KEY IMPERATIVES FOR CBDC AS A FINANCIAL INCLUSION TOOL

1. INTRODUCTION

Digital technology has evolved to become a powerful tool for financial inclusion.

Since the late 1980s, technological developments have played a crucial role in enhancing access to, and use of, formal financial services by unserved and underserved populations in developing and emerging economies11 .

A case in point is the mobile phone, which has proven instrumental in broadening financial access beyond the reach of formal financial institutions. In the Philippines, for example, approximately 34.7 million people had a mobile money account in 2020, despite being ranked as one of the world’s most unbanked countries with only 37 million people owning a bank account.12 Further DFS innovations have evolved to support inclusion off the back of mobile phone penetration. These innovations have ranged from e-money in Kenya and remote banking via mobile banking applications, to technologies such as Quick Response (QR) codes and near-field communication (NFC) that have eased infrastructural constraints for merchants to accept digital payments. Most recently, innovations such as private digital currencies like cryptocurrency13 have further enabled populations in given countries and pilot projects to generate and store wealth in the absence of bank accounts, as well as transfer value across borders faster and more affordably than ever before.14

Barriers remain to greater DFS and payments

adoption. Despite broadening financial access, DFS and digital payment offerings have yet to achieve universal adoption by underserved populations.

37%

For instance, in 2021, only 37 percent of Latin Americans used digital means to make any payment despite 87 percent of the Latin American population living within the range of a 4G signal.15

This lack of adoption is illustrative of a larger trend in developing and emerging countries – the persistence of access and usage barriers that limit the ability and willingness of individuals and businesses to go cashless and benefit from digital payment services. According to recent AFI reports, these barriers include consumer demand factors like weak digital connectivity; consumer distrust in electronic-based money and a lack of required identity documentation; supply constraints such as a lack of sex-disaggregated data; service delivery not being adapted to women; high private sector transaction fees and unreliable payment channels, and regulatory hurdles such as KYC requirements16,17,18 .

Current DFS also risks amplifying exclusion. DFS innovations are also prone to exacerbating existing drivers of exclusion to financial inclusion. Exclusion could be triggered by through poorly designed products that do not take into account the unique needs of vulnerable populations. Financial exclusion risk could also be further heightened as a result of the digital divide.

11 Andrianaivo, Mihasonirina, and Kangni Kpodar. 2011. ICT, Financial

Inclusion, and Growth: Evidence from African countries. IMF Working

Papers 2011 (073): 45. https://www.imf.org/external/pubs/ft/ wp/2011/wp1173.pdf 12 Ventura, Luca. 2021. World's Most Unbanked Countries . Global Finance. 17 February 2021 Accessed March 25, 2022. https://www.gfmag.com/ global-data/economic-data/worlds-most-unbanked-countries 13 Cryptocurrencies are “digital assets that are designed to be used as forms of exchange somewhat like traditional money. As the name implies, they exploit strong cryptography to secure exchange” (Tredinnick, Luke. 2019. Cryptocurrencies and the blockchain. Sage

Journals 36 (1): 39-44.). 14 Mejia-Ricart, Rodrigo, Camilo Tellez, and Marco Nicoli. 2019. Paying across borders - Can distributed ledgers bring us closer together? World

Bank Blogs. Accessed March 23, 2022. https://blogs.worldbank.org/psd/ paying-across-borders-can-distributed-ledgers-bring-us-closer-together 15 Drees-Gross, Franz, and Pepe Zhang. 2021. Less than 50% of Latin

America has fixed broadband. Here are 3 ways to boost the region's digital access. Geneva: World Economic Forum. Accessed March 25, 2022. https://www.weforum.org/agenda/2021/07/latin-americacaribbean-digital-access/ 16 The AFI study that is cited consists of several barriers, including information asymmetries, low-value and low-margin products, limited knowledge, and capacity to serve youth, low levels of internet penetration, limited financial infrastructure on the supply-side whilst on the demand-side it suggests the lack of experience and knowledge of the formal financial system, low levels of financial literacy, lack of proof of ID/ documentation for KYC, biases against financial institutions, lack of traditional collateral or guarantees, and social cultural norms as key barriers. The study also lists regulatory barriers such as, minimum age, KYC requirements, credit reporting, limited proportionate financial regulation. 17 Our study focused on demand-side (Connectivity, fees, merchant acceptance, digital literacy, trust, identity, instant payments) and supply-side barriers (Provider interoperability, cash management and instant payments). 18 Alliance for Financial Inclusion (AFI). 2021. Youth Financial Inclusion

Policy Framework. Kuala Lumpur. Alliance for Financial Inclusion (AFI). Accessed March 25 2022. Available at: https://www.afi-global. org/wp-content/uploads/2021/03/AFI_YFI_PM_AW_digital.pdf,

Digital Financial Services Working Group (DFSWG) and the Consumer

Empowerment and Market Conduct Working Group (CEMCWG). 2019.

Consumer protection for digital financial services: A survey of the policy landscape. Kuala Lumpur. Alliance for Financial Inclusion (AFI). Accessed 6 June 2022. https://www.afi-global.org/wp-content/uploads/2021/01/

AFI_CEMCDFS_survey-report_AW2_digital.pdf and Alliance for Financial

Inclusion. (AFI) 2017. Bridging the Gender Gap : Promoting Women's

Financial Inclusion: Tools & Guidance from the AFI Network. Kuala

Lumpur. Alliance for Financial Inclusion (AFI). Accessed 6 June 2022. https://www.afi-global.org/wp-content/uploads/publications/2017-11/

AFI2017_Gender_full_AW_ISBN_digital.pdf