- Interview by
- Fabio De Masi
Beginning with the idea of microloans in the 1980s and then expanding to cover other sorts of financial services, “microfinance” was sold by global elites as a way to transform the economies of the Global South by allowing poorer communities easy access to banking and credit. “Fintech,” short for financial technology, is the latest evolution of this concept, which deploys digital platforms to offer financial services to the global poor.
But according to economist Milford Bateman, the promise of microfinance and fintech has been an illusion. Far from raising the living standards of the world’s poorest, fintech and microfinance schemes have often pushed people deeper into destitution, while making exorbitant profits for the Western investors behind those schemes. In an interview with Fabio de Masi for Jacobin, Bateman discusses why and how microfinance and fintech has failed to help the poor, as well as promising public sector experiments with these ideas in Brazil that remove the profit motive from the equation.
This interview is part of a series of publications that De Masi, a former member of the European Parliament and the German Bundestag, conducted for his research project on fintech in Africa and the future of money with the Rosa Luxemburg Foundation. De Masi became better known in Germany for his role in exposing the scandal around the German payment processing firm Wirecard and other corporate and tax-related scandals.
His study When Finance Meets Big Data: Financial Technology and the Scramble for Africa as well as other publications can be found in the dossier of the Rosa Luxemburg Foundation, dealing with topics such as fintech, cryptocurrency, and modern monetary theory (MMT). This interview is being copublished by the Rosa Luxemburg Foundation; this version has been slightly updated and extended to cover the selection of the former CEO of Mastercard, Ajay Banga, as the new president of the World Bank.
The Promise of Financial Inclusion
The fintech industry and some developmental advisors claim that financial inclusion uplifts the poor. Similar hopes were initially raised about microfinance. What is your perspective on financial inclusion as a means to address poverty?
It is a rather bizarre story. Beginning as microcredit, microfinance soon evolved to include other financial services — savings, insurance, leasing, and so on. Its leading advocate and 2006 Nobel Peace Prize winner, Muhammad Yunus, repeatedly announced that microfinance would eradicate global poverty in a generation.
Microfinance was first popularized in the 1980s in Bangladesh and Bolivia. By the late 2000s, the sour reality began to kick in: microfinance didn’t actually work. In spite of hundreds of billions of dollars of microloans dispersed to the global poor, it was not possible to detect any meaningful net positive impact on global poverty.
The conventional wisdom began to acknowledge that it had indeed failed to transform the Global South, but still claimed it had provided some benefit to some of the global poor. This, for example, was the view of the 2019 Nobel Economics Prize winners and one-time leading supporters of the microfinance model, Abhijit Banerjee and Esther Duflo. They were then forced to change their minds and admit that the correct interpretation of the evidence was that microfinance had had little-to-no positive impact.
You go further by arguing financial inclusion may hurt the poor. How so?
Microfinance institutions have extracted huge economic rents from the poor. It is no coincidence that we find the most damaging impacts of microfinance in precisely those locations where it has gained most traction: Bosnia, South Africa, Cambodia, India, Bolivia, Kenya, Colombia, Peru, Sri Lanka, and others. In these countries microfinance institutions evolved into some of the most profitable operations in the world.
Most of their clients languished in poverty but, hoping to do better, were all too often plunged into even deeper debt. They lost the collateral they pledged against microloans — such as housing, land, equipment, and so on — and saw their communities “dumbed down” to the point where few productivity-raising jobs remained in existence.
But did microfinance achieve financial inclusion?
Yes. By the 2000s, the microfinance industry had extended financial inclusion in the Global South to new heights, achieving what we might call “nearly full” financial inclusion. This was celebrated at many regular events, notably those put on by the influential Microcredit Summit Campaign.
It is a useful thing for the global poor to have more and better financial services at their disposal, but the key is the way that financial inclusion is designed. So far, financial inclusion has not been about addressing global poverty so much as continuing the building of financial markets that include the poor as clients in order to benefit global investors.
Why are we still discussing financial inclusion twenty years later if it has failed to reduce poverty?
