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The financial inclusion balancing act

An illustration of a hand holding a lightbulb.
Illustration: Sarah Grillo/Axios

Libra, the wildly ambitious and probably doomed Facebook-backed cryptocurrency, is innovative in many different ways. But there's one part of it that's deeply familiar — the way in which it sells itself as a way of bringing millions of people into the global financial system.

The big question: Can the private sector, and technology companies in particular, bring critical financial services to those who have been excluded from the global financial system?

Most fintech startups espouse two lofty goals: disrupting the banks and serving the underserved. But 20 years after Elon Musk founded the early fintech X.com (it later became PayPal), banks still dominate in almost every economy in the world. Meanwhile, the ranks of the underserved, at least in developed markets, have barely shrunk.

  • The big financial-services win for tech companies has been in China, where giants like Ant Financial have effectively replaced banks, and where mobile payments over systems run by privately owned technology companies are the rule rather than the exception.
  • Next on the list might be Indonesia, where tech giant Go-Jek's Go-Pay service is growing fast. But the velocity of old-fashioned cash is much higher in Indonesia than it was in China, which means that displacing it will therefore be that much harder.
  • Also notable is Kenya, where Safaricom, the big telecom monopoly, did a fantastic job of rolling out a nationwide mobile payments system. Safaricom, which is part of telecoms giant Vodafone, is not really a tech company, but neither is it a traditional bank. M-Pesa is now in 11 countries, including Albania, but has struggled to replicate its early success outside Kenya. It is shutting down entirely in South Africa.

In the U.S., the poor tend to be excluded from much of the financial system for various reasons. If you have unpaid debts, money in a checking account can be seized; banks also extract billions of dollars in fees from the very people who can least afford them.

  • Credit unions are generally much more consumer-friendly than banks, but their job is to serve their membership more than it is to provide financial services to the poor and the currently unbanked.
  • The fintech solution for financial inclusion is generally some kind of reloadable debit card. Increasingly, these cards can be virtual as well as physical, living in a wallet on your phone. Square's Cash app is one fast-growing example.

What all the fintechs have in common is regulatory arbitrage: They don't want to be regulated as banks. Just about every bank function is also offered by a fintech, and if cryptocurrencies gain broad adoption, then even central bank functions will start being offered privately.

  • As a recent IMF policy paper says, "if the usage of crypto-assets as money becomes more widespread, monetary policy effectiveness could be undermined."

Why it matters: Central banks have broad powers to shape the financial sector. In countries like Sweden and India, they can mandate moves toward a cashless society and build payments systems to encourage that. They also, crucially, monitor the health of the banking system. But if fintechs start disrupting hidebound banks, or start to dominate the financial sector, then sovereign nations will find themselves with a severely diminished macroprudential toolkit.