(Archived Content)
WASHINGTON - Good afternoon. Thanks so much for inviting me to be part of the launch of the Financial Inclusion Task Force Report on “Financial Regulations for Improving Financial Inclusion.” I am especially pleased to be able to address this topic since both “financial regulation” and “financial inclusion” are topics of keen interest to the U.S. Treasury. Kudos to the Financial Inclusion Task Force for realizing the power of bringing these two topics together. I am struck by the common sense – but powerful - nature of so many of the Report’s 26 recommendations. As important as the recommendations themselves are, the debate and discussion that they will engender among policymakers and regulators alike will help us to understand the options that are available, give us exposure to different approaches and, ultimately, urge us to continue to improve the financial system.
Expanding financial inclusion worldwide is a high priority for Secretary Lew and the U.S. Treasury. In fact, just last week Treasury hosted a Symposium on Women in Finance and Technology. This Symposium – the sixth time that Treasury has hosted a Women in Finance event to celebrate Women’s History Month – featured senior executives from across the finance and technology sectors. They ranged from more traditional financial services firms, like Visa and MasterCard, to newer technology driven firms, like Google and Facebook, and even included some of the newest entrants, like Square. In his remarks, Secretary Lew emphasized the importance of innovation to financial inclusion. He also stressed his firmly held belief that advancing inclusion and protecting the financial system from abuse are complementary goals. By enabling more people to benefit from access to the regulated financial sector, we can reduce reliance on informal services, increasing the transparency and safety of the entire system.
To state the obvious, increasing access to financial services—whether simple transaction services, savings opportunities, credit or insurance—can improve the lives of many people throughout the world—and also here in the United States. It is a big challenge. The World Bank has estimated that more than two billion people around the world currently rely on cash to manage their daily needs. At an individual level, increasing access to financial services can improve a woman’s ability to weather shocks, build financial security and invest in her future—whether by taking out loans for school or starting a business. At a societal level, expanding financial inclusion will foster more inclusive growth and bring more transactions into the regulated financial system, which is good for both financial stability and monitoring risks.
As the Report notes, technology offers great promise for expanding financial inclusion. New technologies are rapidly changing the face of financial services across the globe, allowing the financial sector to reach more people, in more remote places, at lower delivery costs and with higher quality than ever before.
Critically, from a government perspective, digitization of financial services can improve the transparency and traceability of financial transactions, which is crucial to both service providers and regulators.
Digitization has also reached government payments. Why would a country digitize its public payment streams? Reducing costs, transparency, reducing opportunities for “leakage” and encouraging the take-up of regulated accounts by its citizens.
One example is Fiji, which five years ago digitized its social welfare payments, providing recipients with a basic transaction account along with a debit card. Welfare recipients who were previously unbanked—and most of whom are women—now have access to 25 times more electronic points of service than they had before. Encouragingly, evidence shows that the recipients are increasingly using their accounts for a range of purposes, and not just immediately withdrawing their allowances.
We have also seen the benefits of digitization in Mexico. By switching to digital payment of government payrolls, pensions and social benefits, the Mexican government estimates that it is now saving over a billion dollars annually.
And, let me put in a plug for what we are doing here in the United States. Through our Direct Express Card, we have digitized payments, reducing the costs of accessing and using benefit payments for almost five million Americans.
In addition to expanding access to accounts and saving government’s money, digitizing government payments and benefit transfers vastly expands the volume of payment transactions. This, in turn, helps grow the market for payments and make the business case for private sector innovation and investment in commercial services to reach even more people.
Technology is also facilitating easy and affordable identity verification. In developing countries in particular, identity verification can be a hurdle, both for providers trying to bring on new customers and for individuals—and especially women—trying to open an account.
As the Report notes, the Indian government is tackling this challenge through Aadhaar, a national biometric identity number that has already been given to over a billion Indians. Taking the next step, recent Indian legislation allows Aadhaar to be used to verify identity, including at banks, a step that should enable a dramatic increase in access to financial services.
Nigeria is another populous country that is addressing identity verification for its citizens. The Report notes some challenges faced in Nigeria’s earlier attempt to roll out an identity verification system. The government is now partnering with a private sector credit card company to provide identification cards to millions of Nigerians. While initially the cards are intended to serve solely as identification, in the future they hold the possibility of being activated as functional credit cards, providing access to this additional financial service.
Let me now turn to the second pillar of the Report—financial regulation.
To succeed in harnessing the power of technology to expand financial inclusion, we have to make sure that our regulatory structure is keeping pace. At the most basic level, regulators protect consumers. But they also guard against a broader array of risks, ranging from risks to financial stability, to money laundering and terrorist financing. As new technologies change the nature of financial services and bring new people into the financial system, regulators play a crucial role in ensuring that new products and services are safe both for consumers and for the financial system more broadly. In doing so, regulators must balance addressing our safety concerns with encouraging innovation and not inadvertently squelching promising new services. As the Report rightfully indicates, regulations should be appropriately tailored according to risk, and in particular the risks associated with the services being provided and the scale at which they are offered. The Report properly highlights the critical role of “timing.”