When it became clear in the late 2000s that microfinance was not working, progress in advancing financial inclusion was now described as “not enough.” It was argued that we now urgently needed to “go the last mile” to achieve “full” financial inclusion.
If nearly full financial inclusion had no real impact on global poverty levels, why would facilitating just a little bit more financial inclusion now do the job of ending global poverty? This widespread claim made absolutely no sense. Yet it was, and still is, very widely believed.
The claims around financial inclusion are nothing but a cover-up for continuing to expand the supply of microfinance. The microfinance industry in the 1990s began to realize, “Oh boy, we can actually make a hell of a lot of money” by stretching out its financial tentacles, one might say, down into the poorest communities. A couple of examples, such as Compartamos Banco México, SKS Microfinance Limited in India, and ACLEDA in Cambodia, demonstrated that with the right organization, sufficient scale, and the creative use of collateral, a large enough microfinance institution can make a lot of money for its CEO and its investors.
What happened to clients and their communities was not of any real interest to investors, no more than Wall Street’s financial institutions took any time to consider how ramping up the supply of hugely profitable subprime mortgages would ultimately impact the hapless individuals who signed up for them, many in minority communities.
The explosive growth in the global supply of microfinance happened in the 2010s under the cover of “expanding financial inclusion.” This growth was driven by the investment community, the CEOs, the shareholders, and even many external advisors, who all earned a lot from it. Moreover, this rapid growth was also driven forward by the international development institutions, such as the World Bank and the US Agency for International Development (USAID), and by key Western governments, notably the US and UK governments.
The Emergence of Fintch
How does fintech relate to microfinance?
Fintech is often described as “microfinance on steroids.” It’s clearly the next phase in the evolution of the microfinance model. The story started at the end of the 2000s when it became clear that microfinance hadn’t worked and, even worse, that it was associated with a lot of negative economic and social consequences for the poor.
But at this precise juncture, you had this innovation emerge called “fintech” (short for financial technology) that effectively rendered obsolete the old brick-and-mortar microfinance model and catapulted microfinance into the digital age. Investors saw an incredible opportunity and went for it. An entirely new round of profit extraction at the expense of the global poor had opened up.
Are there no benefits to providing financial technology to the poorest?
Many innovations, including financial innovations, start out as beneficial to the poor. But the problems start, in general, when such financial innovations are then commercialized and privatized. Once private fintech corporations conquer a critical customer base and become oligopolists, or even monopolists, which is the goal of those scalable data-driven business models, the situation radically changes. The poor are no longer the beneficiaries of a particular financial innovation, but increasingly its hapless victims.
We first saw this in the case of M-Pesa in Kenya, the iconic money transfer platform that effectively gave rise to the global fintech movement in the early 2010s. M-Pesa was started with the help of the UK’s international development agency at the time, the Department for International Development, and everyone involved professed to having good intentions and they hoped that M-Pesa would be “a great way of helping Kenya’s poor.” Rafts of academic development economists were immediately provided with generous funding to back up the M-Pesa story.
But then the parent company Safaricom within which M-Pesa operated inevitably came under investor pressure, and it quickly morphed into one of the most exploitative corporate titans in Africa, if not the world. Its profits exceeded that of many Western corporations. Even worse, other fintechs are emulating that model now. M-Pesa had become an innovation that extracted value from Kenya’s poor.
This is now increasingly recognized by scholars and development economists and some practitioners. To an extent, the Kenyan government since around 2020 has also begun to try to rein in Safaricom and other newly formed fintech platforms, such as by tightening regulations, increasing taxes, and so on. But so far at least, the impact of these recent efforts has been minimal.
Funding Investment or Funding Survival?
The usual story of how financial inclusion would uplift the poor goes like this: the underbanked receive loans that in turn enhance productivity, by allowing them to purchase better tools or fertilizer in agriculture or by providing inventory for small-scale entrepreneurial activities. Has that happened with microfinance and fintech?
Let’s look at the experience of South Africa after apartheid. Microfinance was aggressively pushed in the early 1990s by institutions such as the World Bank, the International Monetary Fund (IMF), and the US government. Their argument was that more microfinance would support mass entrepreneurship among the black population and quickly deal with the appalling legacy of poverty, unemployment, and deprivation.
