Senior G20 officials are gathering in Melbourne this weekend to shape the deliverables for the G20 Brisbane Leaders Summit on 15 – 16 November. One of things they’ll be focusing on is how to ensure that the G20 commitment to strengthening economic growth is broad-based and inclusive, especially with respect to women.
One of the most effective things that these officials, whose governments represent 85% of global output, could do is address exclusion from formal financial services. Today, 2.5 billion people are forced to rely on a risky, expensive, and inefficient cash-based system.
A growing body of evidence indicates that people of limited income could see significant improvement in their lives if they had access to the kinds of financial services that many of us take for granted – things like safe savings, affordable loans when needed, and appropriate insurance. Moving in this direction would be an important step toward economic justice and a significant economic opportunity.
The Bill & Melinda Gates Foundation and the Better Than Cash Alliance have been working together on the evidence for how this could be accomplished using new digital technologies.
The draft paper is here. We offer it for officials to consider, for colleagues to contribute and the broader community to comment on and react to.
There are some exciting findings we are starting to identify which we wanted to share and start to get feedback on. We offer it for officials to consider, for colleagues to contribute and the broader community to comment on and react to.
What we are finding is that action on digital technologies for inclusive finance has the potential to:
- Spur broader and stronger economic growth by deepening financial intermediation, increasing efficiency of, and access to payment, savings and credit services
- Increase life opportunities and economic benefits for migrant and diaspora communities by enabling a sharp lowering of costs and increased transparency of remittances
- Encourage female participation in the labor force and increase women’s engagement in the broader economy by enabling greater control over finances and household incomes, and increased access to credit and financial systems.
G20 governments should embrace the opportunity of a broad-based digital financial system as a path to growth, greater participation of women in the labor force and economy, and greater equity in payments, including remittances, and we propose several actions to do so:
- There is an important regulatory agenda on which governments can engage. Many regulators are still hesitant to embrace the digital financial revolution that is emerging, and have reasonable concerns that need to be specifically addressed. Regulatory authorities, however, need to be encouraged to enable this movement rather than treating it as an unwelcome development. This means being willing to allow the regulatory system to be more inclusive of new vectors of financial services. New business models can address the critical concerns of anti-money laundering/counter-financing of terrorism (AML/CFT) and related issues that confront regulators. Several countries are grappling with and successfully addressing these issues. Brazil’s approach – with mobile payments regulations that allow non-banks to offer payments and savings and to directly access the central bank’s clearing and settlement system – is paving the way for a number of new commercial partnerships to go to the market. Mexico has pioneered the approach of tiered know-your-customer regulations, proportionate to risk and volume.
- Governments can dramatically reduce costs, and increase efficiencies and transparency, by making their payments and social transfers digitally, which will help build volume and familiarity with digital payments, forming a foundation upon which the private sector and person-to-person payments, such as international and domestic remittances, can build. For example, the Mexican government has cut spending on wages, pensions, and social welfare by 3.3 percent annually, by digitizing payments.
- There is an important opportunity to have public and private sector convergence around the basic technical payment platform infrastructure across which providers can compete on product development. Cheap, robust, and open payments platforms are the connective tissue required to reach the 2.5 billion people left out of financial services. Canada and South Africa are two examples of G20 countries that are leading in the development of such infrastructure.
- The private sector will respond and innovate, if provided an enabling environment. Contributions made by financial sector players other than traditional banks should be enabled. There is a real opportunity for strong private sector growth here, but if regulation implicitly excludes a certain providers, we will miss a big opportunity. At the same time, those providers need to be given incentives to be competitive, transparent, and efficient. The private sector can advance successful business model innovations and invest in scaling up agent networks for financial services, and part of this requires that mobile network operators, payment and remittance service providers need to be able to open accounts, as has been done in Brazil, and elsewhere.
- By digitizing remittances, costs can be lowered for providers, senders and recipients and the remittance can provide an entry point to formal financial services. Family members sending international and domestic remittances can send more money home, and sending and receiving through digital payments can be made and received into accounts, rather than cashed out. In particular, this is important for women who migrate for work. Women make up half of the migrant population, and research in this paper shows they send larger amounts of remittances home, and over a longer time period.
- To encourage stronger female participation in the labor force and broader economy, the evidence indicates special steps governments can take to enable women to participate fully. Digitizing wage payments is an important linkage to increasing female labor force participation. Digital payments enable the confidentiality and convenience women require in financial services. Opening an account can be an important first step for introduction to the formal economy, such as a way for the woman entrepreneur to formalize her small business. In addition social payments can provide the on-ramp to financial inclusion and in many cases the first account that a woman has in her own name and under her control. It is especially important that women, who often lack formal borrowing histories, gain access to accounts and begin to build financial histories.
- The multilateral development banks and comparable agencies should ensure that they are a source of comparative expertise on this emerging field, and should stand ready to provide technical assistance and resources to emerging markets as they undertake this agenda. It is particularly important that development banks pay special attention to the importance of the role of women in the economy and should be developing special advice on the economic resource presented by women.
There is now a great opportunity for the G20 collectively to develop robust, specific initiatives under each of these action headings, building on the experience of digital financial development already underway in individual G20 countries, such as those instanced above. Only governments have the authority to be prime movers on much of this agenda, especially with respect to regulatory reform and the incentive framework for the private sector.
We look forward to your comments and to sharing the full paper very soon.