In some cases, changes in regulation ex ante can help open up the market for new providers and services. But in other instances, regulators may prefer to allow new providers and services to enter the market, and implement regulations ex post. With these dynamics at play, there is no question that fostering financial inclusion presents some challenges to regulators globally. At Treasury, we are focused on three key areas:
- Protecting Consumers;
- Regulating New Providers; and
- Implementing Risk-Based Customer Due Diligence Programs
Protecting Consumers: The Report hits the mark: we must work to avoid fraud and abuse, and help ensure that consumers obtain the greatest benefits possible from newly available financial services. Necessary protections include ensuring full transparency around fees, making sure that consumers understand their rights, assuring that consumers’ funds are protected and insured, and providing simple, fast and accessible recourse when problems occur.
Regulating New Providers: When I refer to “regulators”, I mean both central banks and stand-alone banking supervisors. These regulators have traditionally focused on supervision of banks, rather than non-bank payment providers. The emergence of established non-bank providers of financial services—be they micro-finance institutions, credit unions or postal banks— have already stretched the boundaries of traditional bank supervision in many countries. And, with the growth of new types of payment providers—whether e-money providers, mobile money operators, new niche payment banks, non-bank agents or virtual currency payments systems—there is a lot of work to be done to develop regulatory systems and tools that provide adequate insight into their activities.
As regulators around the world have learned with the microfinance industry, it is very labor intensive to monitor many small providers using different rudimentary reporting systems. Another challenge is ensuring that new providers have appropriate access to payments systems, but in a way that safeguards the overall integrity of these systems. And, as the Report notes, coordination across a broad array of regulators is essential, especially where financial services are being offered by telecommunications providers that operate wholly outside of the ambit of bank regulators.
Implementing Risk-Based Customer Due Diligence (CDD) Programs: Another regulatory area on which Treasury is focused—and the topic that I would like to explore in a bit more depth—is implementing risk-based CDD programs. CDD, such as transaction monitoring and recordkeeping, protects our financial system from abuse by money launders and financers of terrorism, helping advance important law enforcement and national security goals. When the money laundering and terrorist financing risks posed by particular products, services, transactions or delivery channels—as well as the types of customers, countries or geographic areas—are low, Treasury has supported other countries that have adopted a risk-based approach that allows for simplified, or so-called tiered, CDD. Tiered accounts with strict usage limits—such as a balance, deposit or withdrawal caps, coupled with transaction limits—control risk by design and potentially permit the use of simplified CDD.
This risk-based approach is supported by the Financial Action Task Force (FATF) and the G20’s Global Partnership for Financial Inclusion, two entities in which Treasury is an active participant. Despite the flexibility afforded by FATF, many countries remain uncertain about how to design and implement a risk-based approach to CDD, which can lead to overly-rigid national regulations that, in turn, make it hard to reach to low-income customers.
Mexico is one country that has taken a proactive approach, introducing a tiered CDD regime in 2011 that has varying requirements, depending on the deposit and balance thresholds as well as whether digital person-to-person transfers are allowed. At the lowest tier, “Level 1,” users can open e-wallet accounts without verification. The account holders can use their e-wallets to withdraw small amounts of cash that can be used to pay for goods and services, and receive remittances from certain jurisdictions. The financial services institutions offering these Level 1 e-wallets are subject to streamlined recordkeeping and reporting requirements, as well as periodic monitoring requirements aimed at further reducing the risk of money laundering or terrorist financing.
I would like to make a slight diversion from our core topic to address an issue that is front of mind for many of us involved in fostering financial inclusion—that is, “de-risking”. Different people have different definitions of this term. At its core, I think about de-risking as a decline in correspondent bank relationships and a loss of access by money service businesses to banking services in certain jurisdictions. We know that correspondent banks and money service businesses play an important role in channeling financial resources within and across economies and, in doing so, help us further our financial inclusion goals. So, Treasury is committed to addressing concerns about de-risking in a way that accomplishes our joint goals of supporting financial inclusion and protecting the financial system from abuse.
Treasury has developed a plan to (1) bolster understanding of de-risking through better data collection and analysis, (2) improve communication about existing guidelines addressing anti-money laundering and countering the financing of terrorism (AML/CFT), and (3) support implementation of AML/CFT by countries across the globe in order to enhance the confidence of U.S. banks in the AML/CFT programs of their correspondent account holders.
Treasury is also working with FATF and the Financial Stability Board, which recently established a group to coordinate its work on the de-risking issue.
I will end by noting that the challenges covered in the Report require capacity-building. Treasury is working to help other countries build the capacity and expertise to face these challenges through bilateral technical assistance provided by Treasury’s Office of Technical Assistance (OTA). OTA works with our global counterparts -- be they finance ministries, central banks or revenue authorities – in emerging markets. Our technical assistance is exclusively focused on what we know best: public financial management. This ranges from designing government debt programs to enhancing bank supervision. But more directly relevant to the Report, OTA works hand in glove with bank supervisors and financial intelligence units to help our partner countries strengthen their AML/CFT regimes. And, in the past few years, driven by the requests of our client countries, OTA has increasingly focused on providing technical assistance to countries looking to roll out—or enhance—their financial inclusion programs.
Let me end where I began, by again thanking and complimenting the Center for Global Development and its Financial Inclusion Task Force for a timely, thorough and useful piece of research.
We at Treasury applaud the authors—and all of you here today—for your commitment to financial inclusion. We look forward to working with you in the months and years ahead. Thank you.