Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 26 - Evidence - March 25, 2015
OTTAWA, Wednesday, March 25, 2015
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:16 p.m. to study the use of digital currency.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon and welcome to the Standing Senate Committee on Banking, Trade and Commerce.
Before we begin, I would like to take this opportunity to welcome back Keli Hogan as clerk of the committee. We are delighted to have you back with us again.
Today is the eighteenth meeting in our special study on the uses of digital currency, including the potential risks, threats and advantages of these electronic forms of exchange. To date, the committee has received presentations from a wide range of witnesses, including government agencies, digital finance experts, academics and bitcoin companies. In our most recent meetings, the committee has been focused on cybersecurity in the Canadian landscape.
Today we will be changing gears as we welcome a representative from one of the largest non-profit organizations in the world, the Bill & Melinda Gates Foundation. The Gates Foundation is engaged in digital currency and using digital finance to help alleviate poverty in the developing world.
It is a pleasure to welcome via video conference from the Bill & Melinda Gates Foundation headquarters in Seattle, Washington, Mr. Rodger Voorhies, Director, Global Development, Financial Services for the Poor.
The Financial Services for the Poor initiative aims to play a catalytic role in broadening the reach of low-cost digital payment systems, particularly in poor and rural areas. According to its 2013 annual report, the Gates Foundation distributed almost $1.8 billion in funding in the 2013 calendar year to global development programs, with 5 per cent, approximately $90 million, allocated to the Financial Services for the Poor program.
As members of our committee will recall, the concept of the unbanked has come up over the course of our study on a number of occasions. We heard that more than 2.5 billion adults do not have a bank account, which equals about 50 per cent of adults worldwide. We also heard how access to formal financial services can help people protect their earnings, weather personal financial crises, send and receive payments, and better manage their farms and small businesses.
Mr. Voorhies and his team at the Gates Foundation are focused on being able to capitalize on rapid advances in mobile communications and digital payment systems. Their goal is to expand the availability of affordable and reliable financial tools that serve the needs of the world's poorest people.
It is with great pleasure that we're going to proceed to an opening statement from Mr. Voorhies, to be followed by questions from our senators. Mr. Voorhies, welcome. The floor is yours, sir.
Rodger Voorhies, Director, Global Development, Financial Services for the Poor, Bill & Melinda Gates Foundation: Thank you, senator. It is an honour to be invited to speak to your committee today. I want to thank Senator Gerstein for his invitation as chair of the committee, and I also want to thank the clerk of the committee for the assistance in preparing this testimony today.
I want to thank the Standing Senate Committee on Banking, Trade and Commerce for the invitation to testify before you today. The Canadian Senate's study on digital currencies comes at a critical time and will make a major contribution to the discussion globally. The foundation is particularly interested in the committee's study as it relates to how digital currencies affect the world's poorest families over the next 15 years.
In preparing for today, I had a chance to review the transcripts of previous witnesses. Many of the questions raised by the committee are the ones being debated by jurisdictions around the world and, in my conversations with central banks and with ministries of finance, a key component is they look how to regulate. So I think you have both an opportune time to drive this dialogue and to reflect on what the implications are.
You'll appreciate, senators, that also in preparing I had a special in-house counsel who helped me. As Senator Gerstein knows, my daughter Willa has the privilege of attending McGill University. She advised me that I should make sure that the majority of the Canadian National Hockey League teams make the playoffs next month, and I'm not to say a word about March Madness and NCAA basketball right now.
I want to provide a quick introduction to the foundation, and then I'll go on to talk a little bit about our work at Financial Services for the Poor.
As Senator Gerstein pointed out, our foundation invests about $3.6 billion per year, and, of this, $1.1 billion is in global health which supports the development of new tools and technologies; $1.8 billion for global development; and the remainder in U.S. programs primarily focused on education.
We appreciate the Canadian Government's strong support of global health and development programs. I know that in these difficult fiscal times trade-offs may need to happen. Our message is they should not be made at the expense of international development, which delivers some of the best return on investment for our collective resources.
We appreciate the strong partnership with the Canadian Government on international development issues. In fact, Bill Gates' visit to Ottawa in late February highlighted our partnership and thanked the Canadian Government and the Canadian public for their sustained focus on maternal, newborn and child health. In particular, we are grateful for Canada's recent contribution to Gavi, the vaccine alliance, which will allow us to immunize an additional 300 million children over the next five years. The number of child deaths has halved since 1990 and we can halve it again by 2030.
I'd like to focus my remaining remarks on the Financial Services for the Poor program, which aims to play a catalytic role in broadening the reach of robust, open and low-cost digital payment systems.
