BackBill Gates | Inclusion through technology
Digital financial inclusion is vital to rescuing India's poor citizens trapped in an inefficient cash economy
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India is poised to lead the world in connecting the poor to bank accounts through mobile phones. This is an ambitious goal. According to the World Bank, only 35% of Indians use formal financial services right now. But India can get to 100%, and if it does hundreds of millions of Indians will be able to create better opportunities for themselves and their families.
The term of art for what I am talking about is digital financial inclusion. This idea can seem abstract when compared to more tangible goals such as eradicating polio. But the truth is that lacking access to a bank account has a very real consequence: It makes it much more expensive to be poor. Millions of families live on the border between self-sufficiency and destitution, and financial exclusion pushes them in the wrong direction. That’s why the government of India has set the goal of establishing a banking outlet in every village. People without access to a bank account have to save in physical assets, such as cash, livestock, or jewellery. Cash gets spent, animals die, and jewellery can be lost or stolen. What’s more, these forms of savings earn no interest and can actually lose value over time.
To send money to family, those without a bank account have to rely on couriers or friends who carry cash by bus, which is expensive, insecure, and slow. To borrow money in an emergency, they must turn to moneylenders who charge notoriously high interest rates.
Digital accounts help fix these problems. Farmers can save their harvest proceeds in interest-bearing accounts, making it more likely that there will be enough left to buy seeds when planting season comes around. Migrant labourers can send money back home inexpensively and safely with the click of a button.
Bank accounts also help poor people join the mainstream economy. Not only do they connect the poor to formal financial institutions, but they also make it easier to exchange payments with electricity companies, government agencies, and other basic service providers. Over time, these transactions leave a digital footprint that functions as a kind of financial history, which can help the poor qualify for affordable loans.
As a general matter, digital financial systems are simply more efficient. For example, in a digital system, government welfare payments go directly into people’s accounts rather than through layers of intermediaries, reducing waste. McKinsey estimates that connecting every Indian household to a digital payment system and digitizing government payments could save the government $22 billion per year.
India already has assets that combine to make universal coverage uniquely achievable. India has built a widespread mobile communications network that extends deep into poor, rural areas. The Unique Identification Authority of India’s new, world-class identification infrastructure will convert a paper-based, 30-day process for opening a bank account into an electronic, 30-second process. India is also home to one of the largest bank branch networks in the world, a dynamic group of entrepreneurs, and a sophisticated central bank that is committed to solving the country’s financial exclusion challenge.
The recent RBI Committee Report on Comprehensive Financial Services for Small Businesses and Low Income Households (or CCFS) is another big step forward. The report offers an elegant regulatory framework to help convert these assets into universal financial inclusion. It recommends creating “payments banks" that offer payments, deposit accounts, and cash-in/cash-out services, but not loans Because these payments banks wouldn’t have to deal with the problem of credit risk, they could be operated by non-bank actors such as mobile phone and consumer goods companies. Right now, non-banks can do cash-in, but not cash-out which limits the usefulness to millions of Indians who don’t have access to a branch or ATM. Of course, regulators must still mitigate the operational and consumer protection risks associated with payments banks, but full-fledged banking regulations are not required when loans aren’t involved.
This matters because banks have struggled to reach the poor. In contrast, countries that have figured out how to allow non-banks to offer payments and deposits have seen dramatic expansions in access.
Just five years after Kenya, Tanzania, and Uganda allowed non-banks to launch payments and deposit services, 77% of Kenyan adults, 47% of Ugandan adults, and 46% of Tanzanian households have a digital account. This is not a radical experiment confined to East Africa, either. The European Union’s Directive on Payment Services separates the risks posed by payments from those posed by credit, while the central banks in Brazil, Indonesia, Malaysia, Mexico, Philippines, and Sri Lanka (among others) have allowed non-banks to offer payments and deposit accounts.
In the long-run, once payments banks have established digital payment connections with poor customers, they can partner with banks authorized to deliver a broader range of savings, credit, and insurance services.
Poor people have assets. Their intellect. Their labour. Their savings. The problem is that they don’t have the financial tools to capitalize on these resources. They are trapped in an inefficient cash economy that robs them of opportunities to insure themselves against risk, invest in their own productivity, and ultimately lift themselves out of poverty.
India has all the necessary components to help the poor use their assets to improve their lives. If India solves the problem of financial inclusion, it will transform the country and mark a huge leap forward in the global history of fighting poverty.
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