt or shells, instead of clicking on PC screens. If the first industrial revolution was very costly in terms of money and lives, this new revolution is easier: constraints are surmountable and solutions do not require huge amounts of capital.

On the basis of successful practice, we can suggest several activities for the various actors to start with:

Organized SMEs can group together to share the costs of creating a service or consulting company to trade internationally through e-commerce. This has worked very well in a number of countries in Latin America.

Banks, in turn, being heavy users of electronic and digital technologies, can easily adopt new procedures entailing low marginal costs to meet clients’ new demands³. Increased standardization gives banks the opportunity to enlarge the range of traditional services through new channels as well as new, specifically designed products.

Governments can limit themselves to being "active facilitators" -- which is nevertheless a very important role. It means adopting simple, effective regulations concerning registration, taxation, monitoring and reporting, and legal issues. The goal, in this respect, is to create a harmonious company framework and facilitate the installation of private, small and efficient companies. The most convincing step is for governments to use electronic technology themselves as widely as possible, as in Canada or Singapore, or to become a major online client for many local businesses. This will not only stimulate local enterprises but also give governments direct feedback on practical problems faced in the e-banking and e-payment sectors.

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