As you know, communication technology now offers innovative and promising new ways to make payments over mobile phones and other digital means. Shifting payments from cash to digital cannot only make the daily financial lives of the poor easier, but it can also help bring millions of households into the formal economy. We, as the Gates Foundation, believe that everyone benefits from an economy that includes everyone.
In wealthy countries, most people conduct their financial activity in digital form. Money and value are stored virtually and transferred instantaneously with the touch of a button, and the system provides an easy access to a wide range of services to save and to borrow in an emergency.
In contrast, most poor households operate almost entirely in an informal economy using cash, jewellery, livestock or other informal institutions to meet their financial needs. In fact, studies have shown low-income people can use over 11 to 14 informal financial services. The problem is they are both costly and risky.
First, it is riskier and costlier for them to send, store and receive money; and, when large problems arise, these informal tools break down completely. Second, it marginalizes poor households from the formal economy because it makes it too costly for financial institutions to work with them.
I saw first-hand in my work of starting a bank in Malawi how small changes in access can make a meaningful difference in the lives of the poor. We saw that simply providing a savings account during harvest season allowed them to keep that money for a whole season and invest it in greater amounts of fertilizer for the next year. A large panel survey study showed that fertilizer use increased by 35 per cent and household income over 17 per cent. Senators, this is the difference between a dirt floor and a concrete floor, children in school and children not in school, or a thatched roof and a tin roof, and it addresses some of the underlying issues of intergenerational poverty.
Financial exclusion is the most severe among women and rural residents. The infrastructure simply doesn't exist for nearly half the world's adults. The best way to reduce the cost of reaching poor people with financial services is to help shift the majority of their cash-based transactions to digital, which can shift 90 per cent of the costs out.
In our report Doing Payments Profitably that we did in a multi-country study with McKinsey & Company, we found that digital is not only the cheapest way to go but actually has the smallest deviation in costs from country to country, meaning that low-income countries can more easily provide the level of service needed with a digital service.
There are examples of digital payment providers who have leveraged these technologies already. Over 250 mobile payment deployments exist in the world, reaching well over 200 million users.
Communications technology now offers innovative new ways to make payments over mobile phones. As has been a big piece of this committee's work, crypto and virtual currencies are exciting new technologies, but not without their challenges of anonymity and the need for a currency that doesn't go up and down too much in order to provide stability to low-income folks.
I was pleased to hear the Canadian Government has been involved in supporting the expansion of m-pesa in Tanzania and Kenya.
Our approach has three objectives as the Gates Foundation: to advance digital Financial Services for the Poor; to increase the poor's capacity to weather financial shocks; and to generate economic-wide impacts by connecting large numbers of low-income people into the formal economy.
The foundation is divided into four key priorities or focus areas. The first is digital payment systems, which is about driving the right infrastructure in large markets around the world which cover up to 65 per cent of low-income people. We actually have great models in Western Europe and in Interac in Canada where that infrastructure brought in large numbers of people and provided a low-cost, robust system, of which the payment system in Canada is one of the best models in the world. We believe new technology can drive that into these countries and generate similar confidence and economic-wide impact.
We also are working in countries where digital payment systems have taken hold and are trying to develop services that have real impact at household levels. Many of these services are designed to meet specific household management needs, particularly for women and smallholder farmers.
We push and support innovation, and we push and support openness as we try to crowd in new ideas into markets that for too long have been left behind.
Finally, we have global partnerships and a large focus on research innovation. We work at the global level with governments, donors and financial standards-setting bodies, and we applaud the work that FATF has done over the last two years to support financial inclusion and to recognize exclusion is a risk.
In conclusion, digital banking is one of the four big bets highlighted by Bill and Melinda in our annual letter this year. We believe digital services will be transformative and will improve the lives of the poorest over the next 15 years, and we will see a greater acceleration in this service than at any other time in history.
We hope that by 2030, 2 billion people who do not have a bank account will be storing money and making payments with their phones and other digital devices, allowing them to save for school fees, pay for emergency medical care, and to buy food when the family farms cannot produce enough.
Thank you for your interest in this topic, and I look forward to your questions today.
The Chair: Thank you, Mr. Voorhies, for a most outstanding opening statement.
As I hear what you have described, it is so vast and on such a scale, it's very incomprehensible in some ways. Very few governments could support a program such as you've talked about.
Could you give us some indication, where did you start? How did you start the whole situation? How did you start dealing with the issues that you're facing?
Mr. Voorhies: Very good question, senator. Thank you.
Senator, we began with three fundamental questions: Why do financial services matter for the poor? Why should we even care? Why should they be on the development agenda? Second, what's wrong with the informal tools they use right now? Third, what would have to change in the economy to actually bring those services down?
We work through those questions in looking at the empirical evidence, the history of other developmental programs, and then actually using World Bank and other data to understand where the gaps are.
