CBDCs: A Modern Response to Financial Exclusion

While the financial and payments industries are booming with the emergence of fintechs and continuous research for innovation and new technologies, not everyone, however, is able to benefit from these advances as financial exclusion remains one of today's world most serious challenges, and the global pandemic has only exacerbated these inequalities and the urgent need for an appropriate response.

Studies show that globally a staggering 1.7 billion adults do not have access to a bank account and are, therefore, unable to use financial services to borrow, save or invest their money, leaving them no other choice but to turn to alternative institutions that charge high fees. This results in the unbanked being more vulnerable and trapped in an endless and vicious cycle of poverty. These challenges are even more real in developing countries where financial institutions may not be easily accessible or robust, leaving people to rely on cash and barter systems.

Simultaneously, there has been an increasing level of interest in the concept of Central Bank Digital Currencies (CBDCs), with many governments and central banks around the world currently investigating the adoption of this new version of legal tender. Through their decentralized nature, CBDCs are set to revolutionize the concept of money and offer several attractive benefits, notably, enhancing monetary policy, improving financial stability and security, decreasing the demand and the cost of paper currency, increasing the contestability of payments or inhibiting criminal activity to name a few. Above all, CBDCs could also play a vital role in remaking the financial system into one that is more accessible to the unbanked by establishing a more inclusive digital payments ecosystem. Let’s now have a look at how CBDC could concretely promote financial inclusion:

Improved access to digital financial services

CBDCs would promote participation in the digital economy by allowing people to access a wide range of digital financial products and services, including domestic and international transactions that are not easily accessible through cash. Citizens can pay for goods and services using a CBDC through their digital devices, conveniently, anytime, anywhere.

Retail CBDCs that will be issued by the central bank directly to the end users without private intermediaries will especially address several problems being faced by unbanked communities. Furthermore, a fully digital payments system would make it easier and safer for women and people in isolated and rural areas to access financial services even if they are equipped with feature phones, through USSD channels and offline features for remote areas where there is no internet coverage. In addition, CBDCs would favor interoperability across payment systems and foster collaboration between fintechs and central banks.

Lower transactions costs

Nowadays, the management of fiat currency is expensive, particularly in developing countries, due to the high costs of distribution, security, safety, and reliance on bank branches. CBDCs would be less costly for consumers than cash and it will reduce the number of intermediaries in a transaction which will ultimately lower the cost of digital payments. CBDC would also incorporate mobile wallets, giving people the ability to make low-cost mobile payments. As a result, it would increase competition among financial institutions and payment service providers while providing convenience to users.

Enhanced efficiency and swiftness of digital payments

CBDCs will allow faster and more transparent transactions while ensuring real-time settlement finality with the highest level of transparency, which will eliminate deferred payments, improving business cashflows and therefore enhancing financial inclusion for businesses.

Improved engagement between governments and citizens

CBDCs would bridge the gap by bringing closer governmental institutions and people, especially in a retail CBDC, where governments would be able to directly support people in need through immediate transfer of aids to citizens or companies as part of a coronavirus economic recovery program for instance. This will reduce the costs and time for authorities to reach people by eliminating intermediaries and avoiding corruption which will ultimately improve the efficiency of government programs and benefit the people in both developing and developed countries.

Enlarged digital economy

CBDCs would offer unlimited potential to foster the digitization of value chains in the economy. All types of businesses will have access to the CBDC and will be encouraged to bring their activities into this new digital financial system. Various businesses such as real estate companies, energy, health care, transportation providers, telecoms and others would benefit from this new paradigm by developing APIs which can be used to offer valuable services to customers on a real time basis.