Let’s Explore the Connection Between Central Bank Digital Currencies and Financial Inclusion

According to the Reserve Bank of India (RBI), India’s financial inclusion index improved from 43.4 (in 2017) to 60.1 (in 2023). At the same time, the global financial inclusion (FI) index improved to 63.4 in 2023. Despite the recent progress, a significant portion of the world’s population remains excluded from the global financial system. According to the 2021 survey by Global Findex, 1.4 billion people remain outside the formal banking and financial system.

The World Bank included FI as an important goal to achieve 7 of its 17 goals for sustainable development. Recently, the G20 also affirmed its commitment to implement financial inclusion across the globe.

The impact of financial exclusion is devastating in both developed and developing economies. Lack of easy access to financial services can elevate poverty levels and hamper economic opportunities.

Central Bank Digital Currencies (CBDCs) can play an important role in promoting financial inclusion. Let’s see how in this blog.

What is Central Bank Digital Currency (CBDC)?

As the name suggests, CBDC is a digital currency issued by the country’s central bank (for example, India’s RBI). Other examples of central banks include:

• The U.S.-based Federal Reserve System
• The People’s Bank of China
• The Bank of Japan

Built using Blockchain technology, CBDCs enable digital transactions through decentralized ledgers. Issued and regulated by central banks, they have also denominated CBDC as the national unit of account.

CBDCs are primarily available in two formats:

• Retail CBDCs are similar to physical cash (but in digital form) and are fit for use by the general public including business enterprises.
• Wholesale CBDCs are only used for inter-bank transactions and are accessible to selected banks and financial institutions.

Let’s understand why central banks are involved in issuing digital currencies-

• Decline in cash-based transactions: With the increase in digital payments around the globe, there’s been a significant decline in the volume of cash-based transactions. This has prompted central banks to switch to digital currencies.

• Rising public interest in digital assets: Digital assets like cryptocurrencies are gaining more interest from consumers. According to the European Central Bank, 10% of the largest households across 6 European countries own digital assets. Most consumers view digital assets with more investment potential than physical cash.

• Financial inclusion: Financial inclusion is also a driving force behind central banks issuing CBDCs. When properly implemented, Retail CBDCs can improve digital payments by providing a secure mode for daily transactions. Additionally, CBDCs can act as the entry point for the unbanked (or underbanked) population into the formal banking system.

How do CBDCs enable financial inclusion?

With its Digital Rupee, India launched its CBDC to promote financial inclusion. According to June 2023 numbers, over one million users and 262,000 merchants in India have performed CBDC transactions. Financial industry experts rate CBDC as the “transformative catalyst” that can elevate financial inclusion to the next level.

Here are some reasons why CBDCs can enable financial inclusion:

• Digital payments: In the post-pandemic era, the percentage of individuals making digital payments has rapidly increased. When properly designed, CBDCs can encourage the financially excluded population to switch to digital payments. Going ahead, CBDCs can provide easy access to other financial services like savings, insurance, and loans.
• Wide accessibility: With the right government support, CBDC is widely accessible to the general public (just like cash) including individuals without a bank account. Other forms of digital payments like UPI require individuals to have a bank account. On the other hand, unbanked individuals can access CBDCs through their mobile phones or digital wallets.
• Secure transactions: As they are built using Blockchain technology, CBDCs can ensure secure transactions. This protects individuals from the dangers of cyberfraud or online threats, thus encouraging them to participate actively in digital payments and transactions. Through faster settlements and safe transactions, CBDCs are the right tool to build business confidence among more retail merchants.
• Lower costs: Lack of capital is among the reasons cited for financial exclusion. With other forms of digital payments, individuals still need to maintain an active bank account with a minimum balance. This is not the case for CBDC consumers. CBDCs are a cost-effective mode for low-income individuals to make online transactions. In areas of poor Internet connectivity, CBDC is still accessible through communication technologies like RFI, NFC, and Bluetooth.
• Digital literacy: With their easy and user-friendly interface, CBDC applications are also ideal for users without (or poor) digital literacy. Individuals without digital literacy can train themselves properly to use CBDCs, thus further boosting adoption.

Conclusion

In the drive towards financial inclusion, we are seeing the growing role of digital technologies in making this transition. The 2020 global pandemic further accelerated the adoption of digital payments across the globe. Backed by central banks, CBDCs have shown a lot of promise in delivering financial services to the unbanked population.

As a digital payment enabler, Verinite is in tune with the latest technology-driven innovations in the financial sector. We work with a variety of financial entities including banks, fintech, and third-party payment processors.Get in touch with us to learn more about digital currenci