We think if you can make a transformation in eight countries around the world, that represents half of the problem — maybe 60 per cent, depending on how we count it — and we think that has spillover effects.
We also have had great partnerships, sir, and that includes development initiatives both within Europe, in North America, including the world banks and including the development countries themselves.
Senator Bellemare: My question is related to the instrument and the money that you use in those poor countries. You use, I think, the m-pesa and not the bitcoin, which is another form, and based on the time you can phone on the mobile. I want you to explain to us why you chose m-pesa, how it works and how it can work in poor countries, because you need a mobile phone. In poor countries, are mobile phones given to the people or do they have to buy them? Do you have the infrastructure that is sufficient so that it makes a difference? It is quite an advanced technology and sometimes in poor countries technologies are not so advanced, but I may be wrong. I would like you to explain how it works in the foundation.
Mr. Voorhies: Senator, you ask a very good question and one we have done a great deal of research around.
Mobile phones in many economies have a strong degree of penetration, even down to low-income households. Around the globe, I believe the number is over 85 SIMs, which means the little card that goes inside the phone, exist for every 100 people on the planet. The low-income people, while they don't have universal access, even in some of the poorest countries of the world, the population, up to 60, 70 or 90 per cent can have access to a mobile phone.
It actually is one of the key triggers that make it possible to imagine that you could drive mobile phone usage of financial services because the infrastructure is so well developed.
To give an example, if you look at Tanzania, which is one of the poorest countries in the world, somewhere close to over 45 per cent of the population are using mobile financial services, not just m-pesa, but actually the four providers who are there. The exciting thing about that market is that over 35 per cent of people are living on less than $2 a day and that is where we can see transformation.
However, there is one big gap you rightly identified. In several countries in which we work, women have a disproportionate access to mobile phones, and it's something working with the GSMA and other bodies that we're trying to see if there's a role for philanthropic capital to address, so thank you.
Senator Bellemare: You use m-pesa and not crypto-currency like the bitcoin, even though the bitcoin is quite popular, it's been said, in some undeveloped countries. Why this choice?
Mr. Voorhies: We would say that m-pesa is one brand, but it represents one of the earliest brands; so we work with a variety of players.
The choice of using mobile technology rather than bitcoin right now, or a virtual protocol, is really threefold. One is that right now the technology is in low-income people's hands in a mobile device and we think that you can provide very low-cost, robust and open services across the current technology. That being said, we think that crypto-technology is a very exciting area and one that we're currently doing research on. We are engaged with many of the large providers in this space trying to understand it better, and maybe even doing some testing around it.
The part that we worry about at this point for low-income people's usage of bitcoin-like products is, first, the anonymity. I would say, as a development person, poor people are under-known and, therefore, the lack of being known constrains their economic value they can generate. They're always dependent because people don't know enough about them. They pay higher interest rates; they are viewed as more risky; and they don't get the government services they want. So, anonymity in their currency isn't the best solution.
Second, the currency is rather volatile, and I think poor people's lives are volatile enough and they need to have that stability.
That said, we think that technology can actually provide both identity at some point and stability, and I think that's why your committee and others need to think seriously about how they provide those services and will be leading the way.
Senator Ringuette: This is all very intriguing and I understand what you're saying about anonymity. Why wouldn't people in Tanzania exchange into their purchases or their loans, et cetera, or their savings via the digital devices but in their own currency?
Mr. Voorhies: Senator Ringuette, that's a good question. Let me explain a little bit about how the current technology works.
If I was an average Tanzanian — let's say I live in Dar es Salaam and I want to send money to my mother, who lives in Arusha, which is quite a long ways away. What I would do is go into an agent in Dar es Salaam — and there are thousands and thousands of agents. I don't know the number in Tanzania, but it's probably somewhere like 45,000 agents around the country versus a few thousand bank branches. So I would take my Tanzanian money and I would give it to the agent and they would give me electronic value. Very similar to what happens when you go into a bank in Canada and you deposit your cash and they give you money in your account. You just have a mobile wallet that's on your phone. Then, like an SMS but with a little more security than that, I'm able to send money to my mother and she can spend it on something. So, for example, in Tanzania, I can spend it to buy units on my solar lamp and light my home, or I can cash it out. That's what happens right now. They actually just convert Tanzanian money into electronic money, the same way all of us do with our debit cards.
Senator Ringuette: Every time that one converts to another currency, there's always a cost. These agents you're talking about would ask for a fee to go from the Tanzanian currency to a digital currency. To follow up with your example, if that person sends this digital currency to his or her mom, whomever, then on the other end there might be quite a few events that would require additional fees for the exchange in currency and so forth.
