The global pandemic exposed many existing government distribution channels for financial aid as inadequate. With roughly one quarter of the world’s population unbanked, a number of stimulus programs faltered and rolled out too slowly and unevenly – including in developed countries – because of a reliance on traditional bank accounts for payments. 

Central Bank Digital Currencies (CBDC) can help governments overcome this shortcoming in the future and significantly boost financial inclusion efforts overall. Instead of relying solely on bank accounts or mobile money platforms, CBDCs have the potential to enable Central Banks to directly distribute funds to their citizens, augmenting their ability to receive aid, make payments, and engage in commerce.

For many countries, this change could be transformational, improving access to government and financial services that help advance financial access, participation and equity, and overall well-being. 

Mobile Access as Key

Of the people who do have bank accounts, many remain underserved and unable to access the full range of basic financial services, such as savings, loans, mortgages and other forms of credit. In the United States, for example, about 14 million people are unbanked, and 50 million are underbanked. Two-thirds of those unbanked adults also own a mobile phone, an important prerequisite for an effective CBDC rollout. 

Success in using mobile money accounts to expand financial inclusion in Sub-Saharan Africa has shown promise for accelerating adoption of CBDCs and improved financial well-being for traditionally underserved communities. According to the most recent Global Findex Database, despite concerted efforts to expand the number of people in the region with an account at a financial institution, accounts rose just 4% between 2014 and 2017 while the share of people using a mobile money account grew roughly twice as fast during that same period. The same is true in many other regions around the world.

This global embrace of financial services over a phone could pave the way for CBDCs in other regions like Mexico where only 36.9% of the country’s population is banked but 89% of people have mobile phones. A similar juxtaposition of bank account and mobile phone access plays out in much of the developing world, providing a readymade path to CBDC adoption and financial inclusion. 

Designing for CBDC Success

Increasing financial inclusion is a common goal and an emerging point of emphasis for the 80% of Central Banks currently exploring CBDCs. Retail CBDCs can help the unbanked and underbanked in two ways: by establishing a more inclusive digital payments ecosystem and creating financial data identities, often seen as a digital human right and a keystone to financial inclusion, particularly in frontier markets. Even in the Bahamas, a country with a relatively high rate of financial inclusion, the launch of its Sand Dollar is seen as a boon for financial access because it will extend payment services to remote communities.  

CBDCs enable improved financial access and equity because digital currencies designed for transactions confer critical benefits like speed, affordability, portability, security, and transparency. This helps groups of people normally reliant on cash and informal economies to establish a financial identity, to more readily receive government aid, send and receive remittances, travel safely in remote regions, and more. 

But in order for CBDCs to realize these gains and maximize their potential, Central Banks must ensure they are designed for interoperability instead of simply replicating today’s siloed financial institutions and mobile money networks. Interoperability comes in two flavors, domestic and cross-border. Domestically CBDCs will need to integrate into existing payment schemes, such as merchants and eCommerce, as well as allowing P2P transfers. Internationally CBDCs can contribute to an efficient and low cost cross-border payment experience, maximizing the financial reach and capabilities of these traditionally underserved populations, providing them an easier path to participating in the global economy.

Done properly, CBDCs have the potential to create better national and regional payment infrastructures, improve access to global markets, and greatly enhance financial equity for the world’s un- and underbanked. 
Contact the Ripple CBDC team at cbdc@ripple.com or download Ripple’s most recent CBDC whitepaper to learn more.