Joy Kim

Blog Post

&gt; Posted by Brenda Santoro and Ahmed Dermish with Kim Wilson

In uncertain times do developed economies have the resiliency in their financial inclusion processes to withstand rapid change without risking systemic stability and consumer protection?

Modern, nationally integrated systems, high-capacity supervision, and flexible policymaking are helping Germany turn the refugee crisis into an economic opportunity.

The German Federal Financial Supervisory Authority, commonly known as BAFIN, this fall relaxed requirements for opening a bank account. The <a href="http://www.reuters.com/article/us-europe-migrants-germany-banking-idUSKCN0SM15120151028">new rules</a> allow accounts to be opened with a stamped document from an appropriate German authority, such as BAFIN, along with a picture and personal information. Transitional rules are in effect until the approval of the law, expected this year. A directive in the European Union, which will begin in September 2016, will require similar access to bank accounts across the EU.

Citizens of developed countries may not appreciate the role a bank account plays in providing access to basic financial services. A bank account is more than a place to secure our money – in nearly every country, it provides high social and economic value. When a bank says we are trustworthy, even for a simple bank account, doors open for many services we take for granted such as access to electronic payments, basic utilities, housing contracts, education or small business loans. This works because banks use a vetting process to ensure they know exactly who we are, often referencing a nationally issued document such as a passport or driver’s license. For us, the account becomes another form of identity. For the banks, it ensures the correct people have access to funds. With a passport and a bank account, the world is our oyster, an entrée into other services and for the bank, it is an entrée into cross-selling and more profits as they learn more about us.

However, many refugees (we focus here on refugees, not routine migrants) arrive in Germany without passports or other forms of identity. The Germans have found a work-around to provide basic identification, and thus bank accounts for this previously excluded population. <a href="https://ec.europa.eu/migrant-integration/news/germany-a-bank-account-for-everyone-residing-legally-in-the-country-including-refugees">Estimates</a> are that more than 500,000 people in Germany do not have access to a bank account. In contrast, many countries do not provide such simplified access to accounts. Government regulations require intensive background checks and proof of identity. Their interest is to avoid the possibility of money laundering and financial crime.

Because of these barriers, refugees fleeing to the EU are forced to utilize informal channels for moving cash. These channels can be expensive and insecure, putting cash-carrying refugees at extreme risk. Refugees are not only vulnerable but are prevented from establishing themselves financially.

Germany’s solution is intriguing and raises several questions. Has it found a workable alternative to normally restrictive regulations? With more flexible requirements, could innovative technologies further incent financial institutions to provide basic accounts to those with less than air-tight forms of identification? And might we hope that technologies, coupled with lighter government and banking restrictions, will scale banking and other services beyond the refugee population to the many others who are financially excluded? Perhaps we can imagine a time when technologies enabled by lighter regulation contributes to lowering the risk of false identity and illicit activities.

Managing the risk

Germany is a member of the G8 and considered a global leader in financial sector stability. What will the global community of financial sector standard-setters, such as The Bank for International Settlements (BIS) in Basel, Switzerland, say about Germany issuing these accounts?

Our opinion is that the standard setting bodies (SSBs) are probably neutral on this issue. Their main concern is market and systemic stability. So how would broadening access to accounts for refugees impact stability?  Refugees brought into the system, under newly relaxed rules, will represent a very limited percentage of the total number of accounts, with limited purchasing power. It’s doubtful that they could have systemic impact.

Let’s presume however that the SSBs are less concerned with stability and more concerned with illicit use of bank accounts. The Financial Action Task Force (FATF), BIS and the Committee on Payments and Markets Infrastructures (CPMI) have all settled on a risk-based approach to regulating financial services, particularly when trying to enable innovation that would lead to better financial service access. Governments must clarify how they will mitigate and manage the risk of illicit use. For less developed countries, lowering KYC (Know Your Customer) requirements effectively means acknowledging trade-offs between having a significant population outside the formal system and increasing the risk that the banking system will be used for illicit financing. Lower requirements also means that governments concerned with international security (particularly the U.S.) must determine how they will mitigate the risk of new financial services innovations. Do they quash innovation because they fear it will accelerate illicit activities or do they celebrate it because it will promote more access and improve the lives of the excluded?

Germany, it seems, does not see it this way. For Germany, there is no apparent trade-off. It can (and does!) monitor retail transactions. It has a modern, electronic banking system that enables effective risk management. It has robust supervisory practices. For Germany, only a tiny population poses any risk at all, and there is no reason to believe that broadening access to accounts for refugees will impact systemic stability.  And on the off-chance that it might, Germany has the systems and governance in place to manage the risk.