The microfinance model turned out to be a disaster for the country’s black population on several fronts. The amounts involved in microloans were so tiny, by definition, that it mostly supported “survivalist” entrepreneurial activities that, collectively, had little to no sustainable impact on the well-being of the wider community.
Yes, South Africa saw many new microenterprises get started with the help of microfinance, and a tiny few did quite well, but almost as many of these new entrants quickly collapsed. Others ended up making almost no financial return, struggling to stay in business any way they could, including through unethical and sometimes illegal means.
You therefore did not get sustainable poverty reduction, but simply what economists have termed “job churn”: the constant entry and exit of simple microenterprises, a process that has little-to-no positive impact on local economic development. As one of the world’s leading development economists, Ha-Joon Chang, has noted, if microenterprise activity really does have such positive impacts, then Africa as a whole should already have been far more successful, as it has the highest number of microenterprises per capita compared to any other region in the world.
So those loans did not boost investment or productivity?
Microenterprises are simply not going to increase the rate of productivity growth in Africa or anywhere else. Providing these expensive, tiny microloans, and now even more expensive digital microloans, doesn’t allow these microenterprises or the local economy to flourish.
The very few microenterprises that did well in Africa were celebrated, given awards, and presented to the public. This tactic is a bit like what you see with the lottery. You could equally argue that the lottery does away with poverty because you see some winners who now drive a Rolls-Royce. But you can only conclude this if you ignore the fact that the overwhelming majority lost the money they spent on their lottery tickets.
Most microfinance advocates ignore important downsides, most notably the exit phenomenon — as even a lead economist at the World Bank, David McKenzie, recently admitted was the case — because it enables microfinance advocates to better keep on “selling” their model to governments in the Global South.
How were those loans used instead?
The users of microloans unsurprisingly began to realize the futility of starting new microenterprises, arguing something like, I can’t make it as a street vendor as there are already twenty vendors on our street. Life is too short, so let me at least take the loan and buy food, fund my kids’ education, or pay for a relative’s medical emergency! Many hoped that in the future, formal employment or an inheritance or a gambling win would come and help to service the debt.
So the use of microloans shifted to satisfying consumption needs rather than investment in microenterprises. That is where even more problems began to arise, because if the microloan does not kick-start additional income generation, how do you service the debt? The inevitable end result was that countries such as South Africa were turned into economies with some of the highest household debt ratios in the world. Kenya, Rwanda, Tanzania, and other countries had a similar development, but South Africa stands out in many respects.
Winners and Losers of Microfinance
Who were the winners and losers in that microfinance game in South Africa?
Apart from a tiny number of success stories, or outliers, the black community in South Africa didn’t really benefit from microloans. But for those on the other side of the equation — the lenders and investors — things went brilliantly.
The lender and investor class is composed of the old financial elites of South Africa who stood behind Capitec Bank and African Bank, at one time the two largest microcredit banks in the country. For a long time, Capitec Bank made spectacular profits from unsecured microloans while knowing that pouring expensive microloans into the most vulnerable communities — such as the mining workers in South Africa — was clearly doing more damage to clients than good.
But these two microcredit banks grew very fast by bringing in many millions of new clients from the very poorest black communities. They hoped to use the vast profits earned on their risky unsecured lending business to eventually become mainstream banks.
In the early 2010s, Capitec Bank was on the verge of collapse. Its share price tumbled, and its CEO was forced out. But then, rather fortuitously for Capitec Bank, its main competitor, African Bank, collapsed, and that saved Capitec. Having survived by the skin of its teeth, Capitec Bank’s owners and its new CEO opted to take their massive earnings off the table and begin a shift into new, less risky business areas, such as serving wealthy South Africans and funding established, formal SMEs [small and medium enterprises]. Now, there is TymeBank, which moved into the unsecured loans space with the help of fintech.
A rising supply of microcredit made a tiny percentage of South Africa’s mainly Afrikaner business elite spectacularly rich. Just look at the “one hundred richest individuals in South Africa” list, and you’ll see so many of the senior executives and key shareholders from Capitec Bank on that list.
