And, perhaps most urgently, how can society help all those people the markets have left behind?”
― Abhijit V. Banerjee, Good Economics for Hard Times: Better Answers to Our Biggest Problems
The CoVID-19 pandemic is first and foremost a health epidemic and an economic recession later for nothing trumps the health and well being of the global population. However, for many that are not already infected, this epidemic has manifested itself as an economic problem before being a health issue. These are employees, restaurateurs, small business owners, street merchants, vendors and entrepreneurs who have lost their ability to earn a livelihood. In India, the lockdown has meant loss of livelihood and a health crisis for millions of migrant workers who continue to travel hundreds of kilometers to go back to their home town. The situation, as The Economist calls it, is a ‘grim calculus’. It is heartening to note that philanthropy has surged. However, a more direct financial intervention through inclusion is a better ideal.
The US government has approved a $2 Trillion stimulus program-the Coronavirus Aid, Relief, and Economic Security (CARES) act to help the ones affected financially. This package includes a $377 billion stimulus for small businesses. FoMany in the government have also realized the value of a digital Dollar (currency) that can be directly deposited into a beneficiary’s bank account — precisely what Bitcoin and crypto currency evangelists touted as the advantage of crypto currencies rolled out on a Blockchain albeit with a minor difference (in case of the digital Dollar, the beneficiary is not anonymous).
To me, this seems like a step towards financial inclusion. That is because financial inclusion doesnt mean counting the number of people that don’t have a bank account but also the quality of access to fimancial services to those that have a bank account (equal access to tailored and affordable financial products).
Previously, I wrote an article on why financial inclusion is key to the growth and survival of the banking industry titled ‘Banking On The Unbanked’ on Medium. While the situation today is far from pleasant, the pandemic has not only reinforced my conviction but has also reiterated the need for financial inclusion of all of the masses that keep the economic machine running.
In this story, I lay out why I think the urgency is real and the problem solvable. The difference between financial inclusion being discussed as an ideal and it being a reality is that we have the tools to make it a reality today. In fact, the question we need to ask ourselves is this: if not now, when? Lets face it – irrespective of a pandemic, in a grim scenario where we ignore inequality and choose not to treat inclusion as an urgent humanitarian agenda, we could be staring at another French Revolution. This scenario, like a pandemic, may play out in more economies than just one.
The Situation Today
Before we you read further, this video by Ray Dalio is a good way to not only understand how the economic machine works but to also understand why access to credit is critical to it’s functioning. Needless to say, without financial inclusion, access to credit is just a pipe dream.
Globally, there were about 1.7 billion adults were unbanked according to the World Bank in 2017. Exclusion from banking means limited(through moneylenders, loan sharks etc.) or no access to credit and exclusion from basic economic life. Also, as per the bank, women in developing economies remain 9 percentage points less likely than men to have a bank account.
As per a 2019 MasterCard study , about 1019 million adults (0r 60% of the year 1.7 billion unbanked population or about a 1.02 billion adults) lives in 15 countries. What is heartening to note, as per MasterCard’s Tactical Reach Index, is that — In all those 15 countries (except India), about 607 million people have a mobile phone but not a bank account. In fact, in China the number of people with a cell phone outnumber those with a bank account by 204 million. The report goes on to say that these people could be easily included in the financial services ecosystem using mobile banking. However, that is just the starting point, the financial products need to be relevant, affordable and shouldn’t expand the economic divide.
In the United States, as per the Federal Reserve about 6% of the population is unbanked and 16% are underbanked. Unbanked is defined as anyone without a basic bank account whereas the underbanked are defined as those with a bank account but have also used an alternative financial service product (sourced from outside the banking system eg money lenders, loan sharks etc.)
In addition, with the existing banking infrastructure, depositing payments into beneficiaries bank accounts could take a while. As per the Financial Revolutionist, many payment companies have reached out to the US government to help expedite the disbursement of CARE funds.
While the percentage of the unbanked (roughly one third) doesn’t seem like a huge percentage, the actual number ie 1.7 billion is a lot of people. Also, if you add the underbanked or underserved-we get a sizable population with unequal access to the financial system.
Finally, I haven’t even touched on inequality. As per inequality.org, the top 1% of the wealthy own an astounding 44% of global wealth.
Add all of these together and you can understand the gravity of the problem.
What Many Grand Social Experiments Need
Mobile banking, QR codes can enable basic fimancial inclusion especially for those with access to cell phones. However, the quality of financial inclusion is a tougher problem to tackle. Let’s look at one possible scenario which requires a digital ID to verify and establish an identity, a Blockchain to securely record all transactions and AI to provide hyper personalization of financial services.
In an increasingly uncertain world with fragile economies, grand social experiments such as a Universal Basic Income (UBI) or helicopter money (financial stimulus packages such as the CARES act) may be necessary. For the benefits of such experiments to reach everyone, financial inclusion is vital.
