I’ve previously written about the downside of cashless societies and how it can impact some of the more vulnerable members of our society (if you missed it, you can read it here: https://bit.ly/2S05cah). This topic triggered a lot of responses and since it is an issue I (and many others) feel very strongly about, I wanted to give my view on what we as an industry can do to help.
Despite the rapid development of technology and payments infrastructure, financial inclusion is still a tremendous problem. The latest figures from the World Bank’s Global Findex report show that 1.7 billion adults remain unbanked. While account ownership is increasing, 31% of the adult population globally still do not have an account. Even once they do, there is still the issue of enabling them to transact safely and conveniently – something that is not always straightforward, given the reducing number of physical banking touchpoints.
You may question whether this issue can be addressed with just one initiative and, of course, you’d be right. Financial inclusion can occur in many different ways – and there are several movements underway aimed at doing this. While some are tackling access to more traditional banking services, other initiatives are focused on building electronic solutions through e-money infrastructures or access to credit.
In Africa, mobile and electronic money work extremely well, because of the widespread dispersion of people in rural areas with no direct access to the traditional banking infrastructure. Instead, two-thirds of the population own a smartphone. It is fair to say that mobile money is making great headway in extending financial inclusion in many developing countries.
But it’s not just about developing countries – the issue of financial inclusion in countries with well-established banking infrastructures is not something to be ignored. A 2017 survey by the UK financial services regulator, the Financial Conduct Authority, reported that 1.5 million adults in the UK are unbanked. Obviously, this a huge missed opportunity for financial services providers, but, with illegal lenders and high-cost credit providers on the rise, there is also a duty of care to protect these members of society from the increased risk of debt (and worse) that comes with being unbanked.
In more developed countries, increasing financial inclusion often requires a different approach, partly because the reasons for exclusion, and the means to address it, are different. It may even be that the decentralised focus of initiatives is the only way to close the gap – because that gap is just too big and very variable, depending on the available infrastructures in each country or region.
Global collaboration is vital
The different financial inclusion initiatives happening across the world are honorable and are certainly helping to make improvements in each locale. However, the problem is not only being addressed differently on a geographic level, but also on a product-level. For instance, while some initiatives focus on transactions, cross-border remittances, the others focus on credit disbursements and capital flows independently. The question, then, is whether multiple parties attempting to solve the problem in relative isolation could actually create even more silos in the global financial infrastructure – something that could cause more problems in the long-run.
There is no doubt that this is an issue which also needs to be tackled at a higher level by the payments industry and other relevant parties. One great example of this is Accion’s Center for Financial Inclusion – an organization who have been working hard to address financial inclusion problems at a more global level, getting hundreds of stakeholders involved.
Some of the more agile financial services players, along with a handful of technology-driven newer entrants, are baking financial inclusion initiatives into their product and market development strategies. For instance, Mastercard has started offering accounts to the unbanked, while PayPal and Amazon have launched debit cards aimed at those who do not have traditional bank accounts.
But it’s not just the typical tech giants who are making headway. The Bill & Melinda Gates Foundation developed a free-to-use, open source software designed to create payment platforms suitable for the unbanked. The code, dubbed Mojaloop, increased the interoperability between traditional financial institutions and mobile payment platforms. A number of fintechs, including Ripple and Dwolla have partnered with the Foundation to bring the solution to market. There is no doubt that the world would benefit from more of this kind of collaboration.
There are many emerging technologies which are also worth investigating to see if they can support the drive for financial inclusion. A lot has been said about blockchain and how it can help bridge the financial inclusion gap and several national and even regional initiatives are popping up which will be interesting to watch as they develop. Blockchain solutions can certainly create new ways of solving infrastructure and cost management problems and have the ability to work on a global scale.
Identity: the biggest barrier to inclusion?
The struggle for financial inclusion always raises another major concern: identity. As the Financial Action Task Force (FATF) states “one of the main financial integrity challenges… is the lack of reliable identity documentation and data verification for potential customers.”
According to the World Bank, over 1.1 billion people are not able to prove their identity. Low income or displaced people, such as refugees, often do not have official identification documents, so they are not able to meet ‘traditional’ customer due diligence requirements. This means that they struggle to access benefits and services. While this is an issue that governments need to address, the private sector can help here too – potentially using the same technologies that can themselves extend financial inclusion.
For example, the ID2020 Alliance, an alliance of governments, NGOs and commercial enterprises, combines the power of biometrics and blockchain to provide a global identity solution. This initiative is starting to make great strides, with a number of big-name companies contributing their expertise.
Mobile also has a part to play, beyond the payments capabilities it offers those who struggle to access banking services. For instance, in 2018, Trulioo released Mobile ID capabilities, enabling customer verification by leveraging some of the world’s largest mobile network operators- helping to increase coverage in hard-to-reach markets.
The role of the regulator
Of course, with everything in our industry, there is always the question of regulation and how these initiatives are viewed by regulators. Identity is definitely high on the radar of the FATF who are currently developing guidance on digital identity in relation to customer due diligence requirements. A draft of the document will be available in February this year and a final version after consultation in June.
The FATF have recognised “that applying an overly cautious approach to anti-money laundering and countering the financing of terrorism safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the formal financial system”. As a result, FATF have published guidance on financial inclusion, which explains how to apply a risk-based approach which helps balance the conflicting challenges of compliance and financial inclusion. While this is a good start, the payments industry needs to get some momentum behind this movement.
I am a strong supporter of bridging the financial inclusion gap, from a humanitarian perspective, but there are also benefits from a money laundering perspective. Think about the impact of financial exclusion on the extent of cash usage. Moving more people into the regulated economy will make illicit transactions less attractive and people with access to financial services are less likely to be exploited from a financial crime perspective.
The delivery challenges
Blockchain initiatives and programmes to leverage existing infrastructures are very much needed. While blockchain could reduce banks’ infrastructure costs, (for instance for cross-
border payments) mobile solutions could also have huge impact on closing the financial inclusion gap. Whether blockchain technology and the current (unregulated) environment is ready to take this on is a question that is answered by many with hesitance. There are still a range of regulatory and technical challenges for blockchain to overcome and these are unlikely to be resolved in the short-term.
Another hurdle to address is the acceptance network. If people in developed countries still need to pay cash at retail stores, or for their rent, electricity and other costs of living, this access to a bank account, mobile money or debit card is not going to help. No matter how money is sent around the world digitally, people may still need to be able to access and use their financial resources in cash – at least until better solutions are available for paying digitally.
There are an array of challenges ahead, but there’s also a huge opportunity for us as an industry to work together to use technology for good.
One last ask…
Finally, I serve as ambassador of social charity LittleBitz, which aims to disrupt the way people donate by offering a platform that connects donors and displaced people, based on their own needs and preferences. On a voluntary basis, I advise upon and set up their payment channels, which are currently in pilot phase (helping Syrian refugees in Jordan). If you believe you have a solution that can help bringing donations from person to person, while addressing the many complex issues of cross-border payments, CDD and acceptance network, please contact me.