But microfinance did nothing for the poorest black communities. Put simply, black communities didn’t really need microcredit; they needed small business credit on affordable terms and maturities, as well as business and technical support. But that’s not what they got.
It seems financialization and microfinance ease a contradiction that arises from labor’s shrinking share of the income distribution: it supports poor people’s consumption demand via consumer debt while allowing for poverty wages to be sustained. But how do borrowers service debt when their businesses fail?
A lot of already employed South Africans began to access microcredit simply to survive until their next paycheck. This opened up the possibility for the microfinance institutions to use “garnishee” orders. These entitled the microfinance institution to automatically deduct the microloan installment from the wages the debtors received via their employers.
The garnishee system hence insulated the microcredit institutions from the risk of default as they could directly access a proportion of their debtor’s wages to repay the microloan — sometimes up to 50 percent. That system, I understand, is now being challenged because it created massive social devastation, but in the meantime huge amounts of value have been unethically extracted from black communities.
Microfinance started with social collateral, where the microcredit institutions would form borrower groups of, say, ten women, so that if one of them didn’t pay their microloan, all the other nine members in the group had to chip in an amount to cover the payment. This was a revelation in the financial world as it meant that the poor in the Global South were, for the first time, seen as “bankable.”
But things changed over time. When you’re building massive microfinance institutions, you get to a point where you can’t be bothered with the cost and hassle of organizing these groups of ten women to create social pressure around debt service. So you increasingly revert back to traditional forms of collateral.
In Cambodia, more than any other country in the world, clients now have to hand over their land title as collateral, and if you can’t honor your debt, the microfinance institution informally forces you to sell your land to repay your outstanding debt in full. In Bosnia, you had to sign up two individuals from your circle of family and friends who would then guarantee to repay your loan if you defaulted. In places like South Africa, they pioneered this garnishee order.
What sort of problems did the garnishee system cause?
The garnishee system was a factor in precipitating the most atrocious example of state violence since apartheid: the Marikana massacre in 2012 that saw the South African Police Service (SAPS) kill thirty-four unarmed striking mine workers. The problem was that a lot of the striking miners around the mining region of Rustenburg were financially illiterate and so, as often happens, got deeply into debt with the main microfinance institutions, several of which were located on the mine premises. Moreover, many of the miners were recruited from the even poorer rural regions as they were seen as more compliant.
But having to support two households — one on the mine and one in the rural areas where they were recruited from — they needed a decent-enough income to sustain this arrangement. So the mineworkers most affected by debt saw an increase in salary as the only way to float themselves off their debt burden and start afresh. The mining corporations refused to concede, which provoked the strike by mineworkers that eventually led to the massacre.
Some observers already speak of a “debtfare state.” Do you agree with that idea?
I very much agree. The political scientist Susanne Soederberg shows that the postwar welfare state is in many places in the process of being replaced with the “debtfare state” — a state wherein the poor increasingly have to pay for key services they need by accessing microcredit. This forces the poor to engage with the informal sector full- or part-time almost no matter what the financial return, accept poverty wages from formal businesses, run down family assets, and avoid strike action if employed, all in order to maintain repayment on their microloans.
The end result, as intended, is a far more disciplined, flexible, and cheaper workforce operating at the bottom of the pyramid. This trend is good for investors and elites, but not for ordinary people.
A lot of fintech companies are not very transparent about their business models. Do you have a specific example of the fee structure that, say, the M-Pesa platform or TymeBank in South Africa use?
Just look at one of the world’s biggest universal unconditional cash transfer programs in Kenya. It happens to be funded by several US billionaires through a nonprofit foundation called Give Directly.
It is huge in terms of the per-capita cash transfer that people are getting. It also uses a mobile phone money transfer service as well — the privately owned M-Pesa money transfer platform. The problem that arises here, however, is that, depending on how much you take out of your basic income as cash money at any one time, you must pay a sizeable fee to M-Pesa.
