Technology brings banking to the world’s underserved
Roughly 2 billion people are “unbanked” around the world, according to the World Bank. At the “Inclusive Finance” panel at the Milken Institute Global Conference, participants discussed the challenges of accessing capital and moving individuals—especially those in rural areas around the globe—into the financial system. Technological innovations are rapidly changing the financial landscape and transforming how individuals and businesses conduct transactions, opening up possibilities for the unbanked to become “banked.”
Mobile-phone technology, for instance, is already having a positive impact on financial inclusion, especially in developing economies. Bob Collymore, CEO of communications company Safaricom Ltd., cited M-Pesa, a mobile phone-based service designed to transfer money between people. Collymore said that mobile money has greatly contributed to financial inclusion in Kenya’s financial system, but he also made a point to distinguish between mobile money and current movements towards mobile banking.
Mobile money acts as a substitute for cash by allowing two individuals to transact with each other over their phones, while mobile banking moves individuals into the more formal banking system by allowing users to both save and borrow.
And yet, while money can move between two phones over the M-Pesa network for instance, Bill Barhydt, founder and CEO of Abra, said it was “unbelievable” that in 2015, mobile-phone users still cannot send money between any two numbers in the world across different cell services. “We’re in a new era of money when you can digitize cash, physically store it, and carry it with you digitally,” Barhydt noted. Abra’s platform enables users to store fiat money on the phone, allows the movement of that money between any two smartphones in the world using the Abra network, and turns every single smartphone in the world into an ATM for everyone else—letting users become tellers in the process.
And it’s not just mobile phones that are driving financial inclusion. The Ripple Protocol, explained Chris Larsen, CEO and co-founder of Ripple Labs, connects financial networks and local banks, allowing users to make transactions in any currency on any payment network, providing a much more efficient, streamlined way to transact.
These innovations are being driven, in part, by banks’ continued pull-back from correspondent banking and remittance activity due to heightened regulatory requirements and restrictions. Current anti-money laundering and counter-terrorist financing (AML/CTF) regulations are making it much more expensive (both from a cost and legal perspective) for large financial institutions to maintain relationships with local banks in developing economies. As banks pull back, “it’s making the problem of interoperability worse, not better,” said Larsen.
And this makes efforts to improve financial inclusion that much harder. More than 5 billion people have “little access” to basic financial services, said Shamina Singh, executive director of MasterCard’s Center for Inclusive Growth, and this segment represents $4 trillion in purchasing power today, and $8 trillion in the next few years. Much of this population does not have any identification, Singh noted, even though an identity is required to effectively engage in the formal economy, especially in light of heightened AML/CTF regulations worldwide.
David Thompson, chief information officer and executive vice president of global operations and technology at Western Union, said that it becomes very difficult to transact with someone without an identity, especially since cash is still king despite the rise in digital innovations. Roughly 85 percent of remittances are conducted in cash around the globe, with a significant portion of remittance activity going to family support. Heightened regulatory requirements have made it difficult to send money globally, and innovations in payments can go only so far because, as Thompson explained, innovation is especially difficult in rural areas of developing economies—the very areas that depend on remittances.
That said, technological innovation can greatly enhance transparency in transactions both domestically and internationally. Getting regulators and policymakers to understand the benefits of the technology is key to making this happen. Otherwise, legacy systems and regulations are likely to continue to slow—or even impede—innovation. Going forward, the Milken Institute continues its dialogue with policymakers and regulators at the state and federal levels in developing regulatory frameworks conducive to the digital demands of the 21st century.