I understand the simplicity of digital wallets; however, that being said, there are attached fees to all the different steps. It doesn't resolve the issue of establishing credit for future loan requests for a small business and so forth. I'm a fan of financial co-ops, so maybe you could answer this question about all those fees and so forth.
Mr. Voorhies: It is a really good question and one that we wrestle with a lot. I will try to give you a bit of what we have found from the research so far.
First of all, most of the programs around the world allow you to pay in or deposit your money into the mobile wallet for free and the digital-to-digital transmission price — the actual sending price of the money — can be just a couple cents, or less in some countries. Right now where the providers are earning money is on the cash-out side, which can be somewhere between twenty-five or thirty-five cents, depending on which country you are in.
It is still not as cheap as we would like it. There are ways to get it much cheaper, but it is radically cheaper than the alternatives poor people have right now and that's one of the reasons they use it.
Let me give you two examples from the research. One is that low-income people, because they don't have insurance in these countries, when there's an emergency, they go to family and friends and they borrow money. We did a large-scale study by professors at MIT in Georgetown who looked at what is the effect of being a member of m-pesa in Kenya, just having payments, nothing else, not savings, credit or anything. What they found was that people more efficiently sent money in times of emergency from a much bigger network and that network effect protected those people from shocks in the household, whether they were medical shocks — for somewhere around 60 per cent of low-income people who have a crisis, it is a medical crisis — or even good shocks, like having a baby or getting married.
What actually happened was that people who were not members of m-pesa even six months later had a 7 per cent drop in disposable income and being a member of m-pesa protected them against that shock. In spite of the fees, which are relatively low, but we would like them lower, that actually protected that household and, therefore, that's why people were willing to spend the money.
The second thing you raised, rightly, is about credit and savings. We know savings matter tremendously to low-income people. Credit is growing, but it suffers from one of the problems of anonymity for the poor. They're viewed as super risky and they pay very high interest rates because we don't know enough about them. As they do digital transactions, we're seeing new models where groups like M-Shwari in Kenya, M-Pawa in Tanzania and others are starting to offer really short-term emergency loans based on the profile of the payments you have made and other kinds of algorithms.
Suddenly the poor have access to emergency credit in a way they did not. That does not solve the problem of small businesses or the long-term needs of small holder farmers. That's one of the things that we're looking at as the Gates Foundation: How can these credit instruments get cheaper? They're still too expensive. How can they get longer term to have a greater economic value?
It is a mixed story. There are glimmers of hope on one side and still challenges that you identify on the other.
Senator Ringuette: I guess that keeps you going. You have talked in your presentation about a study from the McKinsey group; is it possible for you to forward a copy of that to us?
Mr. Voorhies: Yes, no trouble. We have some of my colleagues in the room and they will make sure that the clerk gets a copy of it. I will warn you, it is rather thick. You might just want the executive summary to begin with, but we will send you the whole thing. It actually is a great insight and informed a lot of thinking, even among central bankers, so I'm happy to share it with you.
The Chair: If I may pursue Senator Ringuette's question just for a moment because I don't quite understand it. If we take Kenya, there's obviously a Kenyan currency. Why would a Kenyan not simply transfer the Kenyan currency on their phone as distinct from taking it into m-pesa?
Mr. Voorhies: The way to think about it, senator, is that they are just transmitting Kenyan shillings. It just happens to be in electronic form, not in a physical currency form, just like we all do with debit or credit cards. They're paying in Kenyan shillings.
The Chair: What is the relationship of m-pesa to the shilling?
Mr. Voorhies: If you think about it this way, think about a mobile phone as just being an electronic wallet. Rather than your bank account being stored somewhere else, it is actually stored in the background in the cloud and accessible through your mobile handset.
It is very similar to the banking service we all use when you put money into Royal Bank of Canada and they give you a credit entry that says that Senator Gerstein has so much money. The same thing happens with Ms. Magadi in Kenya; she puts money in and she has so many shillings in the account and she moves those shillings around. That's distinct from the bitcoin or other kinds of crypto-currencies where you actually are exchanging from a physical currency to a virtual currency.
From the local perspective, it is the same currency. That's true in mobile money around the world right now.
Senator Tkachuk: It is just a digital wallet that holds the currency; right?
Mr. Voorhies: A digital wallet.
Senator Greene: Thank you for being here. We really appreciate the time you are taking in front of our committee.
I would like to pursue the relationship between the m-pesa and the shilling, just so that I can understand it. The implication from your remarks that I'm taking is that m-pesa is just another name for a shilling, but it is the electronic version of it. I had thought that m-pesa was the offspring and the invention of the private company, which is m-pesa, a very large Internet and telephone mobile phone provider.