Now, M-Pesa and the US-based development economists evaluating this program had no great interest in discussing the details of the fee structure — as, I am guessing, they felt it might suggest that Safaricom, M-Pesa’s hugely profitable parent corporation, was making a lot of money from a well-meaning anti-poverty program. But a Give Directly official I was in contact with confirmed to me that M-Pesa does not provide any “special discount” to those receiving cash through the Give Directly program, and so clients are routinely charged anywhere from 5 percent to as much as 20 percent of the total value of the small amounts of cash they take out. That can be a significant amount of money to lose if you are poor.
So M-Pesa had no real benefits for the poor?
You must remember that at first M-Pesa was seen as very cheap. The alternative, at that time in the early 2010s, was putting your money on the bus in the hands of the bus driver or a friend and sending it to your mother in Nairobi. When you were able to send it by mobile phone, then it was indeed much cheaper.
So initially, this technology released a lot of value to the ultimate consumer. But Safaricom was fine with this, because it wanted the word to get out and to build a market. Once it achieved that goal, however — and after attaining a near-complete monopoly, including through extremely unethical means — the situation changed, and they began to exploit the clients using their market power.
In essence, all microloan and fintech companies initially offer services as cheap as they need to to rapidly build up a client base and scale up their business to lower the costs of their operations. But as sure as the sun rises tomorrow, in a few years’ time, they’ll start to raise the prices of all the services they offer because, they hope anyway, that you’ll be locked into their network.
Pointedly, the only time Safaricom agreed to lower M-Pesa’s ultrahigh fees on its money transfer services was during COVID-19. But it was not by choice. There was so much anger at how much M-Pesa was charging the poor to send and receive money during this once-in-a-century emergency that they had to be forced into it by the Kenyan government.
Safaricom also angered many in government by insisting on continuing to pay out the same sizable dividends to its extremely wealthy foreign investors during COVID, notably by paying more or less the same dividend as in previous years to its majority shareholder, the British telecom giant Vodafone plc. It appears Vodafone wanted its usual tribute quite regardless of the difficult situation in Kenya, and Safaricom’s senior management went along with this.
What role does Vodafone play as majority shareholder?
Pointedly, the UK’s Vodafone is a famous tax avoider, having paid almost no corporate taxes for many years by using a large number of Vodafone subsidiaries across the world that are separate taxpaying units. Many newspapers, such as the UK’s Guardian, have called them out on this deceptive, though not uncommon, tactic. Vodafone eventually responded in their annual report by essentially saying, “Yes, it is true we pay no corporate taxes. However, we are one of the biggest spenders on vital telecom infrastructure in the UK that we fund out of the inflow of dividends we receive from abroad.”
In its annual reports, it notes that a sizable part of the dividend flow it receives is from its 40 percent majority ownership of Safaricom. So think about this: Vodafone plc finances its telecoms investments in the UK, which are vital to UK development and growth, out of the dividends it receives from the profits that are extracted from some of the poorest communities in Kenya.
People-Centered vs. Investor-Driven Fintech
You have recently stressed positive examples in Brazil of how financial technology embedded in public or municipal banks could benefit local economic development.
There is a very interesting movement in Brazil trying to link financial technology to local development. It started in the city of Maricá near Rio de Janeiro. Maricá has long been characterized by a high degree of poverty.
Fortunately, Maricá is governed by President Lula da Silva’s Workers’ Party (PT), which means it is far more open to pro-poor initiatives that address poverty, as opposed to the all-too-traditional type of initiatives that mainly enrich the already wealthy. Furthermore, Maricá has a very big advantage, as in their territorial jurisdiction they have much of Brazil’s offshore oil and gas industry, which is mandated by the central government to pay a certain amount of royalties to municipalities affected by their activities.
Maricá has a conditional basic income program that is paid out through its community bank (Banco Mumbuca) in a local currency (the mumbuca) using a fintech platform. It works very well to provide important financial services to the community. The Mumbuca Bank introduced a credit card and later an app on mobile phones to pay out a conditional basic income without the intervention of, for example, Visa, Mastercard, or PayPal.
Enticing the local citizens to pay bills using their mobile phones saves the municipality a lot of money. In return, it funds the municipal bank, which supports local enterprise development. The value generated by using fintech, which is usually appropriated by the private sector, is thus now used for the public benefit.