By making it easy for refugees to transact electronically, Germany can track the movements and livelihoods of a vulnerable population. If you need a basic account to get housing, then the government of Germany not only has control over your funds, they will know where you live and how you transact. From the political perspective of those who fear terrorists entering the country, bringing refugees into the financial system is an elegant way of tracking potential “threats”.

BAFIN’s novel approach explicitly addresses concerns raised by banks regarding anti-money laundering regulations. Regulators assert that providing accounts to refugees in fact combats money laundering as it prevents uncontrolled flows of cash.  Account holders can be vetted and tracked for movement of funds, whereas in a pure cash economy an individual utilizing hidden channels for movement of funds cannot be effectively tracked.

Obviously, there should be a benefit to refugees. Many have liquidated their savings and may be traveling with hundreds or thousands of euro, in cash, on their person. Syria in particular is a sophisticated country with an educated population that has money. Syrian refugees need bank accounts for their own security. Imagine how perilous a refugee camp is without the additional effort required to protect your life savings.

Germany can manage the risk. Refugees need the service. It’s a win-win, and the SSB’s don’t have much reason for concern.

Looking beyond BAFIN

The refugee crisis is not only a “German” problem. Nearly all EU nations are impacted. Can we expect a contagion effect as Germany’s enlightened view cascades across these other markets?

It’s unlikely. Germany has demonstrated a unique political will to have compassion with the refugees. Relaxing the rules suits the needs of the current administration, and given Germany’s sophisticated administrative structures and financial clout, it also has the systems in place to justify its inclusive political positioning.

In contrast, many of the Balkan and East EU states do not have the systems or political will, and their history demonstrates a less welcoming approach to refugees crossing from North Africa. Britain, France, Austria, and Benelux could potentially adopt a similar measure to Germany. They all have substantial immigrant populations and are relatively more centrist. We doubt they will follow closely behind Germany, but perhaps if the program shows success, they may do so. France recently has been making moves to alleviate the situation in the migrant camps in Calais. With winter upon them, all the Northern European countries have an incentive to take a more active approach to integrating refugees. Sweden and perhaps Norway have the systems and possibly political will, but they are often seen as outliers (unfortunately), so it’s hard to say what their influence on other countries might be.

The attacks in Paris and threats in Brussels add an additional dimension to the challenges facing the EU and refugees despite the fact that the Paris attackers were legally residing in the EU. There is more and more pressure to ask questions first and open borders later.

It is unlikely that Germany’s approach towards undocumented refugees will spread. This is unfortunate. We have an opportunity to think more creatively about how we create and manage identity verification, and how our systems can be leveraged to provide opportunities to those without conventional documentation. Governments have a role to play in tempering the fears of the population by using existing systems to demonstrate risk management, turning the unknown into opportunity.

Brenda Santoro is an international financial services executive and graduate of the Fletcher School, Tufts University (any opinions expressed are her own). Ahmed Dermish is a Global Technical Specialist at the United Nations Capital Development Fund. Kim Wilson is Lecturer in International Business and Human Security at the Fletcher School, Tufts University.

Have you read?

<a href="http://cfi-blog.org/2014/02/07/financial-inclusion-for-whom-considering-immigration-and-citizenship/">Financial Inclusion... For Whom? Considering Immigration and Citizenship</a>

<a href="http://cfi-blog.org/2014/05/23/not-just-migrants-but-their-families-too/">Not Just Migrants, but Their Families Too</a>

<a href="http://cfi-blog.org/2015/09/04/combating-refugee-hunger-via-inclusive-finance/">Combating Refugee Hunger via Inclusive Finance</a>

Financial Inclusion and Immigration in Europe – Disrupting Identity Norms

&gt; Posted by Joy Kim, Financial Inclusion Analyst, MIX

<a href="http://www.centerforfinancialinclusion.org/inclusion-visualizer"><img class="alignright wp-image-19679" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/10/visualizer-whole-21.png" alt="" width="325" height="336" /></a>What’s better than reading about data? Visualizing it! Pardon us, then, as we offer a few words on CFI and MIX’s new FI2020 Inclusion Visualizer, a powerful tool to manipulate, visualize, and download images of data related to financial inclusion.

The Inclusion Visualizer, harnessing publicly available data from the World Bank, International Monetary Fund, Economist Intelligence Unit, and others, allows users to explore financial inclusion topics across country, region, and income levels. For the adventurous, users are able to customize the range of visualized categories and sub-categories. For example, do you want to know what percent of women with a primary school education or less have their own account at a financial institution? The Visualizer also offers targeted navigation options that focus on key areas, like the financial inclusion infrastructure, the policy environment, and technology.