What you are doing essentially when you buy m-pesa is you are buying airtime. I was wondering about the relationship to the shilling and how the exchange rates are fixed. Supposing that m-pesa, which is the private company, decided to charge a little more for their airtime, how does that relate to the shilling and what it would take to transfer or buy a certain amount?
Mr. Voorhies: Very good question, and it's getting to a really nuanced piece of the technology. Maybe I will give a little bit of history, Senator Greene, if you will allow me —
Senator Greene: Sure.
Mr. Voorhies: — and then I'll talk through, in practical terms, how it works. When these programs first began, there were different pilots around the world. The first use case was sending airtime to each other and then people would cash out that airtime.
There's a great example from a study that was done in Rwanda. After there was an earthquake in one part of the country, suddenly all the map went to sending airtime to that part of the map where the earthquake had occurred, and that was airtime. They were cashed out and there was a ratio to do that.
In the case of m-pesa, they actually worked with the Central Bank of Kenya. It is a private company. It is a company that is partly or majority owned by Vodafone in the UK. The innovation is that they actually exchanged Kenyan shillings for an electronic value of a Kenyan shilling, and that was backed up by a trust account that was held in liquid form, in cash form, in a bank in Kenya, and now multiple banks.
It was very much like when we send money around the world or we send money within Canada or the United States. You are actually taking physical notes and exchanging them for electronic value, and that electronic value is backed up in this case by a 100 per cent liquidity reserve requirement held in trust for the m-pesa product, and then you cash out.
What I can't say, because I don't know the system architecture of m-pesa itself, are the actual zeros and ones that are transmitted over phone to phone. Are they being transmitted as a currency or are they being transmitted in a different kind of electronic form? For all practical reasons there's not an exchange rate commission that is being taken, and they are viewed in practical terms by everyone in Kenya as Kenyan shillings backed up by Kenyan shillings.
That actually had a very specific, important use case that we have to make sure we realize as bankers. Because of the requirement of the trust account and one-to-one mapping, there was no way to create more electronic value than the amount of Kenyan shillings in circulation. There was some worry at one point about whether that created an inflationary problem or other kinds of problems, and the IMF and others have looked and said no because there's no change to the money supply.
There's a nuance in terms of exactly what transmits, but it is probably easiest to think about it exactly as a Kenyan shilling.
Senator Greene: That takes care of a couple of my questions. Thank you very much.
One additional one, though. M-pesa or any of the other currencies like that in Africa, is m-pesa the largest one like that?
Mr. Voorhies: M-pesa is the largest one in Kenya. They're also the largest in Tanzania. They are still the largest in the world, although a group in Bangladesh called bKash may overpass them in the next year or so, but they are equally large.
Senator Greene: That's very interesting. Is there anything about the development of these currencies that is transferable to developed countries like the United States and Canada?
Mr. Voorhies: As we think about that kind of capacity, there are some things and lessons we can learn from it in the developed world. It may have trouble getting traction because we all are pretty happy with what we have, or somewhat. Let me give you what I think some of the differences are, and I think some of it has driven our work, as we have seen.
Many of our current money transfer systems for retail, like credit cards, are actually pull mechanisms rather than push. The merchant pulls the payment from us rather than us, as the user, pushing the payment to the merchant. There are some studies that seem to indicate that it is much lower fraud to have a push system rather than a pull system. I think that's a great lesson and it is one that is circulating through the payment mechanisms around the world, to move from pull to push, because they think that can reduce some of the fraud and some of the transaction costs.
The second thing we can learn is, at least in the United States, I can't send money from my mobile phone to someone else without signing up for a lot of different intermediaries and using my credit card as the wallet in the background. I would love to be able to send money directly to my daughter in Montreal and not pay the $45 to $55 fee I pay right now.
To the earlier question from Senator Ringuette, I pay $45 or $55 to send money to Canada. I would love to be able to do that cross-border for a dollar or a few cents. I think the technology has gotten to the point it can do it, but the infrastructure and the regulations are not ready yet.
The third thing we can learn about it is that, historically, banking has not separated intermediation — meaning I take in money and lend it to others — from payments. That has retarded some of the financial sector innovation, and all of us are paying higher fees than we need to because there's not enough innovation. I think rightly so because we don't want dangerous things done with our financial system.
Some of these economies that have opened up earlier — Kenya, Tanzania, Bangladesh and others — are actually seeing some innovation that we could benefit from in the developed countries. Some of that, again, is moving from pull to push; realtime settlement and clearing on small-value payments, which doesn't happen right now; irrevocability at some level, and I mean that with the right kind of consumer protection; and, lastly, actually thinking through what this committee is doing, what does this new technology do to the number of middle men there are and is it possible that we have a leaner, cleaner, more simple system that would allow very small transaction volume to flow without large fees?
There are some things to learn, but we're pretty satisfied and pretty efficient right now, especially Interac.
