Leveraging Digital Financial Solutions to Promote Formal Business Participation

Abstract

This paper explores economic informality and how it relates to digital financial inclusion. It focuses specifically on the potential role that digital financial services–including those accessed through mobile phones and the internet can play in encouraging businesses to formalize their operations. The data show wide variations in the extent of informality as well as the financial inclusion of informal business owners. The paper finds that digital financial services can make it easier for informal firms to register and operate as a formal business, while also creating synergies between individual reform efforts. For example, companies that use a digital payroll system can easily make pension contributions when online platforms are available. Digital financial transactions also make it easier for governments to enforce laws and regulations, including tax collection. However, there are several important caveats. It is not clear that formalizing small transactions is an effective way to increase tax collection. As the digital economy grows and countries seek to curb informality, policymakers should tailor their programs to the needs and realities of different groups of enterprises.