The world’s poor people work hard and long, and they try, like all of us, to save for the future and invest in their children. But we know that the poor – and especially poor women – face formidable barriers to full participation in the economy. In particular, some 2.5 billion people globally are effectively excluded from normal financial services – and that is bad for them, bad for poverty reduction, and bad for growth. Now, a new World Bank study powerfully documents how stronger access to basic financial services can help break that cycle of poverty and contribute to broad-based growth. The Bank shows how wider participation in the financial system can boost job creation, help empower women as they enter the labor force or build small enterprises, and raise investment in education. This big potential for greater growth and equity is what drove the G20 governments in 2009 to declare financial inclusion as a goal, and in 2010 to agree to principles to achieve it.
Progress on the G20’s commitment hasn’t been fast enough. Barriers to broader financial access have been costly to overcome. The nearest bank branch is often a day’s journey away. Opening an account often involves identity and other documentation that many poor people do not possess and can consume weeks of the person’s time. In some societies women face special cultural and household barriers. Private-sector efforts to provide cash-based financial services for small accounts and transactions have encountered stubborn cost constraints. And regulators are stretched balancing their multiple responsibilities to ensure financial sector integrity and stability, consumer protection, and financial inclusion.
Yet the World Bank’s new report points to an emerging solution to these challenges: Governments in Africa should lead the way toward digitizing much more of the money in their economies. The Bank’s evidence shows that digital payment systems, enabled by the recent rapid spread of technology into the hands of even very poor people, can deliver security, convenience, and affordability to expand financial inclusion on the scale needed to achieve the G20’s goals. At the same time digitization can deliver the standards of transparency and traceability of money transfer services which governments and regulators increasingly require.
When made electronically, payroll or social benefit payments can give women in emerging markets access to the first account in their own name and under their control. Opening an account, with the confidentiality and convenience it provides, can be an important step for women entrepreneurs, and vital assurance for women entering employment in factories or service industries.
Digital financial services can also lead to significant cost savings. The Better Than Cash Alliance estimates that Mexico is saving $1.27 billion annually by shifting wages, pensions, and social welfare to digital payments.
While a number of governments are on a similar path to Mexico’s, including Kenya and Tanzania, this shift away from cash isn’t happening fast enough, and so potential benefits aren’t being realized for economic growth, the advancement of women, and the reduction of poverty. That is why we think it’s vital that governments lead the shift in their own countries: Only governments have the authority to be the prime movers and create the frameworks and conditions for success.
Governments are also the biggest spenders in most economies, with the ability to jump-start the transition by digitizing their own financial transactions with citizens – and potentially reduce their costs, as Mexico has done, and eliminate many opportunities for fraud at the same time. And governments should offer the clear national vision and incentives so that the private sector innovates with new services and citizens adopt new ways to pay, get paid, and save. Regulators can act to foster competition, ensure consumer protection, and provide a platform for useful business models to emerge.
The G20 accounts for two-thirds of the world’s population, over 80% of global economic activity, and virtually all significant financial centers. Its leadership in embracing the new digital financial economy, and in ensuring universal access to its benefits, is absolutely critical. The World Bank’s new analysis and country examples now show how important digitally based financial inclusion is to the G20’s goals of stronger growth and broad economic participation. Clearly, it is time to move forward from verbal commitments and principles to action by G20 governments and regulators – action that can spur growth and transform opportunity for hundreds of millions of citizens. Why wait?
Geoffrey Lamb is Chief Economic and Policy Advisor to the Co-Chairs and CEO of the Bill & Melinda Gates Foundation and Dr. Ruth Goodwin-Groen is Managing Director of the Better Than Cash Alliance