They operate without any charge levied on the poor by profit-driven banks or the digital payment corporations. There is no charge to the recipient when receiving the basic income that is paid in mumbuca. In other words, you get 100 percent of the amount that is officially due to you. Mumbuca Bank covers its operating costs by charging the many local businesses that accept the mumbuca a 1 percent fee to convert any mumbuca they receive from recipients of the basic income into the Brazilian currency (the real).
The Maricá municipality wanted to generate benefit wherever possible for local citizens through the expansion of basic financial services that improve their lives, not extract as much value from them by, say, selling as many expensive digital loans to them as possible to maximize profits, which is the typical motive of the type of fintech platforms established and operated by investors.
To what extent have oil and gas revenues facilitated the Maricá experiment?
Having a major revenue stream from the oil and gas industry is naturally of benefit to Maricá, but in the longer term this benefit will disappear if not managed sensibly. Maricá officials appear to be willing to examine the many bad examples of mismanaging the wealth generated by such natural resource bounties.
One obvious example is that of Scotland. It had 60 percent of the North Sea oil, while 40 percent lay in Norway’s territory. The UK government centrally managing Scotland’s oil and gas sector favored private industry taking the lead in developing the sector and in creating benefits for the Grampian region, where the oil and gas sector was centered. A few institutions were created, but they were weak and ill-funded, and some were eventually closed down.
Crucially, the royalties were mainly used to fund the huge welfare payment bill arising from the extremely high level of unemployment created in the 1980s and ’90s by the ideologically driven Thatcher government’s forced closure of many of the most heavily unionized industries in the North of England, the Midlands, Scotland, and Wales. Norway’s government, on the other hand, adopted a decentralized, “institution-thick” approach. That approach was based on supporting regional R&D institutions capable of developing and introducing new technologies and new businesses linked to the oil and gas industry.
As the North Sea oil and gas boom is now coming to an end, one can compare the results. The benefits of the oil and gas find in the Grampian region of Scotland, and across Scotland and the UK as a whole, are barely discernible. Many of Scotland’s regions are slowly deteriorating, having derived little benefit from the oil and gas boom.
Norway, on the other hand, is now one of the world’s richest countries, with a high level of technological expertise in many oil- and gas-related areas and having developed many leading technology-based SMEs. And with its huge sovereign wealth fund to fall back on, the excellent progress can continue well into the future.
The politicians in Maricá wanted to figure out how they could use such oil and gas revenues to foster innovation and ensure a much higher level of social development. While President Lula, during his first term in office, introduced a well-regarded cash transfer program called Bolsa Família, the oil and gas royalties allowed Maricá to go even further. This was how they were able to establish an additional cash transfer program, which was then extended during COVID.
Crucially, Maricá has also established its own modest sovereign wealth fund in order to ensure that the key elements of the Maricá model can be maintained into the future. But the key here was the use of fintech in a way that benefited the entire citizenry.
Is Maricá the only example of people-driven fintech?
Maricá was probably the first example in Brazil. Now, there is another, bigger city — Niterói — with about 1.3 million people compared to Maricá’s 250,000 inhabitants — which is looking into this.
On my latest research trip to Brazil, we also heard that several other cities are studying these “people-centered” fintech experiments and are introducing their own arrangements, similar in many respects to Maricá. We’re also currently hearing about some smaller parts of São Paulo trying to link basic income and fintech.
In Brazil, it is important that community currencies can be redeemed easily and at low cost in the real and used to purchase goods and services from anywhere. This matters as most local currencies failed in the past due to the inability to use them for transactions outside of the specific municipality or region.
A lot now depends on the attitude of the central government. The current government under Lula is very much geared toward poverty reduction and trying to repair the damage of Jair Bolsonaro’s government. I understand that the Lula presidency is interested in using innovative ways to use financial technology that can be deployed nationwide to reduce dependence on the likes of PayPal, Visa, JPMorgan, Goldman Sachs, or Barclays. This is a very interesting development, and the fintech efforts underway elsewhere across Brazil, including in Maricá, could be useful experiments to assess.
