In the 2018 Global Microscope rankings of countries whose institutional and policy environments support financial inclusion, there is one newcomer among the prized top five: Uruguay checks in as third in the overall rankings. Only a few years ago – in 2014 – Uruguay languished in fourteenth place.
Changes in both Uruguay and the Microscope itself account for this rapid jump. Uruguay is energetically implementing a financial inclusion playbook that seems to be taken directly from the 2018 Microscope’s increased focus on digital transformation. Since some of my favorite places and some of my favorite people are in Uruguay, I’m happy to have a chance to spotlight this small country that lately seems to be getting everything right.
Uruguay’s advance in financial inclusion exemplifies what a government-led approach can do if it is in sync with local capabilities. The government took a major step in 2014 when its new Law on Financial Inclusion strongly promoted a shift in the economy to digital payments. Among provisions too numerous to list here, two transformational measures stand out: first, the law requires employers to pay salaries electronically into accounts (to have been accomplished by mid-2017). Even gauchos working on cattle ranches are paid that way – or at least that’s what’s supposed to have happened.
Second, the law incentivizes the use of debit and credit cards through a 2 percent reduction in VAT (sales tax) for card-based purchases. With those changes in place, the average Uruguayan employee now receives money into an account and has a good reason to pay for things with a card associated with that account. These changes put Uruguayans well on the path toward a cash-light economy.
It’s not popular among everyone, however. “I’m fed up with this financial inclusion stuff,” complained my friend Mark. “I can’t buy gas at night anymore. The gas stations won’t accept cash.”
“What about using your credit card?” I asked him.
“I don’t trust the gas stations, so I’m not going to hand them my credit card,” he replied. Rather than switching, he simply stopped buying gas in the evening.
But even getting cash can be a problem. So many ATM robberies have taken place that the banks put less cash in them. “You have to go to the cash machine right after it has been filled,” he says.
Not all Uruguayans are as stubborn about cash as Mark. In fact, the Global Findex records that account ownership among adults there rose from 24 percent in 2011 to 64 percent in 2017, and the percent of people making or receiving electronic payments rose from 37 percent in 2014 to 59 percent in 2017.
Uruguay’s ability to make dramatic leaps is predicated on a number of enabling conditions that make the policy shifts actionable. The country already had widespread identification cards, well-functioning credit bureaus, and ubiquitous cellular connectivity. In one sense the digital financial inclusion push can be seen as a part of a larger digital drive covering realms from communications to education to finance. And in the private sector, the shift is enabled by a lively marketplace of software and fintech firms, some of which have organized into the Chamber of Fintech for dialogue with government. Government encourages innovation through test and learn approaches to regulation, and by avoiding placing barriers on the types of organizations that can enter the digital finance arena.
The Uruguayan approach to financial inclusion is focused on driving cash out of the system, more, perhaps than on actually extending financial services to the previously excluded. In the Microscope ratings, Uruguay’s lowest scores are on consumer protection, and the Findex results reveal a fairly significant gap in the inclusion of lower income people as well as a rural-urban divide. Most of the ranch hands on Mark’s farm cash out their earnings immediately to use cash in the local shops, so inclusion hasn’t yet become meaningful for them.
Uruguay’s experience underscores the need for the policy environment to mesh with the existing opportunities in the private sector. If policy gets out too far ahead of the private sector, even the most far-sighted policy may elicit little response from service providers. But as Chris Skinner argued in one of CFI’s 10 Essays for 10 Years on Getting Inclusion Right, when policy provides a well-conceived nudge that harmonizes with pre-conditions in the market, rapid change can follow. Hats off to Uruguay for putting it all together and to the Microscope for documenting the progress.