Chris Calabia on the Role of Public Policy and Regulation in Improving Access to Finance

This is Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Sean Creehan.

And I’m Cindy Li. Welcome back to Financial Inclusion & Beyond, an ongoing exploration of what we can learn from efforts around the world to improve financial inclusion and wellbeing. Into this episode we speak with Chris Calabia of the Gates Foundation. Chris focuses on how to drive financial health for the world’s poor by improving access to essential financial services through better public policy and regulation.

We’d see that when women gain access to financial services, everybody wins. Countless studies have been done across different cultures and countries, showing that when women gain access to a digital financial service account that they control, that they typically spend more on nutrition for their families, on schooling for their children. And they’re more likely to seek formal employment or even start their own businesses. So the impact of inclusion can be profound, can really change how societies develop.

Chris emphasizes the key role that financial services can play in reducing poverty, and talks to some critical examples, including the widespread economic benefits of things as simple as giving women access to their own financial accounts, or paying workers digitally and not in cash.

Yes. And as we have seen since the beginning of this pandemic, and as the Gates Foundation’s own research has demonstrated, countries with functioning digital financial services were far better able to deliver aid to vulnerable populations than those that have not invested in such systems prior to the pandemic. In fact, those countries were also better able to bring unbanked people into the system for the first time to receive cash transfers compared to countries that relied on more traditional things like mailing checks. We will also hear about four models for providing financial services from more traditional bank led approaches to new efforts to leverage less traditional firms and the role of policy and regulation in defining these choices.

That’s what some of our other episodes. We’d note that we recorded this interview before the outbreak of the COVID-19 crisis. Okay. Here’s our conversation with Chris.

Hi Chris. Thanks for joining us.

Thank you for having me.

So maybe for the benefit of the audience, we could start with you telling us a little bit about your work at the Gates Foundation.

So at the Bill and Melinda Gates Foundation, I lead our work on regulatory reform to help promote access to financial services among the unbanked, poor and women in especially lower and middle income countries around the world. The Gates Foundation is best known for its work, promoting health and vaccinations and medicine. And those are all important to addressing inequities in the world. But we also focus on financial services because research shows that when people who are unbanked or poor gain access to financial services, they’re better able to save, to borrow, to invest in new futures and to lift themselves and their families out of poverty.

This is very interesting and important work. Here at the San Francisco Fed, my team has done a lot of research and thinking on financial inclusion. We also look beyond access to think about where financial inclusion ultimately takes a society. Chris, I see that you and your colleagues at the Gates Foundation are looking at financial services from the angle of financial health.

Yes, absolutely. Financial health is ultimately what we’re focusing on. It means that we get to it is by promoting access to financial services.

So what are some of the key supports and infrastructure that drive that access and what are you focused on?

In 2011, about half of people in the world lacked access to a financial services account of any kind. And in the past 10 to 15 years, there’s been a greater focus among policymakers, regulators, central banks, and others, to try to improve those percentages. Today, about 68 and a half percent of people worldwide have access to an account of some kind. But that means it’s still about 1.7 billion people are left without access. And this matters because it means that they have a hard time conducting their economic lives in a cash-only environment. It can be very challenging, risky, and also quite expensive to operate purely in cash. And research shows that when the poor gain access to financial services, it’s much easier for them to save and to borrow, to make payments and to invest in their futures. There are a number of areas that we focus on at the Foundation.

The first thing is thinking a little bit about the regulations that are in place, because we want to ensure that providers are able to serve the poor. And this means as well, welcoming new providers into financial services. In some countries this might be mobile network operators, might be fintech companies, social media platforms. And so we want to make sure that they have the ability to provide services in a safe and sound manner and are subject to appropriate oversight. The second area of focus is looking at the entire infrastructure, especially digital financial services. We look at two things. One is identity. How do people who are poor verify who they are to providers so that they can fulfill the necessary requirements for providers to know their customers and meet anti-money laundering standards. In many countries, people lack access to the full suite of identification documents that you and I might be used to.

And we also look at the payments infrastructure because especially with new providers coming to these financial services sector, they may not have access to legacy payment systems that only commercial banks might have access to. And so at the Gates Foundation, we’ve worked a lot to promote what are called interoperable payment systems, and even have developed an open-source interoperable payment system that’s available to anyone to use. It’s called Mojaloop, which is based on the Swahili word for one or together. It is indifferent to the provider that a consumer might use. So commercial banks can access it. And other types of firms, fintechs which are licensed could gain access to it too. It’s being deployed in 22 countries in Sub-Saharan Africa and at least one central bank as of today is exploring adopting Mojaloop for its national payments rate as well. But this was really meant to just prove that it can be done and inspire more thinking in this area.

