Long Baitao Recommendation | First Deputy Governor of the Bank of France: Financial Inclusion in the Digital Age-How to Change the Status Quo?

Text / Denis Beau (Note: The content of the body of this article is from a panel discussion by Mr. Denis Beau, First Deputy Governor of the Bank of France, on the Singapore Fintech Festival 2019 on November 13, 2019.)

Translation / Long Baitao

Reviews / Long Baitao


The content of this speech is relatively simple and clear. The author does not intend to comment on the content of the speech, but I hope to take advantage of "financial inclusiveness (also known as inclusive finance)". "Financial inclusiveness" is a term that is overused by almost all financial institutions to highlight their social responsibility and moral high ground. In my opinion, all this is nonsense. In the real world, in the field of financial services centered on the banking industry, all are stories of a minority monopolizing social public power and exploiting it from the majority. It is ridiculous to talk about "inclusive finance" in this naturally monopolistic industry. Without changing the nature of the monopoly, providing basic banking services to people who cannot access banking services can only be called "improving the quality of services" at most, and is absolutely not qualified to call themselves "inclusive finance".

In a society with finance, the most basic financial service that individuals can access is the right to obtain and use funds, so inclusive finance should be the basic right around the creation and use of money, and the distribution of monetary benefits (that is, coinage taxes). s right. Money is a social public product, and the monetary system should operate in a way that maximizes public interest, which means that it needs to meet the requirements of financial stability and support sustainable economic growth.

In modern society, monetary authorities monopolized the public power of currency issuance and coinage tax in the name of the government. In the operation of the real currency system, the central bank and commercial banks share the power to create and issue currencies. The central bank creates and issues base currencies (such as cash and reserves) based on reserves (which can be government bonds, gold, or foreign exchange). Banks create deposit currency by issuing loans or purchasing assets (such as gold, foreign exchange, and securities), and destroy the deposit currency when returning loans or selling assets. The deposit currency of commercial banks generally accounts for more than 95% of the currency in circulation, and even in some countries (such as Sweden and Denmark) that are about to realize a cashless society, this ratio can be infinitely close to 100%. For simplicity, we collectively refer to central banks and commercial banks as banking. Therefore, in modern society, the banking industry has monopolized the right to issue currency and enjoyed the coinage tax exclusively. In countries where foreign exchange is compulsorily settled and foreign currency is used as a reserve to issue their base currency, residents who "sell" foreign exchange to the central bank are actually contributing reserves to their currency, but they are not entitled to share coinage taxes. When having to adopt a monetary policy of additional currency issuance, because of the "Cantilon effect", that is, the new currency will not be distributed to all currency holders through various channels in a completely fair way, the additional currency is easy to cause wealth Widening gaps or income imbalances.

Most classic money and finance textbooks describe capital as a rarity like land, so the use of funds requires a (interest) cost. But as mentioned above, more than 95% of currency creation is based on commercial bank (private) credit creation. In theory, new credit only depends on bankers 'optimism about the macro economy and the assessment of borrowers' repayment ability, so theoretically new credit can be infinite [1] . Therefore the price of money, ie interest, should not be "very high". The average spread in the US banking industry in 2018 is about 3.45%, and other countries may only be higher. Why is this number not 2.45% or less? Because the banking industry has monopolized the currency issuance right, commercial banks have not formed sufficient competition, and they may even "conspire" to manipulate the market interest rate level [2] . The monopoly system brings monopoly profits.

The most fundamental risk that threatens financial stability is the financial crisis. The root of the financial crisis is that commercial banks have created excess currency for credit boom and bust and asset price cycles formed by asset speculation. 10%, 10%, and 80% of the newly added currency are used for productive investment, consumption, and asset speculation, respectively. Their roles are to contribute real GDP, drive up CPI, and form asset price cycles. Therefore, the most effective way to curb the financial crisis is to control the creation and distribution of credit into the field of asset speculation. This is a fundamental and simple solution, but it will harm the interests of the banking class and the wealthy group with the largest number of financial assets. There are also technical difficulties that make it impossible to implement this solution in the real world. Therefore, in centuries of modern history, after the financial crisis and after each crisis, wealth is more concentrated in a smaller group is an eternal change.

The moral hazard of the banking industry is an unsolvable problem. The bank's limited liability company system, deposit protection plan, central bank's lender of last resort system, and government assistance can help distressed banks (because of liquidity risk, solvency risk, or financial crisis) to reduce losses to their shareholders, or Converting the bank's private debt into public debt, thus passing the risk on to the government / society. Therefore, shareholders and executives of commercial banks have a strong incentive to pursue high-risk behaviors and enjoy potentially high returns, but they throw all risks to the whole society. This is the moral hazard of the bank-the bank's distribution of benefits and risk taking are seriously unequal.

