Mobile banking apps and the informal economy: evidence from survey data in Indonesia and Bangladesh

Reducing preference for cash and supporting the adoption of digital financial services can help achieve financial inclusion while also diminishing economic informality. However, previous evidence suggests that increased access to formal banking services has not resulted in an immediate reduction in usage of informal services. This paper estimates the effects of mobile phone banking apps on the demand for cash using unique survey data from Bangladesh and Indonesia. Our models indicate that having access to a banking or payment app reduces a variable capturing preference for cash by between 4% and 10%. The results are robust to a range of specification checks (including the inclusion/omission of various controls) which suggests that confounding from unobservables is unlikely to be a substantive source of bias. Since cash is the preferred payment mechanism for the poor in developing countries, the results suggest that access to digital banking apps may reduce informality within the finance sector, leading to broader development implications.