The exploration of greater inclusivity of minority customers in the financial system was a prominent aspect of the virtual Washington DC Fintech Week conference. Many ideas born from fintech are designed to break down certain institutional habits and patterns, usually to elevate overall efficiency.
DC Fintech Week brought together regulators, central bank representatives, and private sector institutions to discuss such matters as inclusivity. That includes recalibrating fintech to better understand diverse communities and meet them where they are rather than continue practices that might unfairly misjudge or overlook them.
Efforts in inclusivity can be found in domestic and international arenas. During a session on “Minority Banks and the Technology Stack,” Jelena McWilliams, chairman of the board of directors for the Federal Deposit Insurance Corporation (FDIC), said it can be essential for community development financial institutions (CDFIs) and minority deposit institutions (MDIs) to be able to enter into third-party technology partnerships that allow them to have broader platforms without the onboarding and building up investments that can be prohibitively expensive for very small banks. “I see that as an opportunity to expand their bases, to offer more products and services in an efficient manner,” she said. “The trick for us on the regulatory side is how do we manage those partnerships.”
The desire is for responsible scaling up, McWilliams said, while keeping in mind that not all third parties function in the same ecosystems as such banks. FDIC and its sister agency created pathways, she said, to consider third-party partnerships, including initiatives on how to expand economic inclusion through MDIs and community banks. Attention is also being aimed at how to change fundamentally the relationship of third-party service providers and small banks, including MDIs and CDFIs.
A project is in development, McWilliams said, for a standard-setting, public–private partnership that would do the due diligence process for onboarding third parties. “That way we can save time for small banks that maybe has a staff of 10 from spending 100 to 200 hours onboarding this third-party technology provider and being able to engage in a partnership,” she said.
On the international front, the rise of digital currency could be a gamechanger for the economic futures of regions that have not yet benefitted from innovation being pushed elsewhere by major financial institutions. Timothy N.J. Antoine, governor of the Eastern Caribbean Central Bank (ECCB), said the eight island states in his monetary union can face issues with cross-border payments because of the dynamic geography. Each country can include multiple islands as part of their territory within the archipelago.
“Our financial system is extremely bank-centric,” he said. “About 85% of assets are controlled by commercial banks.” There is also very high usage of physical cash across the region, Antoine said. “Payments are too slow and too expensive.”
DC Fintech Week founder Chris Brummer said the ECCB made history with DCash, an all-digital currency for the Eastern Caribbean, alongside Sand Dollar of the Bahamas. He asked Antoine what policy goals were set for DCash. Brummer is the director of the Institute of International Economic Law at the Georgetown University Law Center.
Antoine said three policy goals were set for DCash. “Payment system efficiency, financial inclusion, and increase resilience and competitiveness,” he said. “That is so important for small states, which are extremely vulnerable to external shock.” This can include natural disasters, pandemics, or financial crises.
Those goals are aimed at boosting economic growth, Antoine said, and propelling socioeconomic transformation for the region. “That is always fundamentally what is at stake here — shared prosperity for the people that we serve.” “We believe that to do that, we have to transform the region.”
DCash, he said, is an important instrument in a bigger conversation about the build out of a digital economy for the currency union. “One of the important benefits of DCash is financial integrity,” Antoine said, compared with physical currency, which can have complete anonymity, versus this type of digital currency, which offers managed anonymity. “Every person who wants to use our CBDC (central bank digital currency) has to be registered,” he said, though there is privacy in transactions.
Brummer asked why private sector competition, rather than central bank intervention, has not solved the inclusion question in digital transformation in financial services in the Eastern Caribbean. “Our small size means private sector operators would not enjoy the same scale economies they would in China, Mexico, or Brazil,” Antoine said. “Typically, it means the payback period is going to be longer or you are going to have to charge even more.” Furthermore, such institutions are amortizing their legacy systems, so there is no strong motivation or incentive to innovate faster. “If you look at some of the same operators in Canada, they’re not bringing those innovations to the Caribbean,” he said. “That’s the reason why we have not seen more private sector innovation in this area to solve these frictions.”