SPECIAL EDITION: Remittances and inclusion in Africa and SE Asia, why overhyped fintech hasn't solved the problem, and Indonesia's new CBDC!
Fintech's remittance failure shows why we need CBDC
1. CBDC in Africa
2. Africa’s remittances and CBDC
3. Fintech hype is no match for remittances!
4. Southeast Asia goes digital for inclusion
5. Indonesia’s new CBDC!
The selection of artwork was easy this week because I wanted to find something evocative of Africa and financial inclusion. What better place than the marketplace in this painting by Benedict Chukwukadibia Enwonwu, M.B.E (Nigerian, 1917-1994). Open air markets are still the norm, and smartphones with Apple Pay won’t cut it for inclusion, but an offline CBDC card that doesn’t need signal might!
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SPECIAL EDITION: Remittances and inclusion go hand in hand! You can’t have one without the other. This is why the focus of CBDCs and digital wallets across the world is on bringing down remittance costs.
Today we have four stories that discuss the impact of CBDC and digital financial services on remittances in Africa and Southeast Asia to show that the problem is universal!
1. CBDC in Africa
Africa has big CBDC ambitions that focus on digital cash, financial inclusion, and monetary policy.
Africa’s CBDC desires are not uniform across the continent and are very much country-dependent. Showing once again that “cookie cutter” CBDC designs are not going to cut it.
The reality of the African continent is harsh. It is an unfortunate world leader in two key areas:
🔹Half of African adults had no bank account in 2021, a greater proportion than anywhere in the world.
🔹Remittances for Africa are the most expensive in the world: a $200 payment to or from Africa costs $15 (7.5%), that is, $3 (1.5%) more than the global average.
And for those who think that mobile money, like MPesa, can solve these problems, African central bankers disagree and see CBDC as a superior solution.
One look at MPesa’s use costs should show why. Add in CBDCs' offline functionality, and it’s clear that while mobile money isn’t bad, it is an incomplete solution.
Central bankers (CBs) in Africa have prioritized the following:
1️⃣ Digital cash:
The provision of digital cash as an alternative means of payment is the top consideration for more than half of the CBs surveyed. In addition, CBs see that CBDC will reduce cash distribution costs which are likely high when servicing remote areas.
2️⃣ Financial inclusion:
This comes as no surprise! CBs see CBDC as a tool to promote inclusion. Lack of access to banks is a major problem, as is financial and digital illiteracy. CBDC’s ability to potentially “cross the digital divide” is key. CBDC's ability to work offline, with low-tech feature phones, or no phone, is its most important feature.
3️⃣ Monetary policy:
Advanced nations take this ability for granted. The interest in this area is due to the poor ability to transmit monetary policy to populations that are primarily cash-based. With greater inclusion and potentially interest-bearing CBDCs, African nations may be able to transmit monetary policy more effectively.
4️⃣Competition and efficiency:
Payment service markets are often oligopolistic! Surprised? Don't be; look at MPesa! PSPs can gain large market shares due to network effects and then increase the cost of service. Where do you think unicorns come from? CBDC turns money into a public good.
All of this boils down to design considerations that unsurprisingly favor two-tier structures, with offline transfer and a high degree of interoperability.
There is great hope that CBDCs can be used for cross-border transfers. However, CBDCs may not be used in 3rd party nations, which risks monetary destabilization.
CBDCs offer hope, and in the next section, we’ll look specifically at cross-border transfers in Africa!
CBDCs are not a panacea but may solve some big problems.
Cookie-cutter CBDCs won’t cut it.
Offline transfer is critical!
2. Africa‘s remittances and CBDC
CBDC has a role to play in bringing down Africa's ASTOUNDING remittance costs.
This whitepaper does the best job I’ve ever seen in laying out Africa’s remittance markets. It makes a clear case for using retail CBDC under development throughout the continent to reduce remittance costs. Part 1 here:(https://bit.ly/3VDLFJE)
This fantastic paper was written by Giesecke+Devriant, G+D. They are CBDC masters and are now building Ghana’s new CBDC with offline functionality!
Remittances as lifeblood
Africa’s remittance markets are critical. Nations like Somalia and The Gambia receive 25% and 23% of their domestic GDP from remittances. Meanwhile, even larger amounts can be found flowing into Egypt and Nigeria.
Sub-Saharan Africa is the world’s most expensive region for remittances. For example, the fee for remitting $200 from Tanzania to neighboring Uganda would cost 29.7%!