Satoshi Nakamoto created Bitcoin in 2008 and has since opened the door to digital currency in the world. The author believes that in the digital age, inclusive finance has the following possibilities.

First, everyone has the power to mint coins. Native digital assets are naturally secure, transparent, anonymous, irrevocable and highly liquid. Therefore, any native digital asset can participate in the form of decentralized asset mortgage as long as it can manage its market risk (referring to the risk of sharp price fluctuations in a short period) and liquidity risk, and provide custody and settlement functions Issuance of stablecoins. In this way, the threshold for participation in minting cryptocurrency stablecoins becomes low enough for all residents to participate. If a decentralized financial business model in which everyone can participate in coinage can be formed, the cost of currency use will naturally be reduced.

Second, look at everyone's contribution to the monetary system from a fair perspective and reward them accordingly. The successful operation of a currency ecosystem requires at least the following four participants and fair treatment of their contribution: (1) Contributors of reserves, who provide gold or foreign exchange for currency minting, or reserves of native digital assets; (2) Central banks and commercial banks create money and manage the supply of money based on reserve pools; (3) Non-end users who can influence currency acceptance, such as merchants or crypto asset exchanges can encourage or choose end-users to select a currency Use; (4) end users using currency, they decide what kind of stable currency to use in their own payment scenarios. The network externality of currency in the digital age has become extremely important and attracted more users to use and accept it. The fourth type of participants in the currency ecology is the source of currency network externality. Digital technologies such as blockchain and smart contracts allow quantitatively measuring the contribution of each participant to the currency ecology and allocating the coinage tax accordingly. The coinage tax is in the form of cryptocurrency stablecoins and can be directly assigned to the smart contract address.

Third, the use of smart contracts can precisely and finely control the creation and distribution of currency to the targeted field, so it can more effectively stimulate the flow of new currency to the productive investment field and restrain the flow of new currency to the asset speculative field. This kind of control of currency flow is the ex-ante or in-event control achieved through smart contracts, rather than ex-post control, which can significantly improve the effectiveness of monetary policy. This fundamentally brings the possibility of eliminating or significantly reducing the occurrence of the financial crisis.

Fourth, the use of public chains and smart contracts can also be used to more effectively achieve "Cantilon effects" such as "helicopters throw money" and avoid additional currency issuance, thus avoiding the unfair negative effects of traditional currency issuance.

Fifth, through the design of the currency's token mechanism, the matching of returns and risks can be better achieved, and the moral hazard problem of banks can be significantly alleviated.

Therefore, in the digital age, the "ultimate financial inclusive" that the author hopes for should be: everyone has no threshold to participate in coin minting; everyone uses funds at a reasonable cost; fairly measures the contribution of each participant to the currency ecology and gives rewards; is robust , Financial stability and sustainable development of the monetary and financial system.

Long Baitao

December 3, 2019

The following is the text:


Good afternoon ladies and gentlemen,

I am very happy to introduce to you today the issue of financial inclusion at this session. Thank you MAS [3] for providing me this opportunity to contribute to the conference.

Inclusiveness is an important issue for the financial sector, and even more so for society as a whole. This is important because it ensures that everyone has access to financial services. Without this approach, people would not be able or able to participate in the formal economy, accumulate capital, purchase goods and services, and develop entrepreneurial projects. This is important because it means not only growth in the financial sector and the economy as a whole, but also reducing inequality and ensuring that more vulnerable people, families and businesses are not excluded from economic development.

Of course, fintech can play a huge role in financial inclusion. They can provide new solutions, but they also present new challenges as new players enter the financial world and look at customer relationships in new ways. They also bring new risks: for example, excluding those unfamiliar with digitization, causing unforeseen deviations through process automation, or data security issues due to incorrect handling of personal data.

So is the digital age a financially inclusive well-being or a curse? To help us answer this question, this morning there is a session entitled "The Macro View of Financial Inclusion" at the conference. This afternoon, you will have the opportunity to hear many speakers sharing their experiences around a broader topic: What is Financial Inclusion 2.0? Can the blockchain work? What can regulators do? Where are we in developing economies that need financial inclusion the most, especially in Africa?

In order to participate in these forthcoming discussions, allow me to share with you the views of a central bank official and a regulator, my institution is mandated by law to support financial inclusion. I want to highlight the different ways we currently support financial inclusion and how we intend to adapt it to the digital age and improve upon it with digital tools.