So Chris, why do financial services matter specifically to the poor?

That’s a great question, Sean. So as I mentioned about 1.7 billion people lacked access to financial services in 2017 and about half of those people live below the international poverty line, which the World Bank defines as earning less than $1.90 cents per day in 2011 dollars. Now, one of the interesting things about that number, the number of people who live below the poverty line is that poverty is not a static condition. So each year about 10 to 40% of people are able to rise above the international poverty line. But at the same time, the equivalent of about 10 to 30% of people fall back below that line again. And so one of the things that we’re doing in financial inclusion is trying to find a way to break that cycle. And the evidence suggests that when you have access to financial services, it can improve a person’s chances of moving out of poverty and can also help them to mitigate unexpected shocks that might otherwise drive people back into poverty.

So for example, getting access to credit, savings and insurance products can help individuals to invest in agriculture businesses, it can help them to educate their children, and when things go wrong, it can provide a buffer against unexpected losses. So in a way you could think of this as creating financial resilience for families and individuals. And the third area is just thinking about all the ways that digital financial services can improve lives and make strong cases where people could get accounts. And so this includes things like thinking about how do you encourage employers to digitize wages so that staff don’t have to say, line up in some cases for several hours on a factory floor or at a farm to be paid in cash. Thinking a little bit about what can we do to encourage governments to digitize social welfare benefit payments that might be paid to the elderly or the sick to ensure that that money is received by the appropriate people, that is not lost to corruption, and that those people receive their funds in a timely and safe manner.

I’m curious, Chris, India has famously implemented a direct benefits transfer program along the lines of what you’re talking about, leveraging a lot of these new digital identities and trying to encourage a shift from cash to digital, but on the efforts to promote this transition by private companies, do you have any specific examples of how do you do that? Is that a matter of working with governments to create incentives for companies to switch to that?

You have to find a way to promote an infrastructure that works up to e-money. In India, Bangladesh, and in other countries, government has started to say digitize social welfare benefits that they might pay. And one of the reasons for doing that is that they find that they can reduce funds lost to corruption, sometimes in the order of billions of dollars. In the private sector, the issue is just convincing employers and employees that this makes sense. And so the Gates Foundation has sponsored some experiments, including in Bangladesh to encourage, say, for example, garment factories, to pay their garment workers digitally. In one factory that I had a chance to visit in Bangladesh, the employer previously used to shut down his operations for almost half a day, every two weeks to pay their employees. I mean, employees had to stand in line for several hours, four or five, even six hours to get paid out.

The employer had to hire armored cars and tellers and so on to make these payments, and the employees had to wait in line for their payments. And they were not paid during that time that they’re standing in line so that in some cases they would lose half a day’s wages. And in some factories, there may be challenges where employees don’t get the funds that they are expecting to receive in the entirety. There might be handling fees that the tellers charge, or there might just be corruption as well. And so by paying these funds digitally, employers discover that they don’t need shut down their operations, that they can manage their expenses much better because they’re not hiring lots of tellers to pay out this cash. And employees like it because they’re not having to wait in line.

In some cases, employees may not have a bank branch nearby where they can deposit their funds if they do want to keep their money in the account. And they might have to walk several miles or even take a bus for half a day to a local branch to make a deposit. And so this is much easier for them to receive their payments digitally.

Those are striking examples of digital solutions helping to improve efficiency and access. I know you have substantial experience in the public sector as well. So digital solutions, arguably is the key part of a private sector company as a value proposition when they launch fintech products. And then there are government push in various emerging economies to use fintech to combat issues, such as the lack of financial inclusion. From your perspective, what has some of the unique role or unique positions that nonprofit organizations can play in this ecosystem?

This is a really interesting question, Cindy, because we’re talking about trying to build basically a digital economy, and that means that everyone has to be involved. It requires financial service providers to be involved and for like consumers have to be involved, businesses, governments and central banks have to be involved as well. Technology plays a big part in all of this, and there’s a lot of lessons that can be learned across countries. In fact, I would say that this effort to build digital economies is something where both developed and developing countries can learn something from each other. I’ve been in some developing countries where I saw retail payment technology that we don’t have, or didn’t have in the United States until just recently. And in some countries, this technology has been in use for some years. So there’s a lot of opportunities for us to learn and work together.

Are there any downsides that you’re particularly focused on when you think about some of these issues, whether issues like the potential to exclude some populations that aren’t typically online or not sophisticated with even a mobile phone, other issues related to privacy?

