by Brenda Santoro and Ahmed Dermish
with the support of Kim Wilson, CEME Senior Fellow
In uncertain times do developed economies have the resiliency in their financial inclusion processes to withstand rapid change without risking systemic stability and consumer protection?
Modern, nationally integrated systems, high-capacity supervision, and flexible policymaking are helping Germany turn the refugee crisis into an economic opportunity.
The German Federal Financial Supervisory Authority, commonly known as BAFIN, this fall relaxed requirements for opening a bank account. The new rules allow accounts to be opened with a stamped document from an appropriate German authority, such as BAFIN, along with a picture and personal information. Transitional rules are in effect until the approval of the law, expected this year. A directive in the European Union, which will begin in September 2016, will require similar access to bank accounts across the EU.
Citizens of developed countries may not appreciate the role a bank account plays in providing access to basic financial services. A bank account is more than a place to secure our money – in nearly every country, it provides high social and economic value. When a bank says we are trustworthy, even for a simple bank account, doors open for many services we take for granted such as access to electronic payments, basic utilities, housing contracts, education or small business loans. This works because banks use a vetting process to ensure they know exactly who we are, often referencing a nationally issued document such as a passport or driver’s license. For us, the account becomes another form of identity. For the banks, it ensures the correct people have access to funds. With a passport and a bank account, the world is our oyster, an entrée into other services and for the bank, it is an entrée into cross-selling and more profits as they learn more about us.
However, many refugees (we focus here on refugees, not routine migrants) arrive in Germany without passports or other forms of identity. The Germans have found a work-around to provide basic identification, and thus bank accounts for this previously excluded population. Estimates are that more than 500,000 people in Germany do not have access to a bank account. In contrast, many countries do not provide such simplified access to accounts. Government regulations require intensive background checks and proof of identity. Their interest is to avoid the possibility of money laundering and financial crime.
Because of these barriers, refugees fleeing to the EU are forced to utilize informal channels for moving cash. These channels can be expensive and insecure, putting cash-carrying refugees at extreme risk. Refugees are not only vulnerable but are prevented from establishing themselves financially.
Germany’s solution is intriguing and raises several questions. Has it found a workable alternative to normally restrictive regulations? With more flexible requirements, could innovative technologies further incent financial institutions to provide basic accounts to those with less than air-tight forms of identification? And might we hope that technologies, coupled with lighter government and banking restrictions, will scale banking and other services beyond the refugee population to the many others who are financially excluded? Perhaps we can imagine a time when technologies enabled by lighter regulation contributes to lowering the risk of false identity and illicit activities.
Managing the risk
Germany is a member of the G8 and considered a global leader in financial sector stability. What will the global community of financial sector standard-setters, such as The Bank for International Settlements (BIS) in Basel, Switzerland, say about Germany issuing these accounts?
Our opinion is that the standard setting bodies (SSBs) are probably neutral on this issue. Their main concern is market and systemic stability. So how would broadening access to accounts for refugees impact stability? Refugees brought into the system, under newly relaxed rules, will represent a very limited percentage of the total number of accounts, with limited purchasing power. It’s doubtful that they could have systemic impact.
Let’s presume however that the SSBs are less concerned with stability and more concerned with illicit use of bank accounts. The Financial Action Task Force (FATF), BIS and the Committee on Payments and Markets Infrastructures (CPMI) have all settled on a risk-based approach to regulating financial services, particularly when trying to enable innovation that would lead to better financial service access. Governments must clarify how they will mitigate and manage the risk of illicit use. For less developed countries, lowering KYC (Know Your Customer) requirements effectively means acknowledging trade-offs between having a significant population outside the formal system and increasing the risk that the banking system will be used for illicit financing. Lower requirements also means that governments concerned with international security (particularly the U.S.) must determine how they will mitigate the risk of new financial services innovations. Do they quash innovation because they fear it will accelerate illicit activities or do they celebrate it because it will promote more access and improve the lives of the excluded?
Germany, it seems, does not see it this way. For Germany, there is no apparent trade-off. It can (and does!) monitor retail transactions. It has a modern, electronic banking system that enables effective risk management. It has robust supervisory practices. For Germany, only a tiny population poses any risk at all, and there is no reason to believe that broadening access to accounts for refugees will impact systemic stability. And on the off-chance that it might, Germany has the systems and governance in place to manage the risk.
By making it easy for refugees to transact electronically, Germany can track the movements and livelihoods of a vulnerable population. If you need a basic account to get housing, then the government of Germany not only has control over your funds, they will know where you live and how you transact. From the political perspective of those who fear terrorists entering the country, bringing refugees into the financial system is an elegant way of tracking potential “threats”.
BAFIN’s novel approach explicitly addresses concerns raised by banks regarding anti-money laundering regulations. Regulators assert that providing accounts to refugees in fact combats money laundering as it prevents uncontrolled flows of cash. Account holders can be vetted and tracked for movement of funds, whereas in a pure cash economy an individual utilizing hidden channels for movement of funds cannot be effectively tracked.
Obviously, there should be a benefit to refugees. Many have liquidated their savings and may be traveling with hundreds or thousands of euro, in cash, on their person. Syria in particular is a sophisticated country with an educated population that has money. Syrian refugees need bank accounts for their own security. Imagine how perilous a refugee camp is without the additional effort required to protect your life savings.
Germany can manage the risk. Refugees need the service. It’s a win-win, and the SSB’s don’t have much reason for concern.
Looking beyond BAFIN
The refugee crisis is not only a “German” problem. Nearly all EU nations are impacted. Can we expect a contagion effect as Germany’s enlightened view cascades across these other markets?
It’s unlikely. Germany has demonstrated a unique political will to have compassion with the refugees. Relaxing the rules suits the needs of the current administration, and given Germany’s sophisticated administrative structures and financial clout, it also has the systems in place to justify its inclusive political positioning.
In contrast, many of the Balkan and East EU states do not have the systems or political will, and their history demonstrates a less welcoming approach to refugees crossing from North Africa. Britain, France, Austria, and Benelux could potentially adopt a similar measure to Germany. They all have substantial immigrant populations and are relatively more centrist. We doubt they will follow closely behind Germany, but perhaps if the program shows success, they may do so. France recently has been making moves to alleviate the situation in the migrant camps in Calais. With winter upon them, all the Northern European countries have an incentive to take a more active approach to integrating refugees. Sweden and perhaps Norway have the systems and possibly political will, but they are often seen as outliers (unfortunately), so it’s hard to say what their influence on other countries might be.
The attacks in Paris and threats in Brussels add an additional dimension to the challenges facing the EU and refugees despite the fact that the Paris attackers were legally residing in the EU. There is more and more pressure to ask questions first and open borders later.
It is unlikely that Germany’s approach towards undocumented refugees will spread. This is unfortunate. We have an opportunity to think more creatively about how we create and manage identity verification, and how our systems can be leveraged to provide opportunities to those without conventional documentation. Governments have a role to play in tempering the fears of the population by using existing systems to demonstrate risk management, turning the unknown into opportunity.
Brenda Santoro is an international financial services executive and graduate of the Fletcher School, Tufts University (any opinions expressed are her own). Ahmed Dermish is a Global Technical Specialist at the United Nations Capital Development Fund. Kim Wilson is Lecturer in International Business and Human Security at the Fletcher School, Tufts University.