Senator Greene: Thank you very much. I do appreciate those answers very much.
Senator Campbell: Thank you, sir, for coming here today. I think it goes without saying the Gates Foundation is a beacon to the world on what can be done if cash along with ideas along with vision takes place.
I'm going off on a bit of another tangent. One of the things we were looking at — and when we started this, I believe it was our focus — was how to regulate bitcoin. As the chair said, we have been talking to just amazing people, people who just think so far ahead — certainly of me, which is not a big surprise — of many people.
First, do you think we need regulations when it comes to bitcoin? Second, if not, can we just sit back and let the marketplace dictate in this? Just as an explanation, it would seem to me that bitcoin isn't as important as the algorithm chain system that has been set up to transfer whatever from point A to point B. If you could just consider those two questions, I would appreciate it very much.
Mr. Voorhies: Thank you, Senator Campbell. I probably don't feel enough of an expert to decide the right way to recommend what the Canadian government does in terms of regulation on the bitcoin space or on the block chain space; let's use the more general term. I would say a couple of things, though, that are interesting about it, for us, that we have looked at and are excited about.
One is we think that kind of technology has some very interesting capacity to make for very, very efficient payment mechanisms. I also think — and I'm sure you have heard and some of the testimony that I have read before this committee would agree with — it is not just even the payment mechanism that is interesting, but you can uniquely store an asset digitally that we haven't been able to before. You can actually track that asset's movement across one general ledger. That for me, when I look at it, has exciting possibilities for low-income people when we think about title registry for land and other areas where they are disenfranchised. I would want us to have a prudent and thoughtful, rather than accelerated, regulatory environment to make sure we don't miss out on real benefits to the economy by jumping in too quickly.
At the same time, as we have stated, or as has been quoted by Bill Gates and others, the technology is exciting, but it does have some weaknesses on anonymity and fluctuation. I think that governments need to look at that carefully. I don't have a good answer; and it sounds like I'm trying to be evasive about whether the Canadian government should regulate.
Senator Campbell: No, not at all.
Mr. Voorhies: It's not my expertise.
I would say that as a protocol, it's an incredible record-keeping device as we can see the location and history of assets. Now the questions are: How do we think about that in terms of identity? How do we think about that in terms of innovation? How do we think about that in revolution of the financial system in a positive way that's prudent? I think that that's where your committee's really providing good leadership.
Senator Campbell: When you send the money to your daughter, you should get her to buy two tickets to the Montreal Canadiens game as the Stanley Cup playoffs will be on. I note that you're educated at Northwestern, which has a fine hockey tradition.
Mr. Voorhies: Unfortunately, I never played for them, but thank you, sir.
Senator Tannas: I want to go back and maybe pick up a little on Senator Bellemare's original question. For a lot of us, it's hard to believe that there are countries where there is less access to indoor plumbing than there is to cell phones. That's hard for us to wrap our heads around.
Those places can give us lots of interesting lessons. There's one that I'd be interested in knowing about because I don't know that we've heard much about it. We've heard in testimony that in spite of all the hoopla, people go through this ceremony of paying in bitcoin and the guy on the other end exchanges out right away. So there really isn't any significant commerce going on in the actual currency of bitcoin. Can you give us a sense of m-pesa in Tanzania and Kenya and what percentage of transactions or money, or whatever measure you might have, are actually taking place phone-to-phone as opposed to going somewhere and getting the cash out, et cetera?
Mr. Voorhies: Absolutely, Senator Tannas, excellent, excellent question. That's the next big challenge going forward.
There was a study done, I believe by the IMF. I don't have the data in front of me, but we'll send that along with the payments report that shows the per cent of GDP that's flowing over various mobile money schemes around the world so you can just get a sense of the proportionality of it and how much electronic value is happening in mobile currency; but that doesn't answer the question about how much mobile commerce is being done.
Senator Tannas: Yes.
Mr. Voorhies: We have a metric that we're working through: How many digital hops does money take before it's cashed out the other end? When that began in this business, it was one, right? You put money in; it made one hop; and it got money out. Senators, my apologies because I don't actually have the exact numbers in front of me but, in a generalized way, that number now for active users is about five in some countries. I'm sorry; that's the wrong number. The number is somewhere between two and four and a half, depending on which countries you're in.
Interestingly, one of the most active countries is Somaliland, the former British colony province, that is doing, on average, 30 transactions per user per month; but that's where people can pay bills with their mobile phone.
You identify a huge challenge, which is that things are only taking a couple of hops before they cash out. We, as the Gates Foundation, think that for low-income people we have to drive the usage; and we have three ways we're looking to do that. First, we want to drive usage on the things that matter. We're taking the empirical evidence around savings, credit and other kinds of access to make sure that those use cases are the first to come out of the block.
