Matthew Bishop, acclaimed journalist and author of Philanthrocapitalism: How the Rich Can Save the World, defends an unconventional policy experiment called Financial Access @ Birth (FAB). It proposes that after November 11, 2011 (11/11/11), governments—with the help of institutional and individual donors—should create a bank account containing $100 for every registered newborn child. In order to forestall misuse by parents or other adults, the child will be able to make her first withdrawal at age 16.
FAB’s founding members make up quite the impressive crew, including UCLA finance professor Bhagwan Chowdry, philosopher Peter Singer, Indian social entrepreneur and founder of BASIX Vijay Mahajan, former Mexican finance minister and President of Telefónica Francisco Gil-Diaz, former IMF Chief Economist Raghuram Rajan and co-author of Philanthrocapitalism Michael Green.
Similar efforts have been tried before, but only in developed nations like the UK, Canada, Singapore and South Korea, where its potential impact would be much smaller. Even in the US, innovations such as Individual Development Accounts (IDAs) work to bring low-income Americans into the financial mainstream by supplementing savings accounts with matched funds. (Incidentally, IDAs were pioneered by FAB founding member Michael Sherraden.)
FAB’s estimated annual cost is $10 billion, which would only set governments back approximately 0.02 percent of their GNPs. Ten billion dollars may be an unfathomable figure for most, but it is on par with several development initiatives. To put it into context, the Gates Foundation has disbursed $22.8 billion in grants since its inception in 1994. Additionally, in the most recent fiscal year it disbursed $75 million to grantees working towards financial access.
Moreover, $10 billion seems like a trivial amount considering FAB’s expected rewards. Anyone, including relatives living abroad, Ted Turner-type philanthropists, development organizations like the UNDP and whoever else would be able to send money to be used for school fees, condoms, vocational training, what have you. In one proposed use of FAB, every time you swipe your credit card, five cents would be deposited in a FAB account in Ouagadougou.
The money could be used for products and services with developmental benefits—school fees, condoms, vocational training, what have you. It could also act as catastrophe insurance or an efficient channel through which to send aid, a considerable improvement on the current system’s bureaucratic incompetence.
Also, parents would be more likely to register their children. Bishop also points out that it could be a lucrative venture, considering that newborns grow up to become adults—i.e., future clients.
Felix Salmon, however, is skeptical. In theory, he is not opposed to the idea; however, he argues that it would be impossible for FAB to take root in “the real world” where banks have strong incentives NOT to open bank accounts for the poor.
Salmon concedes that innovations in financial access are making headway—e.g., mobile banking such as M-Pesa, WIZZIT and Obopay—but that we are still a long way from being able to send $10 without it being decimated by transaction and currency conversion fees. Salmon contends that the IT infrastructure necessary to enable international money transfers would be even more expensive than the estimated $10 billion.
In response, Bishop contends that FAB would be a case of incentive engineering.
He compares it to Advance Market Commitments (AMCs), which are guarantees of a viable market; for example, the Gates Foundation uses AMCs to fund research for an HIV/AIDS vaccine. (update: AMCs are explained in greater detail in this blog post) Similarly, FAB would incentivize banking the unbanked.
Additionally, Bishop highlights the intersectoral coalition and the spirit of collaboration that would result from FAB. Governments would need to act as funders and enable birth certification to be streamlined with setting up a bank account. A multilateral institution such as UNICEF needs to oversee the entire initiative. NGOs would need to educate the poor on sending/receiving money as well as financial systems in general. The private sector is also key player: tech companies must design and supply the necessary innovations (biometric identity systems?) and telecom companies must integrate mobile banking with FAB accounts. Furthermore, the companies must view FAB as a sort of corporate social responsibility initiative, as they will have to go pro bono and bear administrative and transactional costs.
As Hernando de Soto explains in The Mystery of Capital, the poor are poor because they are unable to “adequately describe and protect their assets.” FAB’s main benefit is not the $100; it is that a child in Niger would be able to participate in the global formal economy, monetizing and securitizing his assets. He will be able to take full advantage of capitalism.
Yes, it’s risky business. But it may be worth it—after all, a ship is safe in the harbor, but that’s not what ships are for.