The paper’s greatest achievement is in showing that if cross-border CBDC transfers can save 50% of current costs, the top 10 nations can save an average of 0.5% of GDP!
Fifty percent is not unreasonable when interregional transfers cost between 8 to 30%. This is all money that can return to society rather than pay fees. This money can also readily offset CBDC development costs.
Three CBDC models
G+D recognizes three potential retail CBDC models:
Here an administering central bank takes the role of a common service provider, allowing domestic CBDCs to transact with each other. Think hub and spoke.
2️⃣ Common interlinked:
Interoperable CBDCs are also possible, and 13 nations just met this week to discuss CBDC technology sharing. Pooling resources to build a common CBDC system might just work. (https://bit.ly/3ViP0hB).
3️⃣ Monetary unions:
Africa has two existing monetary unions, and more are on the way that are covered in the paper. There is the potential under monetary unions to issue common currencies, which would reduce the need to access foreign currency markets. This is not far-fetched, and the savings in foreign exchange would be significant. This model would simplify CBDC issuance and allow for sharing technology expenditures.
Nigeria, Ghana, and South Africa have advanced CBDC programs, with Nigeria’s eNaira the first on the continent. There is a role for CBDC in reducing remittances, and while there are many unknowns, the technology to achieve this is available. It is now a choice of what path to take.
CBDCs have the potential to greatly assist with remittances. That said they are no panacea.
Currency unions in Africa should not be dismissed and may provide a solution between countries with common markets or cultures.
CBDCs may just be the technology that bridges the financial and digital gaps in Africa. Let's hope they do!
3. Fintech hype is no match for remittances!
Fintech hype meets its match as it fails to disrupt remittance markets! What went wrong?
Today we’re looking at the IMF’s report that makes it clear that so far, the hyped fintech space has not disrupted remittances, where banks and money transfer organizations still dominate.
This is a follow-up to this week's stories focusing on Africa and remittance payments with the hope that they would someday be made less expensive through CBDC.
Remittance perfect for disruption?
The remittance market is considered the “perfect space” for disruption, a space “ripe” for fintech’s touted technical advances. If we believe the hype, it was supposed to be easy!
“Remtechs” like Wise, World Remit and Remitly, and of course, Bitcoin, were supposed to reduce cross-border remittance fees, which are seen as high cost, low speed, limited, and nontransparent.
If this paper sounds like a shocker, believe me, it is! Let me ease your pain. The IMF doesn’t hate fintech, though it comes near for Bitcoin. The IMF recognizes that fintech brings important competition to the marketplace.
The IMF acknowledges that fintech is driving costs down in some markets, particularly those like yours, where cash is no longer king. It also acknowledges fintech's role in pushing increased digitization. Fundamentally good things! Still, this isn’t the disruption we were promised.
What went wrong:
Authors note, be sure to read chapters VI and VII in the IMF report!
Here, the problem is that they don’t deal with cash, and the that their business model is constrained to dealing with digital channels when most remittances are still cash. This means that they are limited to the markets they can serve and leave the costliest markets where “cash is king” unserved.
🔹 Mobile Money:
The IMF loves the tech but bemoans that it simply hasn’t reached broad-based adoption. It’s not that it's bad but that the unique conditions that made M-Pesa successful in Kenya aren’t repeated elsewhere. The analysis of these conditions (p. 27) is fascinating and a must-read!
Let me say it upfront; the IMF loathes BTC. Still, they lay out in clear, dispassionate terms how BTC proponents fail to fully account for remittance costs. These include the fees for full cash transactions, the costs of network congestion, and the bigger spread the BTC needs due to volatility. They aren’t lying when they say that despite the hype, BTC’s use in remittance is virtually non-existent.
Fintech, whether remtechs like Wise, or Bitcoin, have not created the hyped disruption in remittances.
The biggest drawback is that fintechs don’t deal in cash, while the world’s most vulnerable people do.
Remtech’s claimed tech advantage is complete fiction. They use the same foreign exchange markets as banks!
The need for cash leaves the door open for CBDC as digital cash to do what fintech and Bitcoin so far can’t.
4. Southeast Asia goes digital for inclusion
Southeast Asia's Digital Financial Services are achieving levels of financial inclusion that 💥traditional banks and microfinance could not!💥
The “Tech for Good Institute” gets financial inclusion and focuses on TRUST as the cornerstone of consumers' relationship with Digital Finacial Services (DFS).
E-wallets are the key
And we owe it all to e-wallets, whose role in accelerating financial inclusion in the region cannot be underestimated. And by extension, we owe it all to China!