One great example out of Kenya is a company called M-KOPA. They will sell you a solar lighting system on credit. Inside the system is a SIM card, so I can simply transfer money from me to that SIM card. It's a pay-as-you-go system, so eventually, at the end, I own that asset. What a powerful way to leverage a payment system to solve a credit problem to solve a lighting program.
Second, we're going to do an experiment in Uganda about school fees. Kids are missing school sometimes for less than a dollar as they don't have the uniform, the book or the exam fee. What if you could prepay those fees every time you had money? They could store in a digital wallet set aside for those school fees. We think you would save thousands and thousands of school days a year for kids. Those are the kinds of use cases where we're trying to get digital money to live longer.
Third, we're excited about taking an open platform approach. We're trying to work with players to allow entrepreneurs and innovators to provide innovation in an Internet-like way on these platforms to come up with use cases.
Let's say you're CARE International and you have a livestock program in Nigeria and want to make sure that your payment helps to save money for fertilizer and seed the next year. Right now, you have to go through a very complex process to get permission to use the mobile payment system. We're trying to create open Application Programming Interfaces, APIs, meaning open protocols to allow you to develop those use cases easily.
We think it's still early stage, but we're seeing the number of transactions that low-income people do moving from one to two to three to seven; but it's going to take time. Your problem is right, but we think it's moving in the right direction.
The last thing on this very long-winded answer is that government-to-person payments are essential. The Government of Mexico digitized, using a card-based system, for its payments over a number of years to low-income citizenry. They're saving $1.3 billion a year according to the Better Than Cash Alliance.
India, one of the largest random control trials, RCTs, in the world with 19 million people, started paying a benefit electronically rather than in cash in a digital manner and we're seeing great household welfare effects.
You're right about the problem, but the direction is at least moving slowly where we want it to go. Apologies for the long-winded response.
Senator Tannas: Is there any risk of governments making a grab for some of the money in the form of a tax, which could potentially drive this back to cash?
Mr. Voorhies: There have been taxes levied in some markets. We, as the Gates Foundation, don't think these services should be taxed. We think that, like banking services, there shouldn't be a value-added tax on them. We actually believe that it's not in the best interest of the long-term economic growth of the country.
Some countries are looking at it, but I think in general the Alliance for Financial Inclusion, which is a collection of governors, is dealing with that issue and I think it will come down in a good place.
Senator Tannas: Good, thank you.
Senator Unger: Thank you, Mr. Voorhies, for an extremely interesting presentation and for all that you and the Gates Foundation do.
I know that life insurance would be an issue probably somewhere down the road; but eventually, it could become important. In your statement under digital financial services, you mention that you work with banks, insurance companies and other providers. I'm just wondering what the insurance company connection is.
Mr. Voorhies: Thank you, senator.
Early on in our strategy, before I came, we did a large amount of work at micro-insurance to understand how small-value insurance policies could reach the poor. I think what we haven't figured out, senator, is how to get the economics and the business model of that right, and how to get the risk distribution right.
There's a lot of work being done. Groups like Telenor, which is a mobile phone company, is doing some interesting experiments around micro-insurance. Right now, we've not focused on it in the current strategy we have. We have focused mostly on payments, and then into savings, and eventually into credit. I think we're waiting for insurance for some more data. We don't feel smart enough on it and we think it's a complex issue. But there have been some experiments done in different parts of the world, so we're watching them very closely, senator.
The Chair: Mr. Voorhies, we have been very much focused on mobile payment systems through the phones. What other economic implications does the use of the phone have for who you're dealing with, in effect, some of the world's poorest people?
Mr. Voorhies: Senator, thank you for the question. I probably am not an expert in all the economics of the mobile phone impact on development, but I can mention a few things that people are looking at closely.
One is exchange of information. There have been studies done on what if I, sitting in a rural area, have better access to crop prices? Can I then demand a higher price for my crop as a smallholder farmer? There have been mixed results on that.
Other things have been in the area of simple messaging and communication that just is a way for low-income people to gather information in a faster, more efficient way. There seems to be some evidence that that's of real value to low-income people and one of the reasons they buy a phone quickly, even though they may not have sanitation in their house yet, which someone pointed out.
Other things that are being looked at is there are a number of interesting developments, once you get into smartphones, at the application level for health and other kinds of mechanisms that people are doing research around. So far, we've been mostly focused on basic phones, because that's what most low-income people have; they don't have smartphones. But as the smartphones begin to roll out, I think you'll actually see some innovations that work for them that way.
The last one that people are excited about is, if you think about just how people do identification, there may be ways to store that in a phone. There's nothing definitive yet, senator, but a lot of hope.
