The topic of Central Bank Digital Currency (CBDC) is gaining momentum. Across the globe, many CBDC initiatives aim to digitalise payments, support financial inclusion, make cross border payments faster and cheaper, support fiscal transfer, etc. What is firing up discussions around CBDC and why is it important today?
Adoption of new technologies and understanding of their huge potential to support and stimulate our life has caused the world to change a lot in the last year. The current pandemic has triggered the decline of cash usage to avoid getting the virus and safeguard the most vulnerable ones (health-wise). Economic wise, as many governments wanted to protect their citizens and directly stimulate the economy down to every citizen, they offered ‘helicopter money’ via digital wallets.
As one of the pioneers of mobile money (cutting my teeth on the initial service proposition and business model for M-PESA, way back in 2004, three years before commercial launch), I’m always naturally inclined to see its potential in a positive light. But I’m starting to wonder if maybe we need to give it a bit of a nudge – realign it, if you will.
One of the more interesting phenomena we’ve seen in recent years is the rise of Over The Counter (OTC) transactions – those transactions carried out by agents on a customer’s behalf, in many cases without any link to the real people relating to a transaction. We’ve seen cases where agents maintain four or five mobile money accounts, on different phones, so that they can spread their customers’ transactions across accounts and so avoid transaction limits.
The reasons for OTC can be various, but certainly include illiteracy, lack of appropriate language support on mobile handsets, and – fairly commonly – liability (after all, if things are going to go wrong, you want someone else to blame, don’t you?). But the obvious potential for money laundering means that this situation can be a financial regulator’s nightmare.
Of course, it doesn’t have to be this way, and there are examples of it being done properly, with even in some cases biometric authentication of all parties to an OTC transaction. Worldwide, however, this is rare.
But I digress. What I really wanted to talk about was the somewhat self-congratulatory attitude we in the industry are all guilty of at some time – after all, an industry that has grown from nothing to something more than 270 services in over 90 countries in only fifteen years is undeniably impressive. But I do wonder if we’re all kidding ourselves sometimes. I mean, sure, for the middle classes, and for many of the employed poor, it has been an amazing opportunity, and has transformed access to financial services. But there are gaps – possibly some big gaps.
As an example, I’d like to relate a recent experience. First, you have to understand that I believe you can’t develop anything new without spending time with the people who are going to be using it; so I like to go out to the field, and see what people are actually doing, not what the research tells me. Just sit and watch, and ask the occasional question. It can be very educational.
So we were working with this mobile money operator (MMO), who has a deal with an MFI for the delivery of MFI services through MM. On paper, it all looks very good, plenty of transactions, lots of people receiving loans and making repayments, all through MM. I was very keen to go to a group meeting and find out what the customers thought, how they used it, what else they did – the usual.
We turned up at the meeting, and the first thing that was happening was training from the field officer. Great. But there was a surprise in store; the training included the following advice about security: “Always keep your PIN secret. Never tell anybody. EXCEPT the Agent – you should whisper it quietly into his ear” – uh oh. The alarm bells started to ring.
And then the Agent turned up. At this point the field officer started to gather repayments, in the traditional way for group lending – laboriously entering everyone’s name into a list, checking that they have the cash to make the repayment, noting down the repayment amount, all at a glacial pace (now this is one area where investment in IT could make an immediate impact) – and then the mobile money part started. Each person making a repayment took their phone and their cash, one by one, to the Agent – who took their phone, ‘deposited’ the cash for them, then forwarded the repayment to the MFI.
There were also three loan disbursements that day, and the process was much the same: hand your phone to the Agent, whisper your PIN to him, walk away with a wad of cash.
All of these people at the group meeting are in the MMO’s books as active mobile money subscribers. So I have to ask: in what way are these people mobile money subscribers? How is this empowerment? All that I can see is that the MFI has outsourced their cash management problems to the Agent, who walks the streets with a bag full of cash. Glad that’s not me.
So there are clearly a large number of people, down towards the bottom of the pyramid, for whom the step from a pure cash environment to being asked to use a mobile money wallet or account to manage their finances is just too big. Expecting people who’ve never had a bank account to make the conceptual leap from paper cash to mobile finance in one step is asking too much. Without help many of them will never do it.
