By Moin Qazi
For decades, balancing one’s chequebook has been the cornerstone of personal finance for conscientious adults in the developed world. Financial institutions are now engaged in a vigorous battle to enlist the poor as their clients, not just for their business but also to open a window for the poor which allows the global development winds to touch their lives.
A necessity of life
Financial services are like clean water and electricity—they are essential for leading a better life. The frenetic global effort to bring those outside the financial world into it are part of a philosophy popularly called ‘financial inclusion’. They provide an opportunity to people to move out of poverty and are necessary to help them stay resilient through life’s worst moments. Financial services also enable them to save and to responsibly borrow—allowing them to build their assets, improve their livelihoods and invest in education and entrepreneurial ventures.
The term most often heard about those who lack financial services is ‘the unbanked’—which usually refers to people who do not have a traditional savings account. These are the people who have to be brought into the orbit of formal finance.
Greater financial inclusiveness is a gateway for more balanced development and a more cohesive society. With billions of people already using mobile phones, the means to introduce people to formal banking and financial services already exist. Technology has enabled contact with villages half a day away from bank branches and unreachable by road. This has transformed both business and family life.
Opening doors to the poor
Access to an account is the first step towards broader financial inclusion. As account holders, people are more likely to use other financial services, such as credit and insurance, to start and expand businesses, invest in education or health, manage risk, and withstand financial shocks. This can improve the overall quality of their lives.
However, merely opening accounts for the unbanked will not help unless they are actively used by people for managing their money. To make this possible, people have to be given the ability to understand and execute matters of personal finance, including basic numeracy and literacy, budgeting, investing, and risk diversification. This skill is known as financial literacy. It is a combination of financial awareness, and the attitudes and behaviours necessary to make sound financial decisions.
Traditional ways of doing business make it difficult and costly for commercial banks to manage the small balance accounts that low-income families need. So banks often fail to recognise that low-income people could actually be viable customers—with some creative adaptations to business as usual.
The costs of traditional banks
The high cost of building and operating brick-and-mortar bank branches has been a major obstacle to extending financial services to the poor. Physical bank branches are expensive to maintain in far-flung communities while travelling to urban areas is costly for many rural customers.
However, innovations in technology are enabling previously unbanked people to gain access to financial services at an unprecedented speed and scale. Microfinance institutions, banks, mobile operators and third-party providers are all leveraging the technologies behind mobile phones to offer basic financial services at a lower cost than traditional banking allows. There are new types of institutions emerging such as managers, agent network payment aggregators and others who are helping build out a more far-reaching and efficient digital finance ecosystem.
Although digital technology is opening new channels for delivering financial services, challenges persist. Sparse populations, inconsistent network coverage, a lack of trust, or insufficient capital for building new business models, can stand in the way of success, particularly in connecting remote or underserved communities.
The challenges of online banking
To blunt the potential risks of security, it is important to properly equip customers—particularly the newly banked—with financial literacy. They need to save, borrow and move money prudently and to keep away from schemes that can get them into trouble. Point-of-service biometrics are also catching up fast and enabling banks to meet the critical levels of security that are required online.
The challenge of financial inclusion is to understand what is best about all the different ways of reaching underserved customers. It is about understanding what works and building on it. The rapid spread of mobile phones is the game changer that can make the economic benefits of digital finance possible. Fortunately, mobile phone penetration is growing far more quickly than access to financial services.
Many cannot afford regular banks and many others have dropped out of the banking system after getting burnt by the increasing hunger of banks for fees and penalties, much of which focuses on people who cannot afford it. Private banks are choosing to extract more money from those at the lower end of their customer base, and many walk away rather than face a barrage of fees. Excessive documentation requirements and the perception that financial institutions are ‘rich people’s clubs’ are among the most persistent obstacles.
Recovering the dream of financial inclusion
In the early eighties, all bankers were part of a financial inclusion revolution that was far more vigorous than the one we see today. A wave of commercialisation put the brakes on this enthusiastic journey and the great mission was abandoned. The high-profit goals spurred bankers to design rabbit holes in which the poor would get trapped and lose their accounts. The introduction of penalties for failing to maintain minimum balances and or for failing to use an account led to the mass-scale demise of bank accounts of millions of poor account holders.
To utilise financial services to their full potential, low-income people need products that are well-suited to their needs. Bringing this about requires attention to human and institutional issues, such as the quality of access, affordability of products, the familiarity and comfort of use, the sustainability for the provider of these services, as well as proper training and outreach to the most excluded populations.
We must strive to develop tools to enable lower-income people to take charge of their own financial health. We have to address real pains, not just offer benefits. If the industry’s priorities are tweaked even slightly in favour of the poor, barriers to inclusion will begin to fall.
Featured Image Source: Flickr
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