> Posted by Ajay Banga, President and Chief Executive Officer, MasterCard
The following post was originally published on LinkedIn.
Organizations like the Center for Financial Inclusion at Accion and the World Bank have recently set a goal by 2020 of achieving full financial inclusion for the 2.5 billion people – about half the planet – who don’t participate in the financial mainstream. Bringing one in two people across the globe into the financial fold is a formidable challenge. Can it be done? I don’t know. But if you don’t set a goal, you won’t start moving towards it. That’s the advantage of an aspiration like this: it fires everybody’s imagination and puts some energy into the system.
If you think about it, it’s not unlike another ambitious goal that was had a couple of generations ago in the early 1960s. For me, full financial inclusion by 2020 is our generation’s equivalent of putting a man on the moon. Just as space flight and research transformed science, telecommunications, transportation, and more, I believe financial inclusion has the potential to be just as transformative. But a lot needs to happen to meet this challenge. I’ll focus on four things that I believe will help.
- Reducing cash-dependency around the globe;
- Leveraging the scale and reach of public-private partnerships;
- Making economic growth more inclusive; and
- Building a global economy that’s closer to being truly global.
Reducing cash-dependency around the globe
Any conversation about reducing cash-dependency has to start with addressing some longstanding myths about cash.
A South African woman makes a purchase with her SASSA MasterCard at a local rural shop.
Myth #1: Cash is free.
The popular dialogue says cash is free. But when you research the costs of cash, you find that’s not the case and there’s a larger conversation to be had, especially in relation to the benefits of electronic and digital payments. Eighty-five percent of the world’s retail transactions are still in cash and check. Why is that a problem? Because if you’re a country that wants to grow in the future and at the kind of rate that’s possible for you, cash is not your solution. Cash is expensive in ways beyond just the cost of printing, distributing and delivering it, which can be anywhere between 0.5 to 1.5% of GDP. It’s also expensive in terms of tax avoidance, corruption, and illegal activity.
A Fletcher School study from Tufts University found cash costs the U.S. about $200 billion a year which averages out to $1,739 per household or 1.3 percent of GDP. What does that $200 billion include? It includes costs like the $31 billion spent just accessing cash; the $40 billion businesses lose because of cash shrinkage in retail; and the $30 billion attributable to bank robbery. There are other studies around the globe. A German university study found that cash costs the German private sector about 12.5 billion Euros a year. A Turkish university study found that if consumers stopped using cash by 2015, Turkey would earn about $22 billion. If we’re to achieve full financial inclusion, we need a broader, more thoughtful dialogue around the costs of cash and why cash not only isn’t free but is an impediment to achieving that goal.
Myth #2: Cash is the friend of the poor man, not the rich man.
Conventional wisdom has it that cash is the friend of the poor man, not the rich man. But it’s the other way around. One of the authors of the Fletcher School study I just cited said as much in a recent New Yorker article: “We tend to think of cash as the poor man’s best friend. That is where we’re wrong.” This is where electronic and digital payments unlock opportunities in ways that cash can’t. In fact, a recently-published Gates Foundation/McKinsey study found that digital payments offer the highest potential for financial inclusion. Only countries with relatively widespread access to digital transactions achieve high levels of financial inclusion. In countries where more than 70 percent of people can pay digitally, financial inclusion is over 85 percent.
I’ll share some examples where payments technology is making a difference in Africa and the Middle East. Earlier this year, Nigeria announced its plan to roll out a national ID program, where ID cards double as MasterCard prepaid cards, with 13 million citizens who will participate in the first phase. The end goal of distributing more than 100 million cards to Nigeria’s 167 million citizens is the broadest financial inclusion initiative of its kind on the continent. When you combine a national ID initiative with biometrics and MasterCard payments technology and take out the middlemen so people get their funds directly, it’s a win-win for the government and citizens through gained efficiencies, saved money, and reduced leakage.
As of last month, the UN World Food Programme (WFP) is leveraging MasterCard payments technology to provide digital food to 800,000 Syrian refugees in Lebanon with prepaid cards. These cards – reloadable monthly – are integral to helping the WFP transition from providing food delivery to food assistance and they provide a multiplier effect. Recipients get the assistance they need. More money stays in local economies. Stores have more business. Refugees gain financial access. And you take out the middlemen where anywhere between 30 and 40 percent of the food that’s distributed is stolen or leaks out. All of this because you’ve changed the payment methods and distribution channels.
Leveraging the scale and reach of public-private partnerships
Reducing cash dependency is really job one when it comes to getting us closer to financial inclusion by 2020. But as the examples I just gave demonstrate, moving from cash to electronic payments in an effort to reach the underserved in better ways is nearly impossible unless the government creates an ID system. So, government has a vital role to play here. By the same token, identities help companies operate without the fear of facilitating illegal activity and help ensure compliance with Know Your Customer regulations. In the 21st century, challenges like financial inclusion are so vast they exceed the resources and capacity for any one sector to solve. That’s why public-private partnerships are key going forward.
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