Maybe the way forward is to make the steps a little more manageable. Introduce an intermediate step. And I think the way to do that is to embrace OTC, but to do it in a way that formalises it and addresses the concerns of the regulatory authorities: give this section of customers a card, which identifies their account. Maybe secure it with biometrics, if you want. Let them visit an agent, and get the agent to do the transactions for them, but now with all transactions linked to the card/the account. Link it to their mobile phone, so that the more adventurous can see their balance via the MM service. Make sure they’re comfortable with this, and make sure there’s a migration path that leads to the full MM service over time.
After all, this is the long term migration path we’ve seen in Europe over the course of decades; the move from cash, to bank accounts, to debit and credit cards, to Internet banking and mobile payments has happened, of course; but with each step taking years or even decades. Expecting people immersed in a world of cash to make the leap in a matter of days or weeks is just unrealistic. Why should they be any different?
Footnote: Yes, the author is well aware of Safaricom’s moves to issue a companion card for the use of M-PESA for retail transactions. That’s somewhat different to the case described here, though in itself interesting.
America is a strange country to foreigner such as myself. And one thing that is particularly strange about it is the constant demand for identification in a society that lacks an identity infrastructure. The most obvious manifestation of this, as I’ve written before, is that when I am asked for identification (in order to get into a building in America, for example) I can present documents that the security guard cannot conceivably verify or validate (e.g., my UK driving licence) or documents that are not identity documents at all (e.g., my expired building pass for our office in New York) and gain entry. This is, as is often remarked, security theatre not security. It’s like a play about security where we all say our lines and play our parts but there’s no actual security involved at all. When it comes to identity, there’s definitely something odd about America.
Buying an assault rifle is easy. You need not show formal identification… Opening even the most basic bank account is far more arduous. The process begins with a rigorous ID check…
Now, I don’t want to get into the madness of KYC/AML here as that’s not the point I want to make, although I will flag up the fact that America has something in the region of a hundred million unbanked people. The point I’m making here is that I don’t understand why we can’t implement a universal risk-based approach for “small” accounts in order to get people into the financial system (not necessarily through a bank account, of course). In Europe, we have a very interesting case study unfolding in front of us right now.
When Anas Albasha arrived in Germany after fleeing Syria in late 2014, one of the first things he tried to do was open a bank account. “In Germany you need a bank account for everything,” he says.
Indeed. Rich Germans and people smugglers might well keep their cash in 500 euro notes, but poorer law-abiding Germans use debit cards and direct debits. If you don’t have an account, you have no access to the infrastructure of daily life. And, in my opinion, if you keep everyone out because one or two of them might be terrorists, then you don’t get to track, trace and monitor the terrorists anyway. Hence the German plan to give refugees a sort of provisional identity so that they can enter the financial system makes complete sense.
But it has been a struggle to persuade banks, which have to verify their customers’ identities, to open accounts for refugees. The heart of the problem is documentation. “Many refugees arrive in Germany without a passport or ID card; that’s just the way it is after the journeys they have been through,” says Katharina Stamm, an expert on migration law at the charity Diakonie.
Later last year, in October, the German government went further and passed a law requiring banks to offer these basic bank accounts to refugees. Unfortunately, and despite that law coming into effect in June of this year, “
Germany’s anti money laundering law still contains a clause that effectively requires a passport or ID card to open an account.
Incidentally, we have the same problem here in the UK because the only ID document that refugees have is the Biometric Residence Permit (BRP) and many bank staff refuse to accept this as an ID document for opening an account. As the British Banking Association point out, “banks have to undertake thorough checks before opening accounts in order to comply with strict anti-money laundering rules”. Once again, as in Germany, it is AML rules trumping KYC rules. And I don’t want to point the finger as to the origin of the problematic AML rules, but the Centre for Financial Inclusion do note that it might be better for society to have people inside a system where they can be monitored and risk managed.
Lower [KYC] requirements also means that governments concerned with international security (particularly the U.S.) must determine how they will mitigate the risk of new financial services innovations.
I’m writing about this because I’m in Ivory Coast for the International Finance Corporation (IFC) and MasterCard Foundation conference on “Partnership for Financial Inclusion”. I was here to keynote about risk management for digital financial services (and how “fintech” and “regtech” can help) but I’ll definitely be hoping to learn more about the relationship between identity and inclusion from the experts here.
I’ve already had a couple of pretty interesting discussions about the idea of building “bottom up” (i.e., attribute-driven) identity to help with inclusion and the relationship between such identities and those KYC/AML issues discussed above. I’m genuinely curious to know what you all think about this stuff – please get in touch – and how some of this thinking might connect with initiatives such as Identity 2020.
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