How to Get the Most Out of the FI2020 Inclusion Visualizer

To get a better understanding of the landscape of financial inclusion around the globe, we suggest you begin by exploring Sections 1A through 1F. One particularly interesting section is Account Ownership (IC) because this metric is, perhaps, the simplest method for measuring financial access. Financial Inclusion Over Time (1B) illustrates changes not only in account ownership, but also with financial activities related to credit, savings, withdrawals, and deposits. As you’ll see, the world has seen growth in all of these activities with the exceptions of withdrawals and deposits, which implies that greater effort is needed on a global scale to increase usage of accounts.

After you’ve spent some time exploring the first sections, it’s time to dig in deeper. Although examining financial inclusion progress over time is important, connecting those changes with other relevant factors can help uncover which factors directly or indirectly affect financial behavior. The second and third groups of sections in the Visualizer allow you to explore the connection between financial behavior and factors including technology, infrastructure, income, and demographics. While correlation certainly does not mean causation, understanding whether relationships exist between two or more variables can help us begin to explore the various factors influencing financial inclusion efforts.

Let’s take a look at the Inclusion Visualizer in action.

Areas of Further Study

We know that mobile phone subscriptions have been rapidly increasing in every country since the mid-2000s. But is there a correlation between this technology adoption and the number of mobile finance accounts? The Visualizer will help us explore this question.

In the Use and Technology tab of the Technology and Inclusion section (2E), we see that within the low-income group, East African countries such as Kenya, Uganda, Somalia, and Tanzania have the highest number of mobile finance accounts (ranging from about 35 to 58 percent of the population), even though they do not have the highest number of mobile cellular subscriptions. This disparity leads us to ask the question: In countries with a relatively high number of mobile finance accounts compared to total mobile subscriptions, how are people using these accounts?

[caption id="attachment_19690" align="aligncenter" width="621"]<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2015/10/mobile-screenshot.png"><img class="wp-image-19690" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/10/mobile-screenshot.png" alt="" width="621" height="307" /></a> (click to enlarge)[/caption]

By examining the Use of Mobile Services tab we see that, for most low-income countries, sending and receiving remittances are the primary uses of mobile accounts. As is briefly illustrated here, the Inclusion Visualizer can guide you from a broad area of interest to focused, specific insights.

[caption id="attachment_19685" align="aligncenter" width="621"]<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2015/10/income-screenshot.png"><img class="wp-image-19685" style="border: 1px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/10/income-screenshot.png" alt="" width="621" height="194" /></a> (click to enlarge)[/caption]

Let’s take another example. What about the intersection of income and behavior? In the Growing Incoming, Growing Inclusion section, the Income and Use tab shows changes in the correlation between the daily income of the bottom 40 percent of the economic pyramid and financial services use. For almost all of the countries included in the Inclusion Visualizer, daily income did not change significantly from 2011 to 2014, but the amount of financial activities increased. The minimal changes in income are an insufficient explanation for the large increase in use, leading us to ask: Which other factors stimulated a greater use of financial products?

Answering this question would require additional investigations, but arriving at this juncture shows how the data overlays in the Inclusion Visualizer encourage us to dig deeper, and uncover areas of further study.

Be Curious, Explore, and Share

Each visitor to the Inclusion Visualizer will have different interests, questions, and perspectives related to the various financial inclusion topics. Our hope is that the easy-to-use tool provides a simple interface to play with the vast data related to financial inclusion, whether you’re a novice or an inclusion data veteran. And we encourage you to take advantage of the platform’s ability to visually capture your work - share the insights you uncover with colleagues and partners!

The FI2020 Inclusion Visualizer can be accessed <a href="http://www.centerforfinancialinclusion.org/inclusion-visualizer" target="_blank" rel="noopener">here.</a>

Have you read?

<a href="http://cfi-blog.org/2015/07/28/new-surveys-fill-data-void-in-chinas-microfinance-industry/">New Surveys Fill Data Void in China's Microfinance Industry</a>

<a href="http://cfi-blog.org/2015/09/02/filling-the-gaps-in-financial-inclusion-data/">Filling the Gaps in Financial Inclusion Data</a>

<a href="http://cfi-blog.org/2015/10/07/addressing-customer-needs-off-to-the-data-mines/">Addressing Customer Needs? Off to the Data Mines</a>

Joy Kim

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