To make financial inclusion a reality, we need three basic building blocks in place. First, we need a unique ID for each citizen of a country. This video from McKinsey Global Inst explains what a digital ID is:
One of the biggest challenges to ensure effective and efficient distribution of funds is the challenge that beneficiaries are not addressable. All individuals residing in a country should be‘addressable’ through a unique ID (call it a universal ID or a citizenship number etc. very similar to the Universal ID system that India has implemented through the Unique Identification Authority of India). Again, no system is full proof and hack proof. But, it should come close. This article from Axios is a case in point. It explains why millions of Americans without IRS direct deposits may not receive stimulus checks for months. The Unique ID can combine all forms of ID’s into one — tax ID, bank account number, motor vehicle record and medical record. Once an individual is capable of being ‘addressed’, all sorts of value (currencies, legal contracts, stocks, bonds etc.) can be transferred to the correct intended recipient. Around the world many startups and organizations are actively engaged in creating a digital ID. The country of Estonia is as close to an ideal digital ID as possible. However, the technology exists in different forms. Then, there is the Digital Identity Alliance consisting of private enterprises, universities and not for profits actively working on creating a digital ID for everyone. According to its website, 1.1 billion people live without a digital ID. Though its not a direct match and could be pure coincidence, that number comes close to the approximate number of unbanked people on the planet.
Second, a Blockchain can be used as a ledger to record transactions, to distribute funds and to transmit value using secure encryption. It is also a decentralized ledger and so all records are not stored on a central server but rather on a distributed database – a copy is available unless the entire network goes down . This article from Newsweek which provides many practical, real life examples of how a biometric identity can be used to create an anonymous identity of an individual on a Blockchain.
Once such an identity is created, many pieces of data can be attached to it and selectively accessed. For example, some services such as donating blood may only require a donors blood group and select pieces of medical data but not the individuals tax records. Similarly, a motor vehicle bureau may only require a drivers licence number which is stored on the Blockchain to look up driving records and so on. Today, there are technologies such as quantum computing that could, in theory, hack a Blockchain’s encryption. Even though this is a remote possibility today, the next level of encryption would be to create a quantum resistant encryption. Quantum key encryption is another answer.
Now that you have a digital ID and a secure, anonymous recording mechanism in place (both of which can be practically implemented with the help of developers), you can maintain all your financial records on the Blockchain eliminating the need to upload documents and contracts. Also, cross border remittances can cost a fraction of what they do today. Companies such as Ripple are actively working on creating the new internet – The Internet of Value to achieve precisely all these outcomes.
Finally, the advent of machine learning and AI will allow for incredible customization eg tailoring a mortgage payment to a clients’ individual cash follow, creating marketplaces where a client can choose an insurance, a banking or a brokerage account from three different providers but each solution customized and working well together. As data on a clients financial life proliferates, AI algorithms can keep getting smarter
The above video is a simple example of personalization but if you stretch it further, personalization can help micro tailoring of products to suit the previously unbanked or underbanked. Thousands of FinTech startups such as Betterment, Wealthfront, Robinhood, Acorns, Titan etc. are leveraging technology to make sophisticated financial services accessible to all with an incredible level of customization.
Vast amounts of research and data can also be made accessible millions, using a digital app, at a fraction of the cost.
When The Goal Is Within Striking Distance
If you read the examples above, you can read the writing on the wall. A decade back, financial inclusion was a theoretical utopia — an ideal whose time had not come yet. Today, smartphones can provide access and Technologies such as a digital ID, the Blockchain and AI can dramatically improve the quality of financial inclusion. Technology is a great leveler. It is truly agnostic to the background of an individual.
All of us keep the economic machine running and all of us need to be able to enjoy the fruits of our efforts. The music of life is not complete unless everyone is enjoying it either as members of the audience or as performers. The only thing we need to do is to keep the price of entry low enough for everyone to experience it. Today, that goal is almost achievable.
Don’t think about inclusion as a socialist ideal. Think of it without applying the lens of economic systems — just a basic human need. Financial inclusion can be a win win for all. Historically, we have not been able to share wealth equitably.
What will make the goal truly achievable is a steely resolve. A collective will to include all those who keep the economic machine running enjoy the fruits of their labor perhaps more equitably. As Nick Hanauer (a billionaire, capitalist and self proclaimed plutocrw) aptly puts it – there are two truths me must recognize . First, unlike the laws of science, the laws of economics are laws made by our collective choices. Second, the more we include people in more ways, the more our economic growth. I normally do not end a story with a video. However, in this case, I really want to make an exception and end this piece with a video that echoes my sentiments. Also, it is good food for thought for you to imagine what a new and inclusive economic order would look like.