Today, over 1.7 billion adults worldwide are excluded from the formal financial system. This means nearly a third of all adults—including 8% of people within advanced economies—lack access to traditional banking services, including savings accounts, credit, loans, and insurance. Those trapped outside this system are stuck operating within the confines of the cash economy, over-reliant on physical assets, susceptible to financial shocks and stressors, and cut off from means of wealth creation.
Expanding access to financial services can drive down poverty and increase economic growth. Government investments in innovative public payments infrastructure, including central bank digital currencies (CBDCs), can help increase financial inclusion by lowering financial access barriers and forging new pathways of upward mobility. CBDCs act as government-issued digital cash–still in its infancy, this technology could take many forms, and central banks worldwide are currently evaluating their potential and even experimenting with implementation. With the right design, CBDCs could help bring about more equitable and inclusive government service delivery.
At the same time, decentralized finance, cryptocurrencies, and other fintech are transforming the way the world interacts and transacts. While private fintech solutions may contribute to financial inclusion, public sector leadership is necessary– private innovations depend on public infrastructure, and public solutions fulfill needs that markets are ill-suited to address. To that end, governments must create an enabling environment to support financial innovation and equitable financial access. This includes state-of-the-art digital payments infrastructure and public service offerings, and fit-for-purpose regulatory frameworks to spur innovation within the banking sector, the first and most legally secure point of access to savings and investment opportunities for the vast majority.
Nearly 90 countries globally are exploring the viability of issuing a CBDC; nine have already launched one, including the Bahamas, which unveiled the digital Sand Dollar in 2020 with the aim to increase efficiency and access for citizens spread across over 700 islands. The Bank for International Settlements predicts that 20% of the world’s population will have access to a CBDC within the next few years. For governments, CBDCs can help cut costs and improve efficiency (compared to money printing and distribution), increase the tax base, combat illegal activities, and optimize government services, such as disbursements and benefits.
The promise of a more efficient and effective government payment system is an attractive proposition for leaders around the globe. But to achieve these benefits, governments must ambitiously tailor CBDCs to the needs of their end-users—their constituents—especially those who are currently excluded from the financial system. While research to date has noted that a CBDC could improve financial inclusion and public services, little attention has been paid to the mechanisms by which these benefits would arise.
A well-designed CBDC is uniquely positioned to address barriers to inclusion, including by offering the unbanked alternative pathways to open transactional accounts and participate in the digital economy, particularly those who might otherwise fail to meet banking requirements. Central banks can do this directly using e-wallets or other account structures, or through partnerships with existing institutions. They can overcome prohibitive requirements by implementing tiered permissions structures, like the e-naira in Nigeria, which simplifies access for those without IDs or formal addresses. These accounts can serve as entry points for building personal credit and accessing integrated digital financial services, including credit and loans at market rate. Furthermore, CBDCs can help lower transaction costs by up to 50%, including for cross-border transactions and remittances, and increase transaction speeds from days to seconds. For households and local economies reliant on remittance inflows, this helps strengthen economic livelihoods and resilience.
But most importantly, CBDCs can help deliver public goods and improve government service delivery, including, for instance, government-to-citizen payments, such as social welfare disbursements (e.g., COVID stimulus checks) and loan and subsidy programs for smallholder farmers or small-medium sized enterprises. In fact, nearly 35% of adults in low-income countries opened their first financial account to receive government payments.
CBDCs can be programmed to carry out predefined functions or follow specific sets of rules, for instance, allowing governments to embed compliance in payments and enforce government policies, or to embed digital IDs and automate government payments. And they can build on innovations in the digital G2P ecosystem by supporting a well-integrated retail marketplace (e.g., increasing cheap and affordable financial service offerings for users), encouraging account usage, and boosting convenience and choice. Lastly, a CBDC can help stimulate the digitization of entire payments value chains, maximizing broad adoption by users and retailers – something other private digital currencies cannot offer at present.
Governments can only build a secure, accessible, and trusted CBDC by putting users at the center of the design process. Governments should aim to deliver a public digital service that addresses citizen needs by focusing on inclusion, user experience, and integration with government services and central bank strategies.
First, a CBDC is only as effective at addressing financial exclusion as the context and framework on which it is designed. Getting this right hinges on an understanding of what people want, what people need, and what barriers are preventing them from accessing it as much as it does any technical component. Governments must solicit citizen feedback as well as input from technical and subject matter experts across sectors, including organizations that specialize in financial inclusion, like the Gates Foundation. Government-backed digital currencies are as much a digital public service as a new form of money, and they should be designed as such—to serve the public, both in terms of simplifying and improving government service delivery and reducing barriers to cheap and affordable financial services.
To achieve this, governments should set up a pilot to test and iterate functionality and impact, and a regulatory sandbox so private providers can live test services based on CBDC infrastructure. This can help inform its design and accompanying regulations, while also strengthening public-private partnerships. This process should draw on diverse expertise—including, for example, behavioral economics and public service delivery experts, as CBDCs depend far more on individual behavior and service usage than typical central bank policy.
Secondly, a public-serving CBDC should set out to complement, not compete with, new and existing financial services (both traditional banks and fintech companies). To realize this level of public-private integration, governments should pursue a hybrid CBDC model, or an analogous design, meaning CBDCs would be backed directly by the central bank while permitting intermediaries, such as retail banks and fintech services, to handle payments and services. This model has shown promise in Cambodia, for instance, where the use of a hybrid model helped expand CBDC benefits from 200,000 Bakong wallet users to 5.9 million citizens by integrating with online banking apps. In a hybrid model, governments can and should introduce a public interface alongside private providers, to ensure all citizens have the option to directly hold digital cash without a third party. This digital public service would go a long way in addressing the financial inclusion and G2P concerns above.
Governments should include banks and payment service providers in the technical design process to ensure broad integration and interoperability of services. Because the choice of vendor(s) matters to broader ecosystem development, governments must also rethink government-vendor partnerships for developing and designing CBDCs. This includes ensuring built-in contract flexibility allowing central banks to switch or engage with multiple vendors as they see fit.
Lastly, a CBDC without universal buy-in from users and merchants is unlikely to increase financial inclusion. The ultimate success of a CBDC boils down to user adoption—and user adoption comes down to the real and perceived utility for users, including ease of use, cash-like expediency, and trust. Thus, it is essential from the outset that governments take steps to raise public awareness and engage users (e.g., citizens) in the design and testing phases. Challenges persist, however, including distrust of financial institutions (30% of the un- and unbanked in the U.S.). Securing buy-in comes down to difficult choices on privacy (how to achieve cash-like anonymity while mitigating illicit transactions), safety (ensuring full confidence in the security of funds in the event of cyber-attacks or bank runs), and flexibility (meeting people where they are, including offline and low-tech capabilities).
To develop a simple, user-friendly, and accessible CBDC for all citizens, governments should lean on human-centered design and user-research expertise as well as those who specialize in digital accessibility for people with disabilities, impairments, or socio-economic disadvantages. In instances where that expertise exists within government, such as with 18F and the U.S. Digital Service in the U.S., governments must ensure these agencies are an integral part of the process, if not leading it.
CBDCs do not offer a silver bullet for financial inclusion. But, if designed thoughtfully and with the public good in mind, they can help increase access to cheap and affordable financial tools and services, improve public service delivery, and usher in a new financial system that works for everyone, everywhere.