Q&A: Why the Gates Foundation is working with governments to digitize payments

India’s most recent economic survey devotes a 40-page chapter to universal basic income. The Bill & Melinda Gates Foundation appears in the footnotes for their work with the Indian government to analyze the impact that UBI would have on financial inclusion. “Our role at the Gates Foundation is certainly not to evaluate the merits of UBI overall, but rather to help the government estimate how much that would expand the payments grid,” said Daniel Radcliffe, deputy director of innovation and research on the Gates Foundation’s Financial Services for the Poor team, which is responsible for expanding access to digital payment systems. He spoke to us about his work at the foundation, how digital financial services can boost government accountability — a subject he recently wrote about for Devex — and what role the global development community can play. These are takeaways from the conversation, edited for length and clarity. What is your team focused on now? We have a hypothesis that payment systems around the world have been built using legacy technology, and they’ve often been built to favor incumbents or rent seekers at the center. [So the question is], can we build a global reference model for a payment system that is as inclusive, open, low cost and fraud resistant as possible? By creating an open reference model, using best-in-class payment technology and software, could you help countries who are trying to improve their national payment system leapfrog? Focusing on the public goods that can unlock a range of innovators as opposed to partnering with individual providers is an important theme you’ll see across our team and others at the foundation. Are you putting something in place that is catalyzing a number of providers to innovate as opposed to one? That naturally gravitates us toward solutions that are systemic and platform-wide as opposed to directing too many resources toward individual providers and helping them scale. Often, the most catalytic roles we can play are on policy and regulatory change. You recently wrote a paper on “Digital Payments as a Platform for Improving State Capacity,” in which you outlined three recommendations for governments. Can you expand on those recommendations and how they were informed by your work in India? Once India understood that payment connectivity and identity [technology] could deliver political benefits and significant gains in public service delivery, then digital financial inclusion started rolling. Regulatory reform started moving faster; all of the levels of the government machinery started migrating from cash to digital. In countries where that political imagination has not been sparked, you’re seeing slow progress across the board. Let me start with the first point, which is that governments can build shared infrastructure. In some ways, we’ve been misled by the Kenyan experience, which was very much driven by private-sector mobile money deployment, whereas the digital financial system of the future will probably have much more shared infrastructure at the center. There’s a payment infrastructure that governments and central banks can help build, and an identity infrastructure. The second point is priming the pump, and this is essential. What you saw in India and Iran were governments committing to and executing on driving significant government payment volumes into these accounts. It’s hard to overstate how important that is as a signal to financial service providers that there are going to be economic returns to setting up payment infrastructure in these poor and rural communities. The third and final point is working with central banks to craft appropriate regulations. Central banks are often independent in these countries and should have autonomy over doing what’s right for the financial sector. But the key point here is that the benefits associated with digital financial inclusion are diffuse across government. The ministry of rural development can make its payments more efficiently; maybe the ministry of finance can collect revenues more efficiently or restructure fuel subsidy programs; the health ministry can make its payments to frontline health workers more efficiently, but it’s spread across all of these government departments. And the risks associated with regulatory reform are concentrated on the central bank. That points to the role of advocacy, which is a big focus at the Gates Foundation across priorities. How do you view the role of advocacy in financial services for the poor? If someone were to ask me what was the biggest surprise when I became a development practitioner about what catalyzes change, it would be the importance of getting the advocacy right. We may be able to craft a powerful argument for how financial inclusion boosts household welfare. However, we have to think very carefully about what is in the interest of the government officials or central bank officials who are ultimately the core drivers of financial inclusion agendas in these countries. Finance ministers don’t get up in the morning wondering about how many people have bank accounts and how many people are financially included. They do worry about whether their government has a perception of fighting corruption, and of effectively delivering services to citizens, and whether they have fiscal space to operate and do things that are public priorities. In many ways this paper is an attempt to reframe the advocacy interaction with governments and say that payment connectivity is about much more than financial inclusion narrowly defined. It can also be a catalytic way for governments to connect directly with their citizens, to create fiscal space and to fight corruption. What role can the global development community play in advancing financial services for the poor? If you take multilateral and bilateral development banks, a lot of financial inclusion spending historically has gone toward microfinance loans. Over 100 million people have received these loans, but it’s not making a massive dent in the 2 billion or so that are unbanked. What we’re starting to see — and the African Development Bank is starting to get involved — is work with countries to build this infrastructure at the center that would then unleash innovation at the edges. I think that’s a pivotal shift and it would be very interesting to see the development community spend more effort trying to crack open payment systems and robust identity systems that would unlock innovation as opposed to trying to help, say, individual mobile money deployments succeed; instead making the system as competitive and low cost as possible at the center. 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