The World Bank identified approximately 1.7bn unbanked adults globally in 2017. The mission to catalyse financial inclusion works in concert with fostering economic growth. But studies have identified several barriers to financial inclusion, including a lack of trust in financial institutions and services.
Public distrust has led some individuals to explore cryptocurrencies, which operate independently of central authorities. However, cryptocurrencies are often subject to price volatility, further complicating their use.
In order to reduce this volatility, stablecoins were introduced but concerns regarding security and the management of private keys remain – posing risks of loss and hacking. These issues are particularly severe for the unbanked population, which typically has limited financial education. The collapse of cryptocurrency Terra/Luna, for example, led to significant financial losses for many families.
Cash continues to be the primary medium of exchange for the unbanked. Yet, the Covid-19 pandemic has accelerated the transition, and inclination, towards digital payments. For instance, in India, the pandemic prompted 80m adults to make their first digital transaction.
The shift to digital payments, spurred by the pandemic, highlights the potential importance of central bank digital currencies in practice. CBDCs – often considered digital equivalents of cash – offer key features in an increasingly digital economy, such as accessibility, minimal costs, privacy and security. Discussions around CBDCs frequently consider a two-tier system that emphasises the role of financial intermediaries, including commercial banks and payment service providers. These entities could facilitate access to digital wallets, particularly for the unbanked.
Moreover, CBDCs could offer significant benefits to micro-, small- and medium-sized enterprises by shortening settlement cycles, enhancing transaction efficiency, improving cash flow management and reducing costs. Pilot projects have also demonstrated how CBDCs can improve the delivery and effectiveness of government subsidies. In China, for example, trials in Jiangsu and Fuyang have aimed to refine the use of a digital renminbi for more targeted subsidy distribution.
Such initiatives fall under the ‘government payments’ use case, which seek to enhance the precision and reach of subsidies. By utilising digital currencies, governments can ensure that subsidies are more effectively distributed to those in need. A more systematic use of CBDCs could also help facilitate access to financial resources and serve as an introduction to manage digital wallets.
However, the transition to digital payments must be carefully managed. It involves leveraging existing systems and ensuring that public institutions play a role in educating individuals on how to use their digital wallets. Gradually, the integration into the digital economy will be underway.
Offline payments and financial inclusion
In the pursuit of financial inclusion, offline capabilities play a crucial role, especially in areas lacking the necessary infrastructure for internet or mobile connectivity. In regions prone to natural disasters, offline functionality is critical for monetary system resilience. A survey by the Bank for International Settlements highlighted a divide between emerging markets and advanced economies concerning the importance of offline payments: 34.5% of respondents from emerging markets deemed them crucial, compared to 14.5% in advanced economies.
The connection between offline capabilities and financial inclusion is evident. While 90% of individuals in high-income countries have easy internet access, this figure drops to just 58% for those in low- and middle-income countries. Given their reliance on cash and existing infrastructure for cash access, it is vital for central banks to use current systems to facilitate access to CBDCs, such as postal networks or ATMs, for topping up offline CBDC wallets or synchronisation.
However, the development of offline CBDCs must consider the accessibility of necessary devices. Many current offline technologies rely on smartphones and secure elements, which may not be affordable for everyone. Policy-makers, together with manufacturers, should standardise secure elements, ensuring compatibility across a wide range of devices, including affordable options and potentially wearables.
Incorporating cards equipped with secure elements for offline transactions is also essential. These cards, which can be topped up via phone, ATMs or cash transactions at post offices, offer a cost-effective solution for storing digital wallets.
It is clear that financial inclusion will not rely on a single device or technology. It will rest on central banks’ ability to provide a variety of devices, to enhance their efficiency and ensure their interoperability.
Thibault Pelé is Product Lead of CBDC at Worldline.
