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M-Pesa
AP Photo/Sayyid Abdul Azim
What’s the American equivalent of M-Pesa?
DEVELOPING SOLUTIONS

Vikram Pandit on how to address America’s two-speed economic recovery

Vikram S. Pandit
By Vikram S. Pandit

Chairman, TGG Group

I’ve had the opportunity over the last few months to meet bankers and regulators from around the world to discuss their economic growth plans, the impact of rising inequality in wealth and incomes, and in some cases, extending the reach of their financial systems.

Since the crisis, central bankers have done a yeoman’s job supporting the world’s economies—and asset prices have increased as a result. The Dow Jones Industrial Average has risen 165% since its lowest point during the crisis, benefitting those with substantial investable assets.

However, the global economic growth rate continues to be inadequate, indebtedness is rising, and the number of global unemployed is likely to increase again next year, according to recent estimates. The news isn’t rosy for people with jobs either. Inflation-adjusted incomes for the middle class in the US have not increased since 1999.

In addition, new regulatory requirements, combined with legacy cost and compensation structures, are driving large banks primarily to focus on the more profitable affluent or “prime” customer base in the US. Leaving the growing number of those with no or tarnished credit scores—another side effect of the recent credit crisis—with limited access to credit and basic and affordable financial services.

The result of this confluence of events is not surprising: there is a two-speed economic recovery in America. One speed for those with rising incomes, rising wealth and unencumbered access to financial services. And one for those with stagnant incomes, minimal returns on savings, and limited access to affordable financial services.

I don’t believe anyone would argue that this construct, based on an uneven distribution of gains from economic growth, is sustainable long-term, and I cannot imagine any country—developed or not—would be complacent with a two-speed economy.

But it’s not just that the two-speed recovery makes long-term growth elusive. This construct reveals a troubling issue: financial inclusion, a challenge that developing countries have been wrestling with for years, is now becoming a real problem for developed countries, too, as more and more people find it difficult to access the traditional banking sector.

Developing countries understand that access to a formal banking structure is bedrock for evenly distributing gains from economic growth. And they have worked for years to remove roadblocks by recognizing that financial inclusion is part of the central banking and regulatory mandate. The central bank of India, for example, considers access to be part of its core function, and Kenya has interpreted inclusion as a necessary part of safety and soundness.

At a recent Harvard Business School conference on financial inclusion, regulators from several countries agreed that innovation is a critical part of ensuring access and expressed a desire to explore new ideas and approaches to banking.

The results are promising. M-Pesa, a telecom based provider, is bringing more unbanked into the formal banking system of several countries, including Kenya and India, by allowing individuals to make deposits and withdrawals, transfer money and pay bills through mobile devices. And in May, Vodafone introduced M-Pawa in Tanzania which effectively is a bank account that can be accessed by phone and pays interest on deposits.

Innovative approaches to facilitating access are essential. But, more importantly, regulators at the gathering confirmed that the best way to ensure access is to foster a dynamic regime of cooperation between innovators, technology-based low-cost providers, and the government, regulators and central bank.

The ubiquitous availability of inexpensive technology and data sciences holds the promise of making affordable financial services accessible to all. And entrepreneurs are working hard to close the gap for the un- and under-banked in the US, using new technologies and business constructs to significantly reduce the cost of financial services, improve inclusion through electronic access and address the needs of clients. Examples of recent innovations include peer-to-peer lending for individuals and small businesses, mobile finance, cashless societies, and affordable savings and borrowing vehicles.

While American ingenuity is part of the answer, other countries have demonstrated that financial inclusion requires a dynamic architecture that brings together the innovators, providers and government, regulators and central banks to work toward the same goal.

The challenges to addressing a two-speed economy are numerous and take time. But financial inclusion, the bedrock for more even distribution of gains from growth, is bearing fruit elsewhere, and the developing world can provide a roadmap for fostering inclusion everywhere.