If I understand correctly, the Maricá basic income is a conditional social grant and hence targeted at the poor.
Yes, Lula’s Bolsa Família is targeted at the bottom 10 or 15 percent of the income distribution. Those were conditional cash transfers, because often you would expect the household to make sure their kids attended school or make sure they went for their vaccinations. That was still prior to COVID. The unconditional basic income in Kenya administered via M-Pesa is different. You receive it on your mobile phone through M-Pesa every month, and you go out and spend it as you wish.
The libertarian right doesn’t like conditional cash transfers because you shouldn’t be telling people they should take their kids to school and so forth. I disagree. I think people don’t need only incomes; they also need fulfilling jobs to be part of the community. Just having an income and doing nothing solves very little and changes very little. It simply eases the pain a little and, crucially, lowers the chances that the poor will totally reject the capitalist system.
That is why the billionaires such as Mark Zuckerberg and Peter Thiel and the like support a universal basic income. They believe it is better that you address poverty with some money so that people are a little less poor but, crucially, the rich can pretty much go about their business and lives as usual. The Brazilians do basic income, however, in a way that is beneficial to, and so acceptable to, a broader working-class constituency.
How important is reaching scale in such public fintech developments? What kind of larger public banking infrastructure is required to provide municipalities with the technological capacity to establish successful community currencies?
Maricá used the extra income coming from the oil and gas royalties and expanded the scope of Bolsa Família. It targets people who fulfill certain criteria — I think 40 percent of the population are now eligible.
This is huge. Now you are starting to get to critical mass because 40 percent of the population are in possession of the local currency, the mumbuca. That is why businesses are saying: “Wow, that’s a fairly big slice of local demand, so I’ve gotta sign up for the mumbuca to make business!” You see the signs outside big supermarkets saying, “We take mumbuca.” Scaling up has been vitally important in making the Maricá model work.
Brazil at the national level has also pioneered a public payments system, termed Pix, that since 2020 has allowed for free financial transactions between individuals, businesses, and the government. Pix saves a huge amount of money that would otherwise go to the digital payment corporations like Visa, Mastercard, and PayPal.
If the United States and European Union pay as much as 2.3 percent and 1.4 percent of their total GDP in payment costs, one gets an indication of how much money can be retained in Brazil’s communities thanks to Pix. Likewise, local digital community currencies operated by community-owned fintechs will allow for the community to control their own local financial system. In that way, the tiny financial transactions that are made are not “mined” by investor-driven fintechs and the value transferred out of the community.
The President of the World Bank and Mastercard
US President Joe Biden nominated Ajay Banga to be president of the World Bank. Is Banga a good choice for the Global South?
No, absolutely not. Banga was the longtime CEO of Mastercard, which many see as one of the most problematic digital payment firms in the world. Mastercard wants to abandon cash so it can intermediate most of the tiny financial transactions made by the poor and extract a growing amount of value from them.
Such a move is not about benefiting the poor in the Global South, as is typically claimed, but about benefiting Mastercard. The fact that many believe Mastercard, and Banga himself, “want to do right” for the global poor is an outcome of a brilliant PR exercise carried out over many years. It is not the reality, sadly.
The process of driving cash out typically starts slowly, so as not to alarm ordinary people and governments, and to ensure that the process is not halted midway. But once cash has been largely abandoned, then the profiteering can start, as the poor cannot easily revert back to cash payments.
That’s the goal: lure them in, then once they are in and effectively can’t back out, you can start to squeeze them hard to make money. It’s a tactic Americans call “bait and switch.” The need to push the poor to abandon cash as quickly as possible also explains why Mastercard funds a number of its own supposedly philanthropic bodies, such as the Mastercard Foundation and the Mastercard Foundation Fund for Rural Prosperity. They operate under the seductive cover of “advancing financial inclusion” or some other pro-poor-sounding term. In reality, they hasten the process whereby the global poor abandon cash and switch to using Mastercard-intermediated transactions, such as those involving mobile phones and debit cards.