"E-wallets are the most frequently used digital payment method and they are particularly popular in Southeast Asia: the total number of e-wallets users have consistently exceeded those in the US, UK and EU since 2018."
"Given the relatively low barriers to entry, e-wallets are typically an individual’s first experience with digital payments. For the 70% of the population in SE Asia who are considered un/underbanked, e-wallets allow them to bypass the formal banking system and access previously unavailable basic financial services."
Trust above all
Trust is at the root of adoption and inclusion:
1️⃣ Build on existing trust and reframe the understanding of trust
High levels of trust in financial service providers across SEA-6 is a solid foundation for the region’s financial inclusion agenda. 🔥For incumbent banks, trustworthiness is important but insufficient to keep customers.🔥 DFS providers, on their own or in partnership with a bank, have the potential to earn more trust as they embed their services into the lives of their consumers.
2️⃣ Invest in digital and financial literacy first
Digital literacy is found to be the most consistent predictor of both e-wallet and non-e-wallet DFS usage in all six countries surveyed. Initiatives to improve financial literacy and digital literacy are especially important to further encourage confident usage and financial inclusion, especially among more marginalised and vulnerable populations.
3️⃣ Consider trust alongside demographic and socioeconomic factors for financial inclusion
Policies to improve financial inclusion should be comprehensive and encompass a variety of demographic and socioeconomic factors because they affect and interact with each other. It is useful to include trust in the equation for encouraging DFS usage and advancing financial inclusion.
Digital wallets are the foundation of inclusion in SE Asia!
Trust is key in establishing financial inclusion and trust levels for DFS and incumbents are very close! Incumbents cannot rely on trust to keep clients
Inclusion and education go hand in hand. Higher levels of financial literacy also bring greater trust!
Trust, education and inclusion for a vicious cycle without education trust and inclusion are hindered!
5. Indonesia’s new CBDC!
Indonesia proclaims, “The future is here,” as it launches a BRILLIANT CBDC project!
Indonesia wants faster, easier, cheaper, safer, and more reliable financial services and is using CBDC to achieve this! Go Indonesia!
Let's be clear about why Indonesia needs CBDCs. With over 100M unbanked, it is SE Asia’s largest unbanked population and number 4 in the world, following China, India, and Pakistan.
On the plus side, Indonesia has an internet penetration rate of 74%, and 98% of merchants use digital payment, which sets the scene for further digitization of the monetary system.
Indonesia is no slouch and already rolled out the BI-FAST retail RTGS payment system and a wholesale RTGS system. It also launched national QR code standards that are now interoperable with Thailand, Malaysia, and Singapore!
Indonesia's new CBDC design is fabulous, and building its new RTGS systems into the design really sets it apart!
Critical design elements:
🔹 Single-tier w-CBDC and two-tier r-CBDC.
🔹 Indonesia reserves the right to issue single-tier r-CBDC! For example, if citizens are unable to access r-CBDC locally. This makes sense given that as an island nation many places are remote.
🔹 Token-based w-Digital Rupiah because of its use in financial markets.
🔹 Token-based r-Digital Rupiah for small-value transactions up to a certain threshold without an account.
🔹 Account-based r-Digital Rupiah facilitates transactions higher than the threshold to ensure AML/CFT compliance. Just like China.
🔹 CBDC tokens can be carried on Indonesia’s BI-FAST RTGS system! This means that Indonesia will be able to repurpose BI-FAST for CBDC! Just like Jamaica's JamDex.
🔹 Smaller transactions will not be private! Tokens can obtain “granular data from token-based r-Digital Rupiah transactions through information stored in a wallet address.”
🔹 OFFLINE Transactions, combined with digital ID for increased inclusion.
🔹 Combined centralized and DLT architecture! DLT for programmable smart contracts, centralized transfer via RTGS.
Three project phases
Project Garuda’s three phases do not have dates:
1️⃣ Immediate: issuance, redemption, and transference use cases of w-Digital Rupiah experimentation will be commenced.
2️⃣ Intermediate: w-Digital Rupiah use cases will be expanded to include more diverse financial market transactions.
3️⃣ End: the concept of integrated end-to-end w-CBDC and r-CBDC will be tested.
Indonesia's CBDC design is FANTASTIC because it plays off its existing RTGS systems! It is pure genius!
Token-based, low-value r-CBDC transfers without accounts to increase inclusion!
Repurposing the existing RTGS network makes it stronger and lowers costs.
Indonesia brilliantly integrates ideas from China and Jamaica!
See how deep the “cashless” rabbit hole goes!
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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