Could CBDCs be a vehicle for financial inclusion? Q&A with ANZ, Head of Payments

Balaji Natarajan is the Head of Payments and Cash Management, Asia for ANZ. ANZ is among the top 4 banks in Australia, the largest banking group in New Zealand and the Pacific, and among the top 50 banks in the world. Balaji leads the development of new payment, liquidity and collection propositions and digital solutions at ANZ. His current focus is assessing and implementing transformative opportunities for ANZ’s Transaction Banking proposition to deliver better value for customers.

As India prepares for CBDC launch pilot at the end of this year and excitement soars for the possibilities of the digital currency - we speak to Balaji about use cases and the impact on merchants, consumers and banks. We converse over CBDC constructs, financial inclusion, CBDCs potential to facilitate financial inclusion for the under-banked.

The Reserve Bank of India is planning to introduce CBDC, initially for use only by wholesale businesses - what do moves like this tell us about the future of alternative payments?

The proposition for using CBDC in wholesale settlements and cross border payments have been showcased in a number of pilots by BIS and other central banks. A wholesale CBDC would allow atomic settlements for other financial and digital assets (DVP) to be made in real-time, reduce lead times and operational overheads, and reduce accounting and systemic risk. India currently operates a sophisticated UPI, NEFT and other retail payment systems available round the clock. A general purpose CBDC would have to establish itself as viable and practical solution for any current and emergent. So, any alternative payment system would have to address and resolve problems to gain adoption.

Can you give us your view on how the private and public sector can collaborate to drive digital innovation and bring CBDCs to life?

Successful adoption of CBDCs involves providing access, arranging distribution, and implementing controls for managing risks. This typically would require a number of intermediaries, who will need to identify diverse range of use cases or problems to be solved .They will have to also assess potential solutions, particularly whether CBDC is a right and meaningful fit. This will warrant all stakeholders esp. the private sector to articulate their problems, be it timely payment of direct and indirect taxes, or effective availability of funds under direct benefit transfer or cashflow and data driven credit for defining the problems which currently remain unaddressed.

Do you think that CBDCs could potentially facilitate financial inclusion by increasing access to digital payments?

Technology can definitely help to close the financial inclusion gap. However, facilitating financial inclusion is not so much about using a specific payment or its prevalence, but focusing on what is required to gain access to the organised financial network which is predominantly comprised of commercial entities. Access to this service requires identity to be verified and established at the opening of an account and then continuously validated every time a transaction occurs.

So the exclusion (or de-banking) is something not directly related to payments, but to the total cost to serve. This includes the substantial costs of compliance for KYC and continued due diligence, transaction monitoring etc

Therefore, to facilitate Financial inclusion, Identity and transaction management is key, which can reduce the cost to service and comply. CBDC introduction should therefore address the digital identity as part of the construct, and if well-designed, making it native to the network and managed in the network. This would serve as foundation for other financial services to be offered on the basis of access to CBDC with its associated identity, however the trade-off is level of privacy.