Can Universal Basic Income Be A Boost To Financial Sector?
There has been an increasing amount of talk in the last few years about a universal basic income (UBI). The idea, also known as a citizen’s income, is that every individual receives an unconditional, automatic and non-withdrawable income as a right of citizenship, regardless of gender, wealth, employment status or age.
Not only is UBI seen as a potential route to helping the world’s poorest people out of poverty and reducing income inequality, but with the prospect of automation and robots replacing individuals in the workforce, influential tech leaders such as Bill Gates and Elon Musk are putting their weight behind it as a way of compensating redundant workers. It could also allow people to work flexibly in future so that they could pursue a career alongside some other non-income-generating interests.
There is a range of other potential benefits. Digital UBI payments can bring people into the financial system and build their financial capability, unlocking a range of development benefits for citizens and governments alike.
Take Mongolia for example. In 2014, 92 percent of adults had a bank account—by far the highest share in the developing world. Young adults, a population often financially disenfranchised, see some of the most impressive usage of financial services; account ownership among Mongolians aged 15-24 years old is 93 percent.
Smart policies, digital payments, and greater inclusion of traditionally marginalized groups all helped Mongolia achieve nearly universal account ownership. The Mongolian Human Development Fund (HDF) distributes revenues from the mineral and mining sectors with the objective of redistributing wealth. A flagship program funded by the HDF is the Child Money Program (CMP), launched in 2012. As part of CMP, the government makes monthly electronic deposits into savings accounts opened in children’s names, helping to ensure that all Mongolians will eventually be banked. The program pays about $10 a month to all children aged 0 to 17, thus ensuring that the parents of every newborn open an account in their child’s name.
Alongside South Africa, Mongolia has one of the developing world’s largest shares of adults receiving government transfers—35 percent—with two-thirds of these payments made directly into bank accounts. Seventy percent of account owners in Mongolia make or receive any payment through their account, while in East Asia and the Pacific as a whole the share is 50 percent.
These accounts aren’t only passively utilized to receive payments—they are also actively used for monthly cash management and longer-term savings. The percentage of account owners in Mongolia who make three or more withdrawals in a typical month is three times larger than the regional average. Over 30 percent of adults use an account to save.
We can tell a similar story in Iran, where 92 percent of adults are banked and over 60 percent of adults receive a government payment into their account. In 2010, the government replaced energy price subsidies with household energy dividend transfers. Since money was paid exclusively into accounts, an estimated 16 million new accounts were opened to ensure every eligible family could receive benefits. The ATM network was also expanded to allow Iran’s rural population access to their accounts.
REDUCED COSTS AND INCREASED SPEED AND TRANSPARENCY
Using bank accounts, instead of dispensing cash through a network of regional and local governments, offers many additional advantages: First, it’s cheaper—for both the governments and households. A rigorous evaluation of a social transfer program in Niger has shown that the variable cost of administering social transfers is 20 percent lower by electronic transfer than by manual cash distribution.
Second, bank accounts offer a safer way for the government to distribute large amounts of money, compared to recipients walking home with wads of cash in their pockets. This concern is especially salient for regular cash payments, such as UBI payments, that are received at publicly known points in time and space.
Third, the liquidity and transactional anonymity of cash payments make them subject to “leakage” (payments that do not reach the recipient in full) and to “ghost” recipients, particularly in the context of government transfers. The electronic payment process, which generally requires more stringent identification documentation, makes it easier to trace payments and harder for ghost recipients to remain undetected.
Fourth, digitizing government payments is a proven way to expand financial access and often the first entry point into the financial system for unbanked individuals. Electronic distribution of social benefits offers recipients an opportunity to open accounts for savings and payments and build transaction histories, which can improve their credit access.
In India, a government program has opened over 250 million bank accounts in the past four years, along with close to 1 billion biometric “Aadhaar” identification cards. The current government has moved toward reimbursing poor people on their purchases of basic goods with money paid directly into their bank accounts. With the banking infrastructure in place for electronic payments, the government of India in its most recent “Economic Survey” flirted with the idea of electronic UBI payments.
Ultimately, there’s a symbiotic relationship between electronic universal basic income payments and broader financial inclusion. Electronic UBI payments can bring unbanked adults into the formal financial sector; greater financial inclusion can lay the groundwork for the introduction of more efficient government payments.
CASH TRANSFER PROGRAMS, FINANCIAL INCLUSION AND DIGITIZATION
As it currently stands, more than 130 low and middle income countries have put cash transfer programs into place. The consequences of such disbursements in relation to both financial inclusion and digitization of financial services are two-fold.
