Saturday, September 19, 2015

BIS Press Release: New Report Examines Payment Aspects of Financial Inclusion

We noted in a recent blog article that we will be hearing more and more about efforts to increase financial inclusion around the world. The Bank for International Settlements (BIS) has just released a comprehensive new report on this topic. Below are some quotes from the BIS press release. Here is link to a pdf version of the full report.


The Committee on Payments and Market Infrastructures (CPMI) and the World Bank Group today issued a consultative report on Payment aspects of financial inclusion. The report examines demand and supply-side factors affecting financial inclusion in the context of payment systems and services, and suggests measures to address these issues.
Financial inclusion efforts - from a payment perspective - should aim at achieving a number of objectives. Ideally, all individuals and businesses should have access to and be able to use at least one transaction account operated by a regulated payment service provider, to: (i) perform most, if not all, of their payment needs; (ii) safely store some value; and (iii) serve as a gateway to other financial services.
Benoît Cœuré, member of the Executive Board of the European Central Bank (ECB) and CPMI Chairman, says that, "With this report, the Committee on Payments and Market Infrastructures and the World Bank Group make an important contribution to improving financial inclusion. Financial inclusion efforts are beneficial not only for those that have no access to financial services, but also for the national payments infrastructure and, ultimately, the economy."
Gloria M. Grandolini, Senior Director, Finance and Markets Global Practice of the World Bank Group, comments that, "This report will help us better understand how payment systems and services promote access to and effective usage of financial services. It provides an essential tool to meeting our ambitious goal of universal financial access for working-age adults by 2020."
The report outlines seven guiding principles designed to assist countries that want to advance financial inclusion in their markets through payments: (i) commitment from public and private sector organisations; (ii) a robust legal and regulatory framework underpinning financial inclusion; (iii) safe, efficient and widely reachable financial and ICT infrastructures; (iv) transaction accounts and payment product offerings that effectively meet a broad range of transaction needs; (v) availability of a broad network of access points and interoperable access channels; (vi) effective financial literacy efforts; and (vii) the leveraging of large-volume and recurrent payment streams, including remittances, to advance financial inclusion objectives.
My added comments:

This is a long report, but it is important in terms of how financial services and payment systems are likely to evolve over time. A few high lights from looking at the report:

- there is a goal of achieving universal access to financial services by the year 2020

-there are at least 2 billion people who are excluded from financial services even today worldwide

-the report lays out the path to offering everyone who wants access to financial services to get them

-the report does NOT advocate the elimination of cash in the future. In fact, the report notes that there are many situations where cash will be viewed by people as the best way to complete a business transaction for a variety of reasons. The report is focused on providing financial services as a new option to those who have no choice but to use cash today

-the report notes that in the case of remittances, it is normal for people to use cash on both the sending and receiving side of the transaction and does not see that as changing in many cases. Example: a migrant worker is paid in cash and goes to a Western Union branch office. He gives them cash to send back to his family. The money is moved to the recipient. The recipient then converts the money back into cash on his end. The report encourages improved technology and increased market competition to reduce the fees for this service. 

-the report does encourage the promotion of cashless transactions, but does not recommend this be mandatory for users. The report even notes that many people prefer cash for cultural and religious reasons and that this should be respected.

Conclusion: The financial inclusion movement will continue to gain momentum in coming years. New technology will make it easier and faster for people to send and receive money across borders in real time (even across currencies in real time). Costs for these services will continue to fall making the services more attractive to many people who need them. 

Eventually, it is possible for this to lead to a more global real time payments system which can do currency conversions in real time at a very low cost per transaction. A continuous link settlement (CLS) process is potentially possible for everyone to use (not just the big guys). This new BIS report should be a signal to you that this goal of financial inclusion has a high priority within the present banking system. But it also says the time frame for the goal is "by the year 2020" which is still five years from now. This suggests the change will evolve gradually rather than suddenly.

Added note: After I wrote this article, the UK Telegraph ran this article quoting BOE economist Andy Haldane as suggesting a possible need to abolish cash in the future. However, I am advised by sources I view as highly credible that this idea is not prevalent within the system and that I should not worry about it. The same source pointed out to me that BOE cash is rising, not falling.

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