Financial inclusion has been identified as an enabler for seven of the United Nations’ 17 Sustainable Development Goals. Unsurprisingly then, the G20 has committed to advancing financial inclusion worldwide, spawning strategies such as the Universal Financial Access (UFA2020) initiative. Organised by the World Bank Group (WBG), the UFA2020 programme exists for adults who are unable to access a debit account to store money, or send and receive payments.
As can be seen from UFA’s data tracker, the percentage of banked adults has increased globally from 51% in 2011 to 69% in 2017. However, that still leaves close to 2 billion adults excluded from financial services worldwide, with just under half of all financially excluded individuals living in only 7 areas: namely China, India, Pakistan, Indonesia, Bangladesh, Mexico and Nigeria.
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Crypto to the rescue!
From the data referenced above, approximately 1.3 billion adults could be granted access to financial services through the opening up of the regulatory environment to include individuals who exclusively save, or pay bills in cash. Cryptocurrencies, such as Bitcoin, present a viable digital alternative to traditaionl finance. The concept of digital financial services (DFS) has proven successful in emerging markets, where it is estimated that there are one billion people that have a mobile phone, but are without a bank account.
The blockchain technology that underpins crypto allows a significant time reduction in financial transactions, which subsequently reduces cost, and can be paired with biometrics to prevent instances of fraud. China’s digital currency electronic payment (DCEP), a digital version of the Chinese yuan, will soon become legal tender in the country. With the largest unbanked population, and 83% of all payments made through mobile devices, the DCEP is a progressional step towards a cashless society in China, promoting enhanced financial inclusion.
In India, with the recent shift to a more favourable regulatory environment, it may no longer be ‘too early’ to discuss the issuance of a digital currency. While the Indian government previously asserted the sovereign function of national currency, prohibiting cryptocurrencies, the Supreme Court of India overturned the stifling crypto ban in Asia’s third-largest economy. This could be incremental to enhancing financial inclusion in another highly unbanked market.
This may be all well and good, but how do you convince people without access to traditional banking to embrace the intricacies of crypto finance applications? While it would undoubtedly address pertinent security issues associated with finance, the biggest barrier to wider uptake is certainly the complexities of leveraging blockchain technology or cryptocurrencies. People can be reluctant to adopt new technologies which may have previously been banned or which may still appear inaccessible.
M-Pesa, a branchless money transfer service operating in Kenya, presents a good example of what can be achieved if cryptocurrencies overcome these barriers. Safaricom, the M-Pesa operator, provides their mobile-banking service through a network of local retailers. Acting as banking agents, these retailers facilitate convenient deposit and withdrawal services. A survey found that M-Pesa has positively impacted 83% of respondents: conveying the potentiality of mobile phone technology to accelerate the evolution of financial inclusion.
As an example, although 335 million Indians opened a bank account through the government's Jan-Dhan scheme, approximately half of these remain unused due to poor commute facilities and work-life time constraints. Comparatively, mobile phone penetration paired with increased Internet access can make financial inclusion a reality for 890 million rural Indians. All users need is a smartphone and an app to get started.
Ideally, while the transactions would be crypto based, explicit knowledge of blockchain tech wouldn’t be required - users may not even be aware of the underlying technology at all. As exemplified by Apple Inc., delivering an accessible and inclusive user experience is fundamental to sitting atop the technological stack. A blueprint for such a user-first experience in crypto has been laid out by the likes of Abra, allowing users to interact with fiat, crypto, stocks, and ETFs.
Technological innovation is at the core of banking the unbanked, and regulators play a significant role in providing sustainable mobile banking services. An intricate set of rules governs the convenient access to financial services enjoyed by so many, and as evidence suggests, regulation in areas such as banking, payments, consumer protection, and anti-money laundering can hinder or help financial inclusion.
Governed by more than 30 global organisations, the Consultative Group to Assist the Poor (CGAP) disseminated the Basic Regulatory Enablers framework to promote financial inclusion. The most fundamental of these enablers is nonbank e-money issuers (EMIs), such as Revolut. Although EMIs like Revolut require access to traditional banking, distributing DFS through a network of agents, as M-Pesa does, would be the key to unlocking financial inclusion.
EMIs allow users to digitally engage with financial services, opening up the prospect for individuals in remote areas to manage their finances through a mobile device. With that said, striking the balance between customers and compliance will be the decisive factor. Technology can reduce the cost of KYC compliance and deliver a seamless user experience, however, this will necessitate a tailored regulatory framework for inclusive DFS: where legacy systems that make it difficult to move with the times will pay the highest cost.
The Reserve Bank of India (RBI) attempted to do as such, with the Prepaid Payment Instrument and Payments Bank, respectively. While demonstrating an advantage over traditional banks in serving more remote populations, the overly onerous restrictions reflect a reluctance to break away from traditional banking methods. Finding the balance between financial inclusion, integrity, and other policy objectives remains a significant challenge for regulators, and should be the central concern when creating new licensing categories.
Not if, but when?
The restrictive regulatory framework surrounding DFS reflects the inefficiencies of an outdated banking infrastructure, not limited to the Indian example. There is an overwhelming amount of unbanked individuals around the globe, who rely on outdated services that were designed in a time before the internet. There is a blatant gap in the modern banking system, encompassing unbanked individuals, which can be plugged through integrating DFS and cryptocurrencies into an enabling regulatory framework.
Supporting educational initiatives on cryptocurrencies, and legitimizing blockchain as a legal payment rail are only the initial steps to banking the unbanked. Regulators need to take action, and begin piecing together a robust framework that integrates innovative tech, and replaces obsolete banking methods. This opening up of regulatory restrictions could catalyse development in both mature and emerging markets, providing socio-economic empowerment of individuals and communities everywhere.