For one, these transfers serve as a funnel into ‘formalized’ financial accounts, whether that be through mobile devices or more traditional banking tools. According to World Bank Global Findex data, only 50 percent of the worldwide adult population enjoys a registered financial account. That percent bounces up to 70 when the cohort subject to analysis is limited to recipients of government transfers. While this is not definitive proof that there is causation between accepting government funds and account ownership, there is certainly a case for correlation.
But, custody over an account is only half of the equation. An account that is merely symbolic of financial inclusion, but fundamentally dormant, does not beget the same benefits – for either the individual or the economy – as an account plugged into, and used for, the full portfolio of financial services. Again, though, data suggests that government transfers, especially digital transfers, warm or coax communities to the idea of borrowing, saving, and even investing.
In India, randomized trials across sub-districts of 60,000 people revealed that the digitizing of government welfare allocations triggered a 15 percent jump in participants’ willingness to take on a loan. Similar findings were echoed in a Kenyan study. Participants who received government payments were 7 percent more likely to squirrel away savings, and 10 percent more likely to borrow from formal channels, in comparison to the control group.
It stands to reason, then, that if digital Government-to-Person (G2P) aid campaigns can cause cascading effects across the financial inclusion spectrum, Universal Basic Income would be the ‘nuclear bomb’ equivalent in a government’s arsenal of wealth and financial services distribution tactics. That said, UBI as a concept is still in its formative phase, and there is no consensus as to whether it would be truly universal or have its availability capped to those in certain income brackets.
Other more practical policy considerations, like what is the ideal value for a basic income to achieve social goals, or which technology will optimize disbursements in regard to administrative costs, reach and red tape, are playing out in real-time as pilots around the world strive to find answers.
Give Directly, a non-profit that delivers cash transfers to the extreme poor, has circulated the first qualitative feedback aggregated from its Universal Basic Income trial in Kenya. The survey data paints a picture of ever expanding economic activity in response to the free money – from entrepreneurship to urban relocation – contrary to convictions that it would breed laziness and inertia. And, of even more excitement, is that this economic activity is absorbed into the digital finance ecosystem, as the transfers are deposited directly into M-Pesa mobile money accounts.
ANYTHING GOVERNMENT CAN DO, PRIVATE CAN DO BETTER?
The logistics and price tag, alone, of UBI schemes render it a tough sell in politics – great as a talking point, but difficult to actualize and therefore a risk that could derail careers. Cryptocurrencies, in contrast, have almost negligible transfer fees and do not face the same level of scrutiny, regulation or taxation, thereby offering a degree of flexibility to react and respond as issues crop up.
In fact, there are a whole host of Cryptocurrencies already exploring UBI initiatives. Resilience, which is powered and secured by Ethereum blockchain, is hoping to grow taxes from Person-2-Person (P2P) exchanges, through Swarm Redistribution and dividend pathways, that would then be doled out among the members as Universal Basic Income.
Universal Basic Income, in this scenario, would be self-generated, and therefore self-sustainable, as Resilience’s ecosystem expands.
Private answers to the question of Universal Basic Income seem to revolve around the idea of consent. In the case of Grantcoin, the re-distribution of wealth is voluntary, whether through grants or individual contributions, and the product of a collective social conscience. Resilience, instead, leverages the technology of block-chain to normalize built-in deductions that ‘branch out’ into a pliable pool of funds.
Even though government might be more of an imposition and arguably less technological adaptive or efficient, there is one unignorably factored that underpins the worth of any government’s attempt to roll out a Universal Basic Income. In terms of financial services, any UBI scheme implemented by a government has to cater to the lowest common denominator of financial inclusion and be accessible to even the most un- or under-banked. Cryptocurrencies, in contrast, are still fairly avant-garde, and those most comfortable with their deployment are unlikely to be the most deserving recipients of a Universal Basic Income.
Perhaps, then, government and private initiatives of UBI should not be treated as an ‘either or’ paradigm, but as two compounding systems that are exposing different segments to the idea and execution of Universal Basic Income.
While government intervention is not necessarily the be-all and end-all strategy to introduce more complicated financial instruments, like cryptocurrencies and blockchain, to overlooked consumers, it is certainly an over-arching tool that can capture, educate and empower numbers unimaginable by a single private campaign.
Therefore, if a private enterprise is ever to pilfer and operationalize certain duties of the State, especially in regard to a Universal Basic Income, it would most likely piggy back on in-roads made by a government that had already cleared the way with broad digital G2P programs. Or, alternatively, maybe it will be government that instead swallows the inventions and value-added of private sector technology, similar to the strategy of a recent UN project, all while maintaining its role as the lifeblood of greater society.
By Humneet KAUR