• Tue. May 28th, 2024

Michael Wiegand: It’s time for a new approach to financial inclusion

One of the most exciting advancements in global development is the expansion of financial services. Mobile money and other digital financial services are a pathway out of poverty, enabling people to transact without cash safely and securely for the first time. In the past decade alone, more than 1.8 billion people globally have joined the financial system, transforming lives and spurring economic growth. We’ve also seen the gender gap in access to financial services decrease by four percentage points over this period.

This rapid rise in financial inclusion started in 2007 when mobile network operator Safaricom launched the mobile money service M-Pesa in Kenya, creating opportunities for people to increase savings and start businesses. Soon, mobile money services were launched in other African countries and a range of innovative payment models began to spring up globally.

Despite this tremendous success, nearly 1.4 billion adults still do not have a bank account, primarily in low- and middle-income countries, and 54% of them are women. Also, many of those who do have an account use it in limited ways.

Innovative providers, like M-Pesa, often remain proprietary and not fully integrated with the broader financial system. Therefore, a wider range of financial products and services designed to meet the needs of lower-income individuals have been slow to scale.

Government leaders recognise the need for inclusive financial systems but are often unable to move quickly enough, or have reached the limits of what they can achieve without new tools and technology, and the funding to implement them.

Bringing down the barriers

For financial inclusion to reach its full potential, decision-makers and regulators need to move beyond just enabling innovative models and embrace a systems-based approach. Countries need to establish a digital network of systems that span the economy, connecting people, data and money in the same way that roads connect people and goods.

This concept is called digital public infrastructure (DPI) and it underpins inclusive financial systems. Foundational DPI is based on three core, interoperable components: digital identity (ID), payments and data exchange. In practice, this gives countries and people the ability to digitally verify identities, securely and instantly send and receive money, and safely exchange information.

Secure and inclusive DPI can transform an economy. It makes important everyday tasks, such as paying bills and receiving wages, faster and easier. This can benefit the private sector by reducing the cost to serve customers, extending reach, enabling innovative business models and lowering barriers to entry.

DPI also enables governments to deliver public services more quickly and efficiently. Togo, for example, leveraged DPI to set up a cash transfer scheme to support its most vulnerable citizens during the Covid-19 pandemic, and more than 500,000 women received financial aid. In addition, through its X-Road infrastructure — with digital ID and data exchange — Estonia provides 99% of public services online. The government has reduced tax filing time to less than five minutes and has cut the time it takes to register a business from five days to three hours.

Many countries are in the early stages of building DPI. Governments that map a path toward safe, inclusive DPI can accelerate traditional development trajectories by more than 10 years, while pulling millions more people out of poverty. But, if they do not urgently define their digital plans, they risk becoming dominated by monopolies or getting locked into expensive legacy systems.

The foundation’s DPI focus

The Gates Foundation has championed financial inclusion for two decades. We were advocates of pivoting from microlending to digital financial services, and were early supporters of instant and interoperable payment systems.

Now we are vigorous proponents of secure, connected DPI. For example, we support the development of digital public goods, which are open-source technologies that function as building blocks of robust DPI. They are readily available and affordable, so countries do not have to start from scratch.

For example, Mosip is an open-source digital ID protocol that 11 countries, including the Philippines, Ethiopia and Morocco, are using to build national digital ID systems. Mojaloop is an open-source digital payment system being implemented in countries such as Tanzania and Rwanda.

We also partner with technical assistance programmes that help countries implement DPI along with the appropriate regulations and safeguards. AfricaNenda provides technical support to build inclusive digital payment systems, aiming to achieve universal financial inclusion on the African continent by 2030. The World Bank’s ID4D initiative supports the development of national ID systems that protect user rights through a comprehensive legal and regulatory framework.

In all our work, we are clear about what it means to be inclusive, especially for women. The world is recognising that when you design for everyone, you design for men, from the shape of crash test dummies to the size of Nasa space suits. Digital financial systems can similarly perpetuate inequalities if they are not intentionally designed to meet the needs of women. For example, in low- and middle-income countries, women are eight percentage points less likely to have official ID than men.

Holistic, connected DPI that is inclusive of women will unlock more opportunities for them to take control over all aspects of their lives. When a woman has her own bank account, which links to a national ID system that identifies her and maps to a digital payment system, then she can receive wages or social protection payments directly into her account, and she has access and control over her finances.

There are two things that still concern us. First, we worry that country demand to implement DPI will outpace the funding and technical assistance available; therefore, countries will turn their attention elsewhere or take shortcuts that will not deliver the benefits that they seek. Second, the range of financial service providers and the number of citizens with financial accounts are growing so fast that it risks outpacing the ability of regulators to properly supervise the financial system.

That’s why we are investing in projects such as the Cambridge Centre for Alternative Finance to help regulators develop new tools and capabilities to monitor their fast-growing financial systems effectively and efficiently. If they do not get on top of fraud and other consumer protections, they risk eroding the trust that people have in new systems.

Financial services for all

As financial and political leaders come together at the World Bank annual meetings, the way forward is clear: we must smooth the path for countries to advance financial inclusion by embracing the systems approach that DPI provides.

The development community must step up and meet the soaring demand for DPI. This is not about advocacy anymore. Countries understand the benefits of DPI and know what needs to be done. They need access to money and expertise from multilateral banks and agencies.

We are calling on global donors to raise $500m over the next five years to supply countries with technology, technical assistance and regulatory support, so they can build DPI that is secure, interoperable and inclusive. The development community needs to help regulators build the tools and capabilities to protect consumers as these ecosystems grow.

The financial sector must widen access to new digital financial services. In many countries, big banks lack interest or do not have the right economic model to serve the poor. Yet they continue to oppose new companies who could reach these groups. Ultimately, a financial system that includes everyone, benefits everyone.

For example, if more people can pay their bills digitally, more companies — who are bank customers — can collect digitally to lower their costs and expand their businesses. Having more formal customers increases liquidity and stability of deposits, and an open exchange of data can increase productive credit for micro-entrepreneurs.

Country governments must embrace these new technologies and learn how to properly protect their citizens and reduce risks. Financial regulators need to harness technology to supervise their expanding ecosystems. All countries face similar challenges, and a range of models and tools is evolving, so we urge regulators and system operators to learn from each other.

The incredible progress we have seen in financial inclusion has exceeded our expectations, and countries are ready for the next step. Now is the time to build on this momentum and support the digital public infrastructure that can create inclusive financial systems and digital economies that benefit all.

Michael Wiegand is director, Financial Services for the Poor at the Bill & Melinda Gates Foundation.

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