BIS chief sees technology as crucial to financial inclusion

Financial inclusion is a crucial goal that can be achieved through a mix of co-operation and innovation, says the general manager of the Bank for International Settlements.

In a speech on April 25 at the Reserve Bank of India, Agustín Carstens laid out three key barriers to financial inclusion that must be overcome.

First, a lack of trust in the financial system owing to a history of bank failures or a lack of financial literacy. Second, the high costs of financial services, where small, low-income communities may find setting up a fully staffed branch too costly. Third, a lack of documentation, due to either a lack of basic documents such as a birth certificate, or a blank credit record preventing access to loans.

Carstens said central banks have a major role to play in overcoming the first of these barriers by promoting trust. “By looking after their core mandates – namely price and financial stability – central bank and financial authorities can bolster trust in the financial system, thus providing the basis for financial inclusion.”

If people do not trust either their currency or the financial institutions within their country, they are far less likely to engage with the financial system, he said.

While central banks have a large role to play in promoting financial inclusion, they cannot do it alone, said Carstens. An adequate legal system, innovation, and in particular big data and other new technologies, are necessary to reach potential users. Central banks must co-operate with both government and the private sector to surmount these obstacles, he said.

Carstens asserted the importance of mobile money services, saying they can “be scaled up at virtually zero marginal cost” and quickly expand the circle of users.

He also gave the example of Aadhaar, India’s biometric identification system, as a key way to use big data to promote financial inclusion for those that may not have adequate documentation to access traditional services. However, he warned of the dangers of market concentration and the need for proper control of customer data with the rise of financial technology.

Carstens then suggested several policy proposals that lawmakers should consider as ways to promote financial inclusion. He praised regulatory sandboxes and innovation hubs as a means of encouraging technological improvement, as well as emphasising the importance of “a sound regulatory framework”.

“The role of central bank and government policies in driving this progress cannot be overemphasised,” Carstens said. “Yes, there is more to be done. As an old proverb has it: ‘We can’t change the wind’s direction, but we can always trim the sails.’”