So, I mentioned that today about 1.7 billion people are estimated to be without access to a financial services account of any kind. Of that 1.7 billion, 1.1 billion of them have a mobile phone. And so technology could provide a very strong avenue for addressing their status and improving their access to financial services. And in fact, the mobile phone has been one of the primary technologies that’s been prominent in promoting access to financial services over the last 10 to 15 years. So the tools exist in most countries. There are, of course, challenges in some of the groups that we focus on maybe illiterate or even innumerate to me and not being able to read or work with numbers, and those can be very big challenges. And so we do encourage providers and regulators to think about how to address those segments of the population.

In many cases, there are experiments taking place to make say, simple cards for consumers to use to help them understand how to access their financial services. There may be education efforts that are sponsored by providers as well as in some cases by public sector organization. So there is definitely a lot of work to be done, but overall I’m feeling quite optimistic because there are these avenues to address lack of access.

When you talk about policy approaches to this and the importance of policy, you mentioned before the importance of things like an interoperable payment system, also telecommunications firms, and a lot of these markets and driving mobile financial services and inclusion. I’m wondering, could you talk a little bit about, this is maybe even more of a wonky topic than something like, know your customer verification, but the idea of licensing and the importance of thinking about how you license operators in this space, specifically telecommunications companies, which aren’t banks or other non-traditional firms that may be entering the space.

Absolutely. There are two issues that we should think about. And so one, I think we addressed a little bit and that is how do we bring new consumers into the financial system if they lack access to identity? And then the other is how do we bring new providers in if they don’t have a license yet to provide these types of financial services? On the licensing side, traditionally in most countries, in order to take deposits from the public, you had to have a special license to operate in an institution that we generally would call a bank or a commercial bank. And in fact, an international standard is encouraged that only banks be allowed to take deposits from the public. But the Basel Committee on Banking Supervision, which is the global center setting body for bank regulators, have recognized that non-banks do play an important role in some countries in promoting access to financial services among the poor and unbanked.

And so, a number of countries have explored different types of licenses that they could provide to financial service providers. At the Gates Foundation, we think of four models for providing financial services in any lower and middle income countries to the unbanked. The most traditional way is to require a banking license with a bank only model. There are some countries such as India experimenting with narrow banks. That is a limited commercial bank license that allows an entity to do some banking services, but not all. And in India’s case, there’s a new type of license called payments bank license. A similar version was adopted in Nigeria recently, and this allows, especially licensed companies, to take deposits from the public to make payments on their behalf, but they are not allowed to extend credit to manage the risks that might be involved in that type of service.

And so, this is the avenues which mobile network operators in India and Nigeria and other countries have been able to establish subsidiaries that receive this special narrow bank license to participate in financial services. And remember, this is important because so many people already have access to a mobile phone in these countries, but there might not be a bank branch anywhere near them. There are two other models and some countries still banks are the only ones allowed to ride these services, but they’re allowed to partner with a non-bank organization to provide that service. And then a fourth model would be the creation of a special purpose vehicle that could be owned by either a bank or a licensed non-bank to provide certain types of financial services.

Chris, let’s talk about identity for a moment and the data privacy. So with the expansion of a digital economy, with more customers being a part of that digital economy, what are some of the challenges that you have seen in digital identity and data privacy?

The lack of access to the full suite of identification documents is a big challenge in many lower and middle income countries. Because in many countries, you can’t open a bank account, you can’t get a cell phone or buy a SIM card for yourself without being able to prove to a company or to the government who you are, where you live and so on. And in the World Bank’s most recent study of financial inclusion with the Findex database from 2017, they identified that about 1.1 billion people lack appropriate documentation. About 20% of people who say that they are unbanked told the World Bank researchers that their lack of being able to prove their identity was a key reason. In low income countries, 30 to 90% of the population may lack access to appropriate identification documents. This problem is particularly pronounced for women about 45% of women lack access to identity documentation versus about 30% of men.

These are longstanding problems in some countries. Live births of girls might not be registered. And so those living in impoverished areas also might live in a dwelling that doesn’t have a recognized address by the post office, or that might not have a street name or a number. And that makes it very difficult to tell a bank or a mobile network operator where they live. The good news is that global standards setting bodies have become more aware of this problem and have indicated that countries can adopt risk-based approaches to authenticating and verifying customer’s identity. And this is sometimes called progressive customer due diligence or tiered KYC know-your-customer requirements. Often there are limits on the size and the counter transactions and very small accounts with small transactions are less likely to be associated with concerns like money laundering. With simplified know-your-customer rules you might only need your name and a government issued identity number to open a special account. Whereas in contrast, with a full know-your-customer requirement, you might need to prove your address, who your employer is, what your phone number is, and maybe even provide particular documentation.

