The global pandemic has exposed many existing government distribution channels for financial aid to be inadequate. Since around a quarter of the world’s population has no bank account, some economic stimulus programs have stalled and were introduced too slowly and unevenly – even in industrialized countries – because traditional bank accounts were used for payments.
Central Bank Digital Currencies (CBDC) can help governments overcome this shortcoming in the future and greatly boost overall financial inclusion efforts. Rather than relying solely on bank accounts or mobile money platforms, CBDCs can enable central banks to distribute funds directly to their citizens, improving their ability to get help, make payments, and conduct trades.
For many countries, this change could transform and improve access to government and financial services that help improve access to finance, participation and equity, and general well-being.
Mobile access as a key
Of those with bank accounts, many remain underserved and unable to access all basic financial services such as savings, loans, mortgages, and other forms of credit. For example, in the United States, approximately 14 million people are without a bank account and 50 million have a bank account. Two thirds of these adults without bank details also have a mobile phone, an important requirement for an effective CBDC rollout.
The success of using mobile money accounts to expand financial inclusion in sub-Saharan Africa has shown promise in accelerating the adoption of CBDCs and improving the financial well-being of traditionally underserved communities. According to the latest Findex global database, the proportion of accounts increased by only 4% between 2014 and 2017 between 2014 and 2017, while the proportion of individuals increased, despite concerted efforts to increase the number of people in the region with an account with a financial institution who use a mobile money account increased roughly twice as fast over the same period. The same applies to many other regions of the world.
This global adoption of financial services over a phone could pave the way for CBDCs in other regions like Mexico, where only 36.9% of the country’s population have a bank, but 89% of the people have cell phones. A similar juxtaposition of bank account and mobile phone access is happening in large parts of the developing world and offers a ready-made path to the introduction of CBDC and financial inclusion.
Designing for CBDC Success
Increasing financial inclusion is a common goal and new focus for 80% of central banks currently investigating CBDCs. Retail CBDCs can help non-banks and under-banks in two ways: by creating a more inclusive ecosystem for digital payments and creating identities for financial data, often viewed as a digital human right and a cornerstone of financial inclusion, especially in frontier markets. Even in the Bahamas, a country with a relatively high rate of financial inclusion, the introduction of the sand dollar is seen as a boon to financial access as payment services expand to remote communities.
CBDCs enable improved access to finance and equity, as digital currencies designed for transactions offer key advantages such as speed, affordability, portability, security and transparency. This helps groups of people who normally rely on cash and informal economies establish financial identities, easily obtain government aid, send and receive remittances, travel safely to remote areas, and much more.
In order for CBDCs to realize these gains and maximize their potential, central banks need to ensure that they are designed for interoperability rather than simply replicating today’s isolated financial institutions and mobile money networks. There are two types of interoperability: domestic and cross-border. Domestically, CBDCs have to be integrated into existing payment systems such as retailers and e-commerce and allow P2P transfers. Internationally, CBDCs can contribute to an efficient and cost-effective cross-border payments experience by maximizing the financial reach and capabilities of these traditionally underserved populations and providing them with an easier way to participate in the global economy.
Done right, CBDCs have the potential to create better national and regional payment infrastructures, improve access to global markets, and vastly improve financial equity for the world’s non- and under-banks.
Contact the Ripple CBDC team at email@example.com or download the latest Ripple CBDC white paper for more information.