1 / What has French banks done to support the inclusiveness of the financial sector?

Over the past few decades, French banks [4] have been given different tasks to support financial inclusion. Today, our contributions in this area are quite diverse and are a major part of our mission to serve the public. For central banks, this is not a traditional task: central banks usually focus on monetary policy and financial stability. However, I believe that all these missions go hand in hand: Whether we are working to achieve financial inclusion or price stability, the overall goal is the same-to support inclusive and sustainable economic growth.

With regard to financial inclusion, the role of French banks has always been to support the efforts of public authorities and the private financial sector to help expand access to financial services. Providing this support helps achieve three main goals: improving fair services, preventing unfair treatment, and improving financial knowledge. Let me give some examples.

To help improve fair services, French banks are part of the "account rights" procedure under French law. If the bank refuses to open a bank account for the customer, he / she can make a request to us. We will designate a bank within 24 hours. This particular bank account will provide basic services for free. In 2018, 50,000 people used this right.

Reducing the cost of using bank accounts is also crucial for financial inclusion. "Vulnerable" customers, for example, because of insufficient resources or bad credit, are most likely to pay for their account problems-an average of 300 Euros per year. That's why French law requires banks to offer specific benefits to these customers, including a minimum service that reduces monthly fees to 3 euros. To track the implementation of this provision, France has set up a bank inclusive observation post. It is chaired by the President of the French Bank and brings together public authorities, NGOs and banks, which has proven to be a very useful forum.

The second example is the "credit intermediary" function. It is led by an official of the Bank of France and targets small businesses and relies on the operational support of the Bank of France's local branches. The aim is to help entrenched entrepreneurs with banks and creditors to mediate to overcome these financing difficulties. Since the function was established in 2008, 20,000 mediations have been successfully conducted. This mediation function not only provides financing, but also reduces the risk of beneficiary companies going bankrupt.

Another contribution that French banks make to improving services for vulnerable people is to support aid to microfinance activities. French banks strongly support these activities by funding a credit guarantee fund (5 million euros in 2018) and establishing a network of local correspondents.

To help prevent unequal treatment, French banks are involved in preventing and addressing excessive household debt. People who encounter this type of problem can go to the French bank's local branch network throughout the country. Together with other stakeholders, we help those who encounter such problems find solutions to their financial difficulties. In 2018, more than 180,000 such cases were reviewed.

In addition, through our financial institution regulator, ACPR, and our relationship with the Financial Markets Authority AMF, we ensure that banks and insurance companies have effective procedures in place to detect vulnerable customers and provide them with appropriate solutions. This means that banks and insurance companies provide the specific banking services I mentioned earlier to everyone who might need them. But also make sure that financial products are not sold to those who don't understand or can't afford them-it could be a new consumer loan that can lead to excessive debt, or the policy clearly doesn't meet customer needs.

In an aging world, we need to ensure that older customers are not exploited by abuse or deception. For us and other international authorities, this part of our market behavior role is becoming increasingly important-Japan's G20 presidency in 2019 has made this recommendation.

Finally, to help improve financial literacy, Bank of France is the national coordinator of the stakeholders involved in this area. This is, of course, especially important for those at risk of financial exclusion. In this role, we specifically provide social workers with specific tools, resources and training. In 2018, Bank of France organized more than 800 training and information conferences with more than 16,000 social workers participating.

2 / How digitalization is changing the way we treat financial inclusion

The examples I mentioned from the experience of French banks illustrate what public authorities like the Central Bank can do to promote financial inclusion. However, you must also consider how to do this . Here, fintech and the digitalization of the financial sector are creating new ways to bring more inclusiveness. This afternoon will introduce many examples of "financial inclusion 2.0" and how specific technologies such as blockchain can work.

Fintech can help bring more financial inclusion in many areas. Let me give you a few examples:

  • Improving access to financial services, such as via mobile devices;
  • Collect more and better data to provide more customized and better-priced products;
  • Reduce operating costs and make profitable relationships with vulnerable customers.

It also means a major change for public authorities. Fintech means dealing with new companies, new technologies, new ideas. In order to respond quickly and participate, many authorities have set up fintech departments, as is the case with ACPR in France. We work closely with our peers around the world, especially with MAS, which is leading these developments.

As public authorities, we also face new risks and challenges related to financial inclusion in the digital world.

