Imagine living on a remote island, surrounded by vast ocean, with limited telecommunications, minimal internet access, and few means of connecting with the outside world. 

For people living in the outer islands of the Federated States of Micronesia (FSM), this is not a hypothetical scenario but a daily reality. The FSM comprises more than 600 islands, of which 65 are inhabited, scattered across over one million square miles of the Pacific Ocean, presenting substantial logistical challenges and persistent connectivity barriers in its most remote areas.

According to data estimates from 2021, the country has a population of approximately 104,832 inhabitants.  While comprehensive data on the population residing in the outer islands is not available, national estimates indicate that this subgroup comprises around 20,000 individuals. 

The geographical remoteness and connectivity challenges of the outer islands not only contribute to social exclusion, but also to digital and financial exclusion, by entrenching access to crucial services that urbanites enjoy. Financial inclusion data in the FSM tends to be fragmented, obsolete, or not available, but existing figures from 2020 indicate that the financial sector represents about 4.5% of FSM’s nominal GDP. In 2020, only 23% of the population owned a deposit bank account, with no available disaggregated data focusing on outer islanders or women. Lacking a deposit account not only limits the ability to save but also restricts access to electronic payment channels and other services such as credit and insurance, further hindering financial inclusion., further hindering financial inclusion.

Limited infrastructure is another key factor influencing outer islands’ cash or trade economy. The Bank of Guam and Bank of FSM, the two banks operating in the country, have branches only in the main islands of Pohnpei, Chuuk, Yap and Kosrae States, but not in outer islands. With only eight branches and 10 ATMs spread across the country, physical access to banking services is often impossible for outer islanders. The lack of access to electronic payments and banking services means paying high transport fees and risking losses to engage in simple activities like sending, receiving and storing money safely. 

Digital Economy as an opportunity 

In this scenario, digital financial services (DFS), such as mobile money and digital wallets, could change the calculus for the FSM. These services, supported by robust digital infrastructure, would increase access to financial services for those that cannot access the traditional banking system.

However, regulation is a key component to create an enabling ecosystem for DFS, and FSM is still in the early stages of developing comprehensive policies and regulatory frameworks that can support financial innovation and the growth of DFS.   Nevertheless, there is a significant opportunity to improve and expand DFS regulation, which could enhance financial inclusion and foster a more dynamic digital finance ecosystem across the country and the region.

Successful cases in the Pacific region show the potential of DFS, such as digital wallets.  M-PAiSA is an award-winning mobile money service developed through the Pacific Financial Inclusion Programme, that was jointly implemented by the UN Capital Development Fund (UNCDF) and UN Development Programme (UNDP).  In Vanuatu, UNCDF supported the launch of Mvatu,  with services such as peer-to-peer money transfer, air-time purchase, some bill and merchant payments. Through the Pacific Digital Economy Programme (PDEP), UNCDF and UNDP also supported Our Telekom in the Solomons Islands with the deployment of M-SELEN mobile wallet. With 335,000 registered users and 3,000 agents nationwide covering 9 provinces and islands, 80% of the adult population has registered for the service within two years of the launch.

From a gender and social inclusion lens, access to digital financial services would create more opportunities for women in FSM, who tend to be financially reliant on male family members, as well as for MSMEs and entrepreneurs. For the private sector, cash on delivery is in fact the most popular mode of payment, limiting private sector development. Mobile money and digital wallets could transform how MSMEs and entrepreneurs manage their finances, by enabling secure and efficient payments and money transfers, both B2C (business to consumer) and B2B (business to business), as well as enabling access and adoption of e-commerce platforms.

 The challenges

If the digital economy represents an opportunity for the outer islands, it also brings challenges with it.

Mobile usage in the FSM is low, at just 25% of the population in 2023. Increasing affordability and digital literacy might improve this figure and ultimately facilitate the usage of DFS, but the limited data makes it challenging to fully understand the barriers faced by the different population segments, particularly outer islanders and women.

Satellite-based internet might represent a valid alternative for internet connection in the outer islands, but the costs are generally higher and with limited available broadband plans. Some islands experience intermittent connections, weather disruptions and technical issues with the satellite systems.  While significant progress has been made with Starlink becoming available in the FSM in mid-2024, satellite-based internet can be expensive and not always able to fully support mobile financial services due to high latency that can delay real-time financial transactions, high cost, and reliability challenges. 

The extension of mobile network operators' services to the outer islands would improve connectivity and telecommunication, but the high cost of developing and maintaining the necessary infrastructure might hinder such expansion. In this context, in the FSM many outer islanders rely on prepaid plans with limited data, making it difficult to maintain consistent access to the internet and stable telecommunications.

A multi-layered approach 

To promote financial resilience in the outer islands, a multi-layered approach supported by development partners, including UNCDF with its unique capital mandate, is recommended:

1. Data collection: Collecting data is essential for gaining insights about access to finance, especially for women, for which comprehensive data is currently limited for the FSM.

2. Investment in digital micro and meso infrastructure is critical for the growth of digital finance. UNCDF can support this transition by delivering scalable, blended finance solutions to increase capital flows and de-risk investments.

3. Offline and low-connectivity digital financial services could also serve as a transformative solution. Most current mobile wallets rely on Unstructured Supplementary Service Data (USSD) channels and don't need satellites as they run on Global System for Mobile Communications (GSM) networks. In this vision, it is fundamental to ensure a more extended GMS coverage.

4. Community-based hubs with satellite connectivity, where possible, can serve as internet access points in outer islands, while USSD/SMS and offline digital wallets can support the usage of basic financial services when internet access is limited. 

5. Partnerships with telecoms, fintechs, and policymakers are essential to enable and expand the DFS market and to foster a flexible and resilient financial ecosystem, ensuring that even remote communities can access, save, and trade digitally. 

By prioritizing financial structures tailored on challenging geographic and economic ecosystems such as those of the FSM's outer islands, the country's outer island population will have equal access to the digital tools and opportunities to thrive, regardless of location.