So a number of organizations are looking at this issue. As well, the World Bank is studying national identity systems and trying to come up with design principles for countries. In addition, the Gates Foundation has released an open source platform for national identity systems called MOSIP or Modular and Open Source Identity Platform that would be available for any country to adopt if it wanted to digitize its identity systems. I think the most famous example in the world and the most successful might be India, which is about the Aadhaar system, which you’ve probably talked about on the show. In India, now 1.3 billion people have been registered and they’ve given their thumb prints and retinal scans and this makes it really easy for them to prove who they are.

And I’ve been able to observe customers in branches opening accounts. They walk up to the teller. They tell the person their name. They put their thumb down on a thumb print reader, or their eyes are photographed, and then within two minutes they can open accounts. It’s a really impressive innovation, but not all countries may want to adopt a biometric authentication. So there’s many other ways to provide the service as well.

One reaction is that seems like this digital identity systems, as you described, are really serve as a digital infrastructure that would facilitate various functions, such as eKYC, and remote onboarding of customers by financial institutions.

Absolutely. And so at the Foundation we look at what’s sometimes called the foundational identification systems that could serve multiple purposes. Other segments of the economy would also benefit from these types of identity systems. For example, healthcare providers or parents trying to send or register their children for schools. So there are many places where identification can make a huge difference in the lives of the poor.

You mentioned some global standards setting efforts in this area. Do you see any new solution that would facilitate cross border banking with digital ID in different countries?

So that is a terrific question. And it’s really important in these types of people that we’re trying to serve, especially in the context of international remittances, that when workers go overseas to earn money and they want to send money back to their families. I don’t know that there are many cross border applications yet for identity. That’s probably something we still need to work on. And it does open up interesting questions about privacy and protection of consumers data. So because if a government has information on a consumer, it may not easily be able to share that with another government or a company outside of its borders. There may well be appropriately laws restricting that from happening.

Chris. So I think historically in developing economies, agent banking has proven to be relatively effective in reaching some of the remotely located population or communities without a sufficient bank branch network. How has technology changed the picture?

It’s been a tremendous driver of activity in agent banking, and it might be helpful if we could define agent banking since it’s not a service that we’re familiar with typically in United States and other developed markets. As I mentioned in, in many countries, there may not be a local physical presence for a bank or even a mobile network operator might not have an office in or near a village. And that means that it’s very difficult for people to open accounts and deposit their funds or withdraw funds. This is a big challenge in highly impoverished areas where banks are unlikely to build branches because they believe that they wouldn’t be profitable or in remote areas of the country. So if you think about, say the mountainous part of a country where it might be difficult to get services there or thinly settled regions of countries or islands, if you think of Indonesia, archipelago of 17,000 islands, banks can’t have branches on each of those islands.

If you earn wages or receive payments in cash, it’s very difficult to get that money to a bank branch. To overcome this challenge of banks or non-bank and mobile money providers, will partner with third parties to take and receive cash.

In some countries, they may partner with say a local mom and pop shop. This is sometimes called a cash-in or cash-out service. Technology has actually led to a large growth in the number of these third party agents. Initially, third-party agents had a point of sale terminal that connected to the digital financial service providers systems, perhaps through a wired connection initially, and then later to a satellite or a wireless connection. But now many agents can provide cash-in and cash-out services with a mobile phone. So depending on the licensing requirements to become an agent, agents now might travel between villages or on locations on bicycle or motorbikes. Some countries even provide motorcycle, taxi drivers to take deposits on behalf of digital financial services. Kenya, for example, which is where in many ways the non-bank mobile money revolution was started along with the Philippines, in 2010, they had about 23,000 agents. And by 2014 they had 110,000.

So Chris coming back to some of those overarching numbers, you mentioned on the gains made in financial inclusion and the remaining ground that needs to be covered. Imagining another seven to ten years where gone from roughly 50% and not quite 70% of the world with basic financial access. And imagine another equivalent level of progress over the next decade. And thinking about the basic problem of access being hopefully solved in the near to mid-term future, what do you see as the areas of focus beyond that? Where’s the Gates Foundation most focused in terms of taking the newly banked and helping them build better economic lives through this new financial access, through better participation, through financial activation, as opposed to just access?