The Chair: Thank you. I would like to move to round two of our questions, starting with Senator Bellemare, to be followed by Senator Ringuette.
Senator Bellemare: I was wondering, with the technology that you use, have you encountered some problems with illicit activity or security problems?
Mr. Voorhies: I think that, like all financial systems, there is some risk and there are security problems. They have been relatively minor, senator, in most cases. As we look through our platform strategy and our approach to this problem, fraud and fraud analytics are a big piece of it. We're working with a large community of payment providers to understand how to drive that so that we have good consumer protection for poor people, as well as good stability. We want to make sure that in this innovation we don't risk up the system. So far there have been good controls, but we think that as the volume grows, you can get even better.
Senator Bellemare: So there were no problems with stolen wallets or things like that? The technology is secure enough so that the amount of wealth that people have in their mobile, they can keep it with security?
Mr. Voorhies: I think that, compared to other vehicles, whether they're different kinds of debit cards or things, yes. If you lose your phone, you don't lose your money. There are ways to get it back.
But there have been normal cases, right? I don't want to lead the committee astray. Like all financial systems, there have been both issues of some fraud, some mistakes, but relatively in control, and so far we've not heard of low-income people losing out. The system itself has protected them.
Senator Ringuette: My first question is to clarify my understanding of m-pesa. M-pesa will take the value of the country currency in which it is being used; that's correct?
Mr. Voorhies: Yes, senator, that's right.
Senator Ringuette: So m-pesa will change in value from Tanzania to Mongolia?
Mr. Voorhies: If you were to think about mobile wallets, and you're in Kenya and you move to a different country, in that country your mobile wallet would be holding in the equivalent — and I use the word "equivalent" — of another currency. So it's not its own currency in the traditional way we think of it.
Senator Ringuette: Just to further clarify in my mind, and comparing to the traditional monetary system, if I make the following statement, correct me if I'm wrong. If I say: M-pesa is not a digital currency; m-pesa is a digital banker that issues bank notes.
Mr. Voorhies: I would be comfortable except for the very last bit, because it doesn't really issue. That's really the right of the Central Bank of Kenya.
What it does is it creates electronic value. In some countries there's what's called an e-money issuer. I guess you could use that word, meaning it takes in currency and it issues electronic value. In that way, I would put it in, so I would probably use that.
But we would almost need someone from m-pesa here to tell us what the system's architecture actually does at that level. I just want to be specific. But I do think it's very safe to say that it's not a currency in its own right; it is an electronic issuance of a local currency. I think that would be okay.
I'll tell you what: I'll ask them, I'll think about it, and if I change my mind, I'll send it to the clerk of the committee. We're into a really detailed point here.
Senator Ringuette: Thank you very much.
The Chair: Mr. Voorhies, you have outlined so many remarkable achievements that many of us on the committee could only dream about. Could you tell us, what do you dream about? What do you see happening as you look out in your crystal ball as to what might be accomplished?
Mr. Voorhies: Senator Gerstein, that's a very excellent question.
As the committee knows, I spent a huge piece of my life in Africa and raised my children there. One of the things that leads me to be active in this work is that I can imagine a world where low-income people are real, full participants in that economy, and the economy benefits from their ideas, their economic activity and their involvement in ways that they're excluded right now.
What does that look like? I think right now we miss out because of the marginalization of low-income people from the economy. We miss out on what they're really contributing in a way that shows up in GDP. I think that there's GDP on the table that low-income people can contribute.
The second thing I have is there were too many times when I saw a low-income person be able to bring a sick child in the middle of the night but not afford the malaria medicine, or a farmer who puts and has to hold all of their money in their pocket for a full year — none of us could do that — and therefore has obligations from family and friends, and finally gets to the planting season the next year and doesn't have enough money for seed.
I imagine a world where people get to safely store their value for the things they want to spend it on, not just for the immediate case in front of them. I imagine a world where, in an emergency, a low-income person can borrow and that way avoid a sick child with malaria dying. I imagine a world where low-income people actually begin to create their own entrepreneurship and ideas because they have access to credit and savings, and then they're protected against risk. I imagine a world where young people get to go to school, and parents are able to pay those bills in advance.
I don't know if that's a great answer, but that's the world that we're working for.
The Chair: It is a great answer.
Senator Campbell: Great answer.
The Chair: Mr. Voorhies, to simply express the appreciation of the members of this committee for your time today I think would be understated. I think I could add to that that it has been a great privilege for us to have you before our committee. On behalf of each and every one of us, we thank you and wish you every good thought in terms of what you are doing. We thank you very much.
Mr. Voorhies: Thank you, Mr. Chairman. Thanks very much.
The Chair: Thank you kindly.
This meeting is concluded.
(The committee adjourned.)