The global financial sector is facing an unprecedented revolution driven by modern technologies. Cross-border transactions through blockchain-enabled payments, digital payments, and more have the potential to revolutionize financial transactions. This notwithstanding, underdeveloped countries have several challenges in fully accessing these technology-driven financial innovations, especially in transactions.
A fast, secure internet connection is the building block of seamless e-financial transactions. In developing countries, enormous rural and remote areas may not be covered with proper broadband. In sub-Saharan African countries, extensive parts of the population reside in regions where mobile network coverage is spotty and fixed-line internet penetration is zero. Unconnectedness has a direct impact on transaction-driven activities. They cannot use mobile payment apps like Apple Pay or Google Pay. Small companies, the backbone of local economic growth, cannot accept customers' web-based payments, domestic or foreign. Without assured connectivity, e-commerce transactions based on real-time data transfer for payment processing and order fulfillment are severely affected. This not only prevents local business development but also discourages the participation of these countries in the global digital economy.
The lack of requisite hardware and software also prevents undertaking transactions. Citizens of underdeveloped countries do not have access to the smartphones, tablets, or computers necessary for interaction with e-financial services. This deficiency is a major hindrance because the majority of modern financial transactions, such as online banking transfers, investment portfolio management using robo-advisors, or payments with digital wallets, are device-dependent. Furthermore, software prices, particularly financial management and security software, are typically very high. Small and medium enterprises (SMEs) in such countries are unable to afford enterprise-grade accounting software that complies with e-financial regulations. Therefore, they may not be able to account for and process financial transactions suitably, and this will lead to inefficiencies and could result in non-compliance issues.
Financial literacy is crucial for the effective use of modern technology in financial transactions. Most people in developing countries are unaware of the fundamentals of digital finance. They may not be aware of how digital payments work, how digital payments are secure, or how disputes in transactions can be resolved in the digital economy. For example, in South Asian countries, consumers do not like to use mobile wallets due to fear about the safety of their money. This absence of information causes hesitation in carrying out digital transactions, even where the system is in place. Consequently, digital payment ecosystems within these nations are hindered from growing, and the advantages of quicker and easier transactions are never achieved.
The quick development of e-financial technologies poses another challenge. Concepts like cross-border payments made through blockchain technology, which is more secure and efficient, are advanced and entail some level of financial and technological literacy to appreciate. In the absence of sufficient education and training, the population in the underdeveloped world may be afraid to adopt the new payment techniques. For instance, the idea of using a decentralized blockchain network for cross-border payments may be too complex or risky for the majority. This aversion to change affects the implementation of new technology in financial transactions. It leads such countries to lag behind the world in trends as well as in the economic advantages that accompany it.
Developing countries often do not have mature regulatory systems for e-financial transactions. In the online payments ecosystem, there may be no regulations or rules for fintech companies to be licensed to enable transactions. There can be no clear rules for holding capital adequacies to stabilize payment systems or data protection with regulations to ensure customer data confidentiality while effecting transactions. This regulatory void creates ambiguity in the space. Customers may be reluctant to initiate online transactions since they are unaware of their legal recourse in the case of fraud or disruption of services. Investors also may avoid investing in fintech companies operating in such nations, fearing regulatory ambiguity. Thus, a strong e-financial transactions system is hampered from developing.
Despite regulations, less developed nations suffer from implementation and enforcement issues. Electronic transactions fraud detection and prevention, such as money laundering through online payment systems, require sophisticated data analytics software and highly skilled experts. These sophisticated technologies or specialized experts are not typically affordable for regulatory agencies in these countries. Thus, criminal activities can be undetected, and the integrity of the e-financial transaction system can be compromised. This not only jeopardizes the economic stability of the country but also deters honest consumers and businesses from conducting electronic transactions.
Building and sustaining the infrastructure for modern e-financial transactions is too costly. Underdeveloped countries must invest in digital payment systems, secure data centers, and communication infrastructures. The creation of a country-level online payment system, for example, will run into millions of dollars. As they have limited financial resources and other priorities, such as medicine and schooling, such countries may not be in a position to allocate sufficient funds to infrastructure development. This lack of investment manifests itself in substandard payment systems that experience frequent breakdowns or partial functionality. Consequently, businesses and consumers would be discouraged from using such systems for transactions.
For consumers and businesses in underdeveloped nations, transactional costs in e-financial services are generally high. Fintech institutions and banks may offer fairly expensive services such as access to financial data, online transfer of money, and digital payment. In other nations in Africa, the charges for mobile money transactions are very expensive and are based on a percentage of the sum. These are very high rates that serve as a big disincentive to low-income consumers and microbusinesses. These consumers and enterprises might end up using outdated but less efficient means of payment or not paying at all. This not only limits the growth of the e-financial sector but also impedes economic development at the grassroots level.
Underdeveloped countries are particularly vulnerable to cyberattacks in the e-financial transaction sector. Their relatively weaker digital infrastructure and lack of advanced cybersecurity mechanisms make them an attractive target for cybercriminals. Banks and e-financial service providers of these nations may not have the ability to invest in the best-in-class security technology in terms of advanced firewalls, intrusion detection systems, and encryption machines. Hence, their likelihood of suffering data breaches during transactions is higher. To better understand, let's consider the example of a small Southeast Asian online payment gateway. It is hacked easily since its security software is never updated, and customers' payment information is stolen. The incident not only leads to financial losses to the customers but also shatters trust in online payments and thus slows down the evolution of the e-financial system.
Apart from the absence of technology, underdeveloped countries do not have human capital with sufficient expertise in cybersecurity. Banks and regulatory agencies do not have professionals with the necessary skills to protect themselves against cyberattacks, address security breaches, and have effective security controls. In the event of a cyberattack, they cannot respond effectively, expanding the damage. For example, in the case of a ransomware attack on a payment processing center, the lack of expertise would result in extended downtime and substantial financial loss. The lack of cybersecurity expertise in such situations would, therefore, be a major threat to the integrity and growth of e-financial transactions in underdeveloped countries.
The application of modern technology in finances is very promising for underdeveloped countries, but they are facing tremendous challenges in transactions. Dealing with these challenges will require a combined effort from the private sector, international institutions, and governments. Digital infrastructure investments, financial literacy, capacity building of regulatory bodies, and cybersecurity are vital. If they address these challenges, underdeveloped countries can achieve the full potential of modern technology in financial transactions and contribute to economic growth and inclusion.