That is a fantastic question. One thing that we try to remind people periodically is that financial inclusion is about much more than getting access to a bank account. It is about being included and participating fully in the economy and society more broadly. And it’s had tremendous benefits for particular groups. So for example, women are among some of the chief beneficiaries of efforts to promote financial inclusion. Although a gap does remain, we’d see that when women gained access to financial services, everybody wins. Countless studies have been done across different cultures and countries showing that when women gain access to a digital financial service account that they control, that they typically spend more on nutrition for their families, on schooling for their children, and they’re more likely to seek formal employment or even start their own businesses.

So the impact of inclusion can be profound, can really change how societies develop. There are a number of topics that we still need to work on. So first of all, you mentioned the gender gap. Although it’s closing, has still persisted. And in fact, the gap remains about seven percentage points since 2014, in terms of men having access to a financial account versus women worldwide. So we want to do more to think about how can we empower women to gain access to accounts and make good use of them.

We’ve heard a number of examples of successes where they’re related to your own work or just other activities you’ve seen around the world that have been working well in terms of driving inclusion. Are there any notable failures or just existing challenges where it seems like it’s a tough nut to crack or you think there’s insight to be drawn there?

So I mentioned for one thing, the challenge was dormant accounts. Part of that may be simply a need to educate consumers a little bit more about how to make use of those services. But a big part of it is finding ways to build out the ecosystem. So we need to do more work to ensure that merchants will accept e-money from consumers and that there are other opportunities for people to make use of their funds when they’re held in a digital financial service providers account. I mentioned as well the challenge in trying to continue to close the gender gap. In some cases, countries have adopted what we might think are appropriate regulations yet, for whatever reason, the services haven’t been picked up yet. And we’re studying closely some of those cases right now,

Chris, a lot of people sitting here in the United States may think, “Oh, for the most part, we’ve solved the challenge of getting basic access.” Then of course, there are still many people that lack basic access to financial services. And even if they do have an account, maybe don’t really have the broader participation. Are there any specific lessons that you think are most salient sitting here in the United States, from everything you see overseas?

One thing that I’ve seen in some countries is a very strong level of dialogue between innovators, regulators, and policymakers on ways to enhance the ability of people to access financial services while still maintaining a safe and sound system. There are some countries where they’re even things like tech sprints, where innovators will come together with regulators and service providers to try to solve problems together. One of the most common agencies doing work in this space is the Financial Conduct Authority in the United Kingdom. The FCA has attracted a lot of attention and is partnering now with regulators in many countries, including in the United States. Some state and federal regulators are working with FCA to think about ways to improve that dialogue between regulators, financial service providers and innovators. There’s a lot that we can continue to do to build that dialogue and to make sure that it’s not simply an adversarial relationship, but it’s actually an opportunity for us to learn from each other and to find ways to provide services to consumers in more efficient and effective ways.

The other thing for me that’s an important lesson is, providing financial services to the poor is not simply about gaining access to an account. It’s really about trying to alleviate poverty. Sri Mulyani Indrawati, Minister of Finance in Indonesia says that access to financial services serves three purposes. It helps lift people out of poverty. It helps to empower women, and it helps governments to deliver services to their people more efficiently and effectively. And so I try to think about those three objectives and it helps me to see that financial services are much more than simply providing an account or making a loan or helping somebody make a payment. It’s about improving people’s lives. And that’s why I am so excited and enthusiastic to work in this space.

This is great. Thanks a lot, Chris.

Well, thank you both for your interest in this topic.

We hope you enjoyed our conversation with Chris. Clearly there are a number of different models for delivering financial solutions around the world to help people escape poverty, whether it’s through traditional banks or non traditional firms leveraging new technology.

Yes, as Chris told us, policy choices matter. In the midst of the COVID-19 crisis, the United States can learn from digital financial solutions from the rest of the world, and think hard about how to harness the post COVID-19 digital transformation to improve access and deliver equal opportunity. We caught up with Chris recently about what he and his colleagues at the Gates Foundation have learned over the last year, and he offered to update saying, “Many low and middle income countries have developed especially impressive digital cash transfer programs to help meet the needs of furloughed workers and ensure that vulnerable families have sufficient resources to follow a physical distancing requirements. It’s clear that investing in digital public goods related to identity and payments can help us to build back more inclusive, secure, and resilient economies that serve the needs of all, including the poor.”

We’ll talk more about these topics, including the central importance of digital identity and driving access in our next episode with Matt Holman, a global expert on the role of digital identities, data and financial inclusion.

For more episodes like this, you can find us on iTunes, Google Play, Stitcher, and Spotify. If you like what you hear, please leave a review. Feedback from listeners like you will help more people find us. And for even more content, look up our Pacific Exchange Blog available at frbsf.org. Thanks for joining us.