The value extracted by Mastercard from such transactions is already pretty large, but if cash could be removed entirely, then there is almost no limit to the value that Mastercard and other digital payment corporations can extract from the poor. For Mastercard and others like it, serving the financial transactions needs of the poor in the Global South is a new “gold rush.”
Can you give specific examples?
Yes, Mastercard — and Banga personally — have pioneered value extraction from the poor using internet-based payments. In South Africa, Mastercard teamed up with the US-based fintech Net1, which was awarded a huge contract to operate South Africa’s social grants scheme. Setting up a local company, Cash Paymaster Services (CPS), to do the business, around seventeen million cash transfer payments were made.
CPS would earn a generous fee from the government as part of its contract to facilitate these transactions. Even more important as a source of profit, however, was using the social grant as a form of collateral. CPS was able to use its subsidiaries to aggressively cross-sell many other items to the most vulnerable of South Africa’s poor, including even more microcredit (Money-Line), insurance (Smartlife), utilities (uManje Mobile), and payments (EasyPay).
The payment for these services and products was automatically taken out of the social grant before disbursement. For CPS, it was a brilliant, risk-free way of loading up the poor with more debt. As the poor began to slide into deeper levels of debt, however, profits increased considerably. In the end, resistance eventually rose to the point where the South African government canceled the contract.
The whole episode was a major scandal in South Africa for which Mastercard lost much credibility as a financial services provider in the country. But it just shrugged off this episode, as there is simply too much money to be made from working in the poorest communities. Moreover, the international development institutions, notably the World Bank, like the idea of pulling all financial inclusion products together and selling them to the poor, as CPS did. It is a simple form of financialization that brings the poor into markets rather than offering relevant public services to them, and it also generates higher returns for the fintech platforms.
Why do you think the US government favored Banga?
The US government has a track record of aggressively pushing for US corporations and investors to own and control the most profitable companies. The United States wants to repatriate as much value as possible from the Global South.
For instance, in the early 2010s, the US government, in cooperation with the Gates Foundation, tried to ensure that India’s emerging fintech sector and payments system would be dominated by US firms. Its infamous “demonetization plan” was at least partly premised on deliberately creating an enlarged market for US-owned fintechs to get a firm footing in the financial system.
The whole project backfired, however, as it led to major economic and social disruptions in rural areas. The otherwise quite horrendous government of Narendra Modi at least recognized what the game was all about, and it began, among other blocking measures, to insist that Indian companies take the lead in any partnership with foreign fintech corporations.
Do you expect the US government to change its strategy of financializing the poor?
The US government expects setbacks, no doubt. Almost since its creation, the World Bank has been serving mostly the US government’s interests. That’s not a controversial statement.
Today, there is probably no better person to further advance this goal than Ajay Banga, as the fintech sector is clearly going to be one of the most important sectors of the digital economy. I don’t believe the choice of Banga is a coincidence given his experience at Mastercard and his personal, almost religious belief in the supposed power of financial inclusion.
His appointment by the current US administration, I’m sure, was at least partly conditional upon him doing the right thing for the US government over the longer term and opening markets in the Global South for US corporations and investors. His immediate task will be to ensure markets are kept open, regulations are kept to a bare minimum, efforts to tax fintechs are smothered, and so on.
Maybe he will also find some concessionary finance, or blended finance, to subsidize and de-risk the efforts of US fintechs hoping to work in the Global South. The losers in all this, of course, are the global poor whose local financial systems will fall under the day-to-day control of foreign-owned financial intermediation systems, like Mastercard. Unlike selling furniture, clothes, household goods, and the like, which are irregular events and often require extensive advertising, control of the local financial system is the gift that keeps on giving — it means you simply quietly skim off your slice of every financial transaction every day forevermore.
Do you expect the World Bank and Banga to support publicly owned fintechs that serve local economic development, like the examples from Brazil you discussed earlier?
I doubt it. Banga will be expected to ensure that there will be no chance of any local publicly owned fintech projects. That would just be way too much like socialism — as is comically said in the US government, World Bank, and IMF about even mildly pro-poor policies — but it would also deny foreign investors their “right” to enter any market they chose, which is the fundamental right given to them under the current global economic order.