Unlocking financial inclusion: Transition to digital payments

The role of the digital euro in broadening financial inclusion

In 2017, the World Bank identified approximately 1.7 billion unbanked adults globally. Catalysing financial inclusion aligns with fostering economic growth. Yet, barriers persist, including distrust in financial institutions and services.

Exploring cryptocurrencies and stability solutions

In response to this distrust, some individuals have turned to cryptocurrencies, enticed by their promise of decentralization and autonomy from central authorities. However, the inherent volatility of cryptocurrencies poses a significant challenge, undermining their suitability as a reliable medium of exchange. To address this volatility, stablecoins emerged as a potential solution. Yet, concerns persist regarding the security of stablecoin transactions and the management of private keys, particularly among the unbanked population with limited financial literacy.

Traditionally, cash has been the primary medium of exchange for the unbanked. However, the COVID-19 pandemic catalysed a rapid shift towards digital payments globally. With lockdowns and social distancing measures in place, individuals increasingly turned to digital platforms for their financial transactions. Notably, in India alone, the pandemic prompted an astonishing 80 million adults to make their inaugural digital transactions, highlighting the growing relevance of digital finance in a post-pandemic world.

Central Bank Digital Currencies: Key to inclusive finance

Central Bank Digital Currencies (CBDCs) are considered as digital equivalents of traditional cash. They offer a host of advantages in an increasingly digital economy, including accessibility, lower transaction costs, enhanced privacy, and robust security features. Discussions surrounding CBDCs often center on implementing a two-tier system that leverages existing financial intermediaries, such as commercial banks and payment service providers, to facilitate access for the unbanked population.

The potential benefits of CBDCs extend beyond individual users to encompass micro-, small-, and medium-sized enterprises (MSMEs) and government agencies. By shortening settlement cycles, improving transaction efficiency, and reducing costs, CBDCs can significantly bolster the operational capabilities of MSMEs.

Moreover, pilot projects have demonstrated how CBDCs can streamline the delivery of government subsidies, ensuring greater precision and reach, as exemplified by initiatives in China's Jiangsu and Fuyang provinces.

Government payments use case: Precision and reach

Under the umbrella of 'government payments,' CBDCs offer governments a powerful tool to enhance the effectiveness of subsidy distribution. By leveraging digital currencies, governments can ensure that subsidies are targeted more accurately to those in need, thereby alleviating financial hardships and promoting social equity. This targeted approach not only optimises the allocation of resources but also serves as a gateway for individuals to embrace digital financial services.

Managing the transition: Offline payments and financial inclusion

Financial inclusion hinges on central banks' ability to provide diverse, interoperable devices. It necessitates clear communication, ethical considerations, and inclusivity.

In the pursuit of financial inclusion, offline payment capabilities play a pivotal role, particularly in regions lacking reliable internet or mobile connectivity. The importance of offline functionalities is underscored by their resilience in the face of natural disasters, ensuring continued access to financial services when traditional communication channels are disrupted. Policymakers must prioritise the development of user-friendly offline CBDC solutions, taking into account the affordability and accessibility of compatible devices.

A multifaceted approach to financial Inclusion

Empowering financial inclusion hinges not on a singular device or technology, but notably on the capacity of central banks to offer diverse operational modalities. This will surely enhance their effectiveness and ensure their compatibility, setting the standards high in the financial world. Only then, the Central Bank can achieve their objective, and offer the ultimate payment method, covering all the usecases, for all the citizens. 

Learn more about Worldline Digital Currency and visit our page about Central Bank Digital Currency (CBDC).