Nepal: Ensuring customer confidence
Electronic banking has led to a surge and uptake of digital finance worldwide. It has captured the attention of developing countries and least developed countries (LDCs) alike, where traditional banking—or no banking at all—is still prevalent. Transitioning these populations to digital channels requires shifting customer behaviour, which in turn necessitates building greater customer trust in the system.
Introduction of ATMs: An example to assess the role of trust in digital finance
The automated teller machine (ATM) was the first of several innovations that led to the digital boom. ATMs have steadily dotted the landscape of many developing countries and LDCs, with the pace of ATM infrastructure development heavily influenced by the demand side through the acceptance of cards. The process typically starts with one bank installing the services for its own customers and slowly, as acceptance picks up and other banks follow suit, demand for joining the network and for achieving interoperability in the long term grows.
Metrics to assess trust
Institutions invest in digital banking to increase revenue or to reduce cost. While non-financial transactions, such as balance enquiries and mini-statement requests, do not generate revenue (in fact, they put some strain on resources), these types of transactions build customer trust—first in the machine and ultimately in the system. The behavioural shift by customers to electronic banking and the confidence of customers in the system can be gauged by the volume of non-financial transactions. ATM data from one LDC in South Asia for financial and non-financial transactions underlines this point. In 2013, when ATMs were still in an early period of growth in Nepal, the ratio of financial to non-financial transaction volume was 3.07. It is now 4.57, revealing the growing confidence of customers to use ATMs to withdraw money as well as to conduct other financial transactions and not just to check balances (see figure I).
Role of central bank to build trust
Many examples from across the globe attest to the fact that adoption and usage of electronic banking channels and instruments take time. The trust in the system that must be developed is linked to customer protection. Most LDCs are in an early stage of market development with technology-based banking. At that stage, the central bank needs to play a key role in ensuring customer confidence in the system through implementation of a robust grievance redressal mechanism and other rules/policies for customer protection. One issue that can erode customer trust in the technology is repeated transaction failure, which may or may not lead to financial loss but ultimately pushes the customer away from using digital instruments and instead to relying more on cash.
Failures that decrease trust
In Nepal, transaction data show the following failure ratios. On the ATM network, the ratio of successful to unsuccessful financial transactions is 3.21. On the point-of-sale (POS) network, this ratio is 3.27. The same ratio for non-financial transactions is 2.44 for both the ATM and POS networks (see table 1).
Reasons for failures that must be addressed to improve trust
There are a number of underlying reasons for these failures (see figures II and III). In the case of ATM transactions, while a lack of awareness on the part of the customer is the cause of a significant number of failures, most failed transactions are on the part of the issuing bank, machine or network (e.g., issuer time-out, issuer down, switch not available). In the case of POS transactions, the high level of failure is singly attributed to the supply side: the bank or acquirer network is unable to process and pass the transaction message (due to various causes).
These are the types of issues that could drive down customer confidence and trust in digital channels and that must be considered as markets prepare to offer digital channels/instruments, especially in the context of achieving financial inclusion goals. A focus on building customer trust by providers can go a long way towards increasing uptake and hence sustainability of investments. In the same vein, central banks must play a key role in establishing platforms to collect and address customer grievances, establishing principles for market players to follow when dealing with customer issues and implementing a strong oversight mechanism to ensure compliance.
August 2017. Copyright © UN Capital Development Fund. All rights reserved.
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