Michael Wiegand
Much progress has been made on financial inclusion over the last 15 years, with account ownership in low- and middle-income countries surging from 42% in 2011 to 75% today. This largely reflects the rise of new banking models, such as mobile money, which have lowered both costs and technological barriers substantially, especially by enabling people to access their accounts using basic mobile phones. But 1.3 billion adults—more than half of them women—remain excluded from the formal financial system, and lower-income consumers still struggle to find and access the financial products and services they need. Stablecoins are being touted as the technology that will finally bring the world’s unbanked poor into the financial system. But the hype is unwarranted. Everyday domestic payments are the cornerstone of financial inclusion, and money and bank accounts linked through an inclusive instant payment system are clearly superior to stablecoins for this purpose.
Both options offer 24-hour access and instant low-cost financial transfers. But traditional accounts can be accessed through regular phones using simple messages, whereas stablecoins require a smartphone or internet-connected computer, not to mention a much higher level of digital literacy. For a woman farmer in northern Kenya, who has a basic phone and no data connection, stablecoins are no solution. Data support this assertion, showing that the vast majority of stablecoin transactions are limited to uses like cryptocurrency purchases. Even where governments have pushed hard to launch their own digital currencies, such as in China and Nigeria, there has been little uptake, because people see no advantage in adopting them. For some, digital currencies might even represent a disadvantage: stablecoins transmit risk from payer to payee in a way that instant payment systems do not, partly because their value on traded markets can differ from their face value.
Some argue that stablecoins are better for cross-border payments. They point out that remittances sent in the form of a dollar-backed stablecoin could reach, say, Kampala from anywhere else in the world in seconds and at low cost. But the recipient would still need to convert the stablecoin into Ugandan shillings, and the market for doing so is a fraction of the size of the market banks and money-transfer operators draw on, with worse exchange rates.
As a result, money-transfer operators like Wise or Remitly generally offer better value end-to-end; they are certainly easier to access for most low-income recipients. Cross-border bank transfers are still slower and more expensive than such operators (and stablecoins), but this can be addressed by linking domestic instant-payment systems, as envisioned in the G20 Roadmap for Cross-Border Payments. This approach is already being implemented in some regions: the Nexus payment system, for example, links India, Malaysia, the Philippines, Singapore, and Thailand.
Of course, financial inclusion entails more than just payments. Financial systems must offer all consumers a range of products that meet their needs. Fortunately, we may well be on the verge of an explosion in new financial products for low-income customers. The key ingredient is data: critical information about an individual (shared with their consent) can increasingly be used to build tailored financial products. This approach is already beginning to transform lives. In Ethiopia, a regulatory reform on data exchange enabled the Cooperative Bank of Oromia to launch a lending product called Michu, built not on collateral but on transaction data, and tailored to the borrower’s specific needs.
Within a year, Michu had built a customer base that was more than one-third women. For farmers—who typically do not have extensive transaction histories, since most agriculture payments are still made with cash—different types of data could be used. Governments already increasingly collect data on the land farmers hold, the crops they grow, and even the rainfall on their fields (verified via satellites), primarily to provide advice. Shared with consent, such data could enable a lender not only to estimate farmers’ current income accurately, but also to structure loan repayments to match their cash-flow cycle.
Lenders could even use these data and advice models to identify opportunities for individual farmers to increase their incomes, such as by installing solar-irrigation pumps. Linking lending to such opportunities would lower the price of the loan, reduce the risk to the lender, and add extra value for the farmer. The same data could be used to price insurance that pays out the moment satellite imagery confirms a drought, instead of waiting for a claims adjuster. It is early days, but initiatives along these lines in Ethiopia and Kenya offer reason to hope that this approach can deliver the financial products farmers need. Ethiopia’s National AgriFinance Implementation Roadmap (NAFIR), launched jointly by the National Bank of Ethiopia and the Ministry of Agriculture, will provide lenders with a wide range of data from the OpenAgriNet system, structured in a way to be useful to lenders. Ultimately, what increasing financial inclusion requires does not involve stablecoins.
Policymakers must develop interoperable payment infrastructure to enable banks, mobile-money providers, and fintech firms to exchange money freely, domestically and across borders. Funders should support the strengthening of regulatory capacity and data infrastructure—less glamorous than launching a stablecoin pilot, but far more impactful. And financial institutions should leverage new data to design financial products for low-income people’s needs and opportunities, rather than what they own or their past transactions. Future progress on financial inclusion will not be decided by which digital currency wins. It will be decided by whether the financial system is sufficiently open, competitive, and interconnected.
The writer is Director of Inclusive Financial Systems at the Gates Foundation.
Orissa POST – Odisha’s No.1 English Daily