For example, when artificial intelligence is embedded in financial solutions, the risks of the "black box" become greater and it becomes more difficult to track and understand the results. Discrimination biases can occur and exclude customers, not even being detected. Big data will never forget: However, financial inclusion means sometimes being able to overcome past conditions and give customers a "second chance."

In addition, the digitization of our economy carries the risk of a digital divide between those who feel comfortable with the digital world and those who don't understand or have access to it. This is a major issue for financial inclusion. When banks or insurance companies preferentially access their services through digital devices, those who do not use those devices may be excluded and become "second-class" customers. We must not ignore this.

3 / Fintech and financial inclusion: moving forward

Facing the new ways, challenges and risks brought by financial technology to financial inclusion, how can our French banks adapt to the digital age and use digital tools to further improve policies and actions conducive to financial inclusion? The first way is to develop our understanding and use of new technologies: in addition to the ACPR financial technology sector I mentioned, French banks launched "Le Lab" in June 2017. Le Lab is a truly open innovation laboratory: its goal is to introduce new practices and technologies into our activities, and to achieve this, experiments can be performed in a short and flexible cycle when necessary. To this end, it works closely with innovative companies.

An example of this work is the use of artificial intelligence to improve our business ratings. Scoring is something that French banks have been doing for a long time: its network of branches across France provides company quotes based on analysis of financial data and on-site visits (more than 250,000 last year). These quotes are provided to banks and other institutions to help many SMEs obtain financing and thereby improve financial inclusion.

Therefore, we work with startups to study how to improve data analysis and incorporate learning algorithms into the scoring process. Of course, this is not easy-the integration of existing processes is complex, especially the role of expert judgment. We are also part of a larger experiment led by the French government, which is called "signaling" (weak signaling). Its purpose is to compile data from various French public authorities and develop AI analysis capabilities to identify companies with signs of vulnerability in order to provide better public support for these companies.

The second method is to re-examine and adjust some of our policies. For example, our policy in support of fair use of payment instruments is a good example: French banks are committed to ensuring that a range of payment instruments are available within our jurisdiction to suit the needs of all users. The development of electronic payment based on innovative technologies has laid the foundation for a smoother and more secure payment experience. But this should not exclude some populations. A big part of financial inclusion so far has been making cash more accessible to those who do not have a credit or debit card, so ensuring the acceptance and supply of banknotes has always been an important aspect of our retail payment policy. However, changes in the supply of payment solutions and changes in payment habits in favor of electronic payments may make this policy more difficult and more costly.

One possibility often mentioned is the issuance of publicly accessible central bank digital currencies. At this stage, in many advanced economies, and of course in Europe, this innovative business use case is not a short-term priority in my opinion. The priority should be to facilitate cross-border payments. Given that financial assets may be rapidly and widely tokenized, for me, at the wholesale level, central bank digital currencies for financial intermediaries are more convincing to me. Therefore, our French bank, together with the European Central Bank and other central banks in the euro system, is very willing to experiment, especially in the wholesale central bank digital currency.

Finally, the third area of ​​reform is our contribution to preventing unequal treatment. With the emergence of new inequality related to the digital age, supervisors need to play a more important role here. I mentioned AI earlier, and it has the risk of becoming a "black box." Therefore, AI algorithms must remain interpretable and properly governed—proving why and how financial decisions are made, and ensuring that any combination of variables does not act as a proxy for models based on discriminatory methods. ACPR is currently working with voluntary financial companies on specific use cases for their AI algorithms.

In terms of market behavior, we also need to ensure that our regulatory priorities are adequate to meet the challenges of the “digital divide”. For example, I mentioned our current focus on older customers. Of course, older people are becoming more comfortable with digital tools, and this will become more true as more generations of digital "indigenous people" are born. However, we need to ensure that digital solutions are also designed for users who have difficulty reading on a computer or mobile screen, or whose cognitive ability may be reduced. There is also a need to ensure adequate protection against new fraud and deception strategies when using digital tools.

Finally, I would like to emphasize that doing something for financial inclusion is finding solutions to help those in need. This means finding innovative solutions while ensuring that no one is excluded.

To achieve this, innovation and support from the financial sector and public authorities go hand in hand. As a central bank, this forces us to think and act creatively and to explore new ways of doing things. For fintech, this means you can count on us to work towards a more inclusive and sustainable financial world.

In this regard, I look forward to the discussion in the afternoon to help us work together to find new solutions for financial inclusion, and I wish you all fruitful discussions.

Thank you for your attention.


[1] In fact, it is necessary to consider the central bank's ability to restrict the ability of commercial banks to create money through various monetary policy tools.