I often get asked whether Central Bank Digital Currencies (CBDCs) will bring banking to the unbanked.  A CBDC is a solution for some but not all problems, and like many other systems, it may create more problems than it solves.  The banked vs unbanked ratio varies significantly by region and can most obviously be tied to the level of economic progress in that region.  First-world countries do tend to have the highest levels of banked adults (read: adults with at least one bank account); third-world countries, on the other hand, generally have lower numbers of banked adults. It’s not all about technology - the economy in a given region or country will determine the need to be banked in the first place.

Urban vs Rural

The dynamics within rural regions tend to work differently than in big cities.  Rural communities may not have bank branches or banking machines available and, in some cases, may require hours of travel just to get access to either of them.  Within urban settings, the necessity to transact in currency is more urgent since residents need to pay rent, utilities and other services.  

Access to Technology

Access to technology and connectivity to the broader world is expanding at a staggering rate.  Mobile phones are becoming de facto personal devices in almost every corner of the world.  Mobile networks are bringing telephony and potentially data and internet access to more remote locations.  It is actually getting harder for many people to find places where they are not connected.  So the ability to access and transact using digital cash is winning when compared to physical cash or various forms of bartering transaction.  The cost of owning and using the dumbest of “smartphones” that could support a digital wallet or at least an interface to a cloud-based digital currency account is plummeting.  However, even with access and availability soaring while costs are dropping, there are still barriers to access in many regions worldwide.

Literacy and Numeracy

One of the barriers may be some combination of functional literacy and numeracy within specific population segments. This can pose a significant challenge for accessing and using currency and banking.  Picking up a smartphone, recognizing the icon to open an app, and using that app is simple enough for most children these days, but comprehending words or numbers within the app can still be challenging.  Significant factors in the success of any digital currency will include the accessibility and usability of that currency and the wallets and services for illiterates, innumerates, the blind, or any other challenged individual who needs to engage with that currency.

China Setting the Stage

China is one of the best examples we have to demonstrate successes and failures in digital currency.  China is a large country with a population of over 1 billion people who are spread among some of the world's largest cities and some of the remotest regions.  Even with high population concentrations in large cities, China has barely over 60% of its adults banked. You can also see issues with literacy in their usage of apps like WeChat - over 87% of the messages in WeChat are exchanges of voice recordings.  While voice is admittedly quicker and easier than keyboarding messages in Chinese, it also points out that the text messaging feature is not always accessible to all users.  Most users can open their phone, tap on the WeChat icon, tap on a recognizable picture or avatar of a person they know and then tap on the microphone to record their message and then hit the button to send. Receiving voice messages from the alerts is even easier.  For individuals with any level of literacy challenge, this is the repeatable model of visual cues that they need to rely on to use these tools.  

Tapping your phone to transact via digital wallets with merchants may solve some numeracy issues. I have witnessed people who walk into shops in Europe and Africa to buy goods and essentially just hold out handfuls of money to the merchant.  The buyer seems pretty sure they have more than they need, but now they must also trust the merchant to take the right amount from what they are offering.  Using a digital currency for this scenario, the merchant rings up the regular total, the patron taps their phone, and both of them hope for the best.  At least in future, the shop owner may not know or realize that the customer is an innumerate.

But digital currencies and smartphone banking do not always bank the unbanked.  I was directly involved in Bradesco’s build of NextBank which launched along with neoBank and a couple of other all-digital smartphone banks in Brazil to specifically target the unbanked population in Brazil.  While they have shifted a swath of existing users to digital banking, the ratio of unbanked to banked has barely changed by 1% after 3 years.

Staying Unbanked

While most of the unbanked are in that mode by circumstance, a small population segment is purposely unbanked.  Whether due to trust or other issues, they simply are not interested in dealing with banks.  The digital model of a currency wallet on a smartphone or in the cloud may be more appealing to this segment.  Some banked individuals may choose to take advantage of a digital wallet to purposely unbank themselves.  For some CBDC models, this may be an option.  Digital wallets could also mean that the penalties of being unbanked are also less than with current economic models.  It would be possible to be unbanked and show a pool of value or wealth from a digital wallet, without the need for a bank, when using digital currencies.  

The Great Underbanked

While there is a lot of talk about wooing the great unbanked masses, the reality is that almost half of the world's unbanked are split between Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan.  The other 54% of the unbanked are spread out amongst all other countries.  In countries like Canada, the United States and the UK, the story will be less focused on the unbanked and much more focused on the underbanked.  

Many people in first-world economies get set on a bank by their parents and don’t do much else.  They may look at the services and dabble with a credit card. Still, they are rarely taking advantage of all the opportunities for investment and growing their financial footprint in the economy.  Not venturing into investments or other financial services is likely a lack of financial literacy for many people.

If you’ve had any experience with cryptocurrencies, you would have a much deeper appreciation for what operating from a digital wallet means.  There is a significant opportunity for financial independence from banks and much more potential for control over your finances.

We’ve seen a recent surge of ‘marketplace banking.’  In the current economic context, this a bank creating an ecosystem of fintechs and financial services for you.  In a CBDC economy where you have digital wallet independence from banks, ‘marketplace banking’  means having a google store equivalent of different financial services, investments and opportunities to leverage your money for your benefit.  Essentially you won’t be limited to one single bank or their niche marketplace.  Want to earn interest on your money? You could search through dozens of different banks and providers for an offering that will pay you interest.  Simply tag the amount of money you want to pledge to the product and start earning.  You don’t even need to transfer the money anywhere - it is simply looped into a smart contract.  That smart contract lets the interest-bearing product provider know that they have a sum of money that they can leverage for other banking activities and the person pledging the money to the product gets paid the interest on an agreed schedule.

The move to CBDC will highlight the need for more emphasis on financial literacy going forward.