Focused on financial inclusion, this is the third article of a three-part series on convenience, inclusion, and advocacy (Read part 1 and part 2) – and lessons FIS is learning in its quest to support global goals of providing financial access and education to underserved and unserved consumers and businesses.
Two billion. That’s the number of global consumers who remain unbanked! How do you balance the goal of banking the unbanked with the reality of what it takes to achieve so much?
Six Things We Know about Executing Financial Inclusion
1. An effective strategy for one region does not apply to all others. India has made significant progress through government and industry intervention to promote account opening among the poor and support the execution of the government’s Pradhan Mantri Jan-Dhan Yojana (PMJDY) initiative through mobile technology. Is the strategy transferable without a high degree of government intervention? Not in my opinion.
2. There is a common denominator for success: putting unbanked consumers’ attitudes and behaviors at the center of executing a strategy. Unbanked consumers must become motivated – by internal or external forces – to make choices that lead to financial inclusion and, ultimately, enable access to credit at a reasonable interest rate.
3. Unbanked consumers require a compelling value proposition to modify their behaviors. If you’re already toiling 10 hours a day just to feed and house your family, what value proposition is attractive enough for you to persist on the path to creditworthiness? Bankers must identify a clear value proposition that will motivate individuals who, by the nature of their circumstances, view the world through different lenses.
4. Affinity is a key part of delivering the value proposition. Social networks, wherever they arise, can play a key role in delivering the value proposition to motivate its members.
5. Facilitators make financial inclusion possible. Affinity only goes so far without the facilitators – e.g., financial institutions, governments, and other agencies – to provide financial education and delivery mechanisms to make global financial inclusion possible.
6. Financial institutions serving the unbanked can mitigate their risk. Onboarding unbanked consumers with thin credit files are risky but embedding technology in financial inclusion initiatives makes unbanked customer acquisition feasible. Digital solutions reduce service delivery costs. Prepaid cards also provide access to a variety of “pay-as-you-go” transaction services and a path to becoming banked.
Can disadvantaged consumers save their way to financial inclusion?
Can you save enough to become banked? Suppose you’re a disadvantaged Indian farmer whose income depends upon what your crops yield. This past year, you saved money to purchase fertilizer that provides higher yield and, as a result, your income doubled from the prior year. You continue to save and, eventually, you have enough income to open a bank account and obtain access to credit to expand your farm.
Proponents of saving believe that decreasing income volatility and reducing the number of disruptive financial shocks plaguing poor people have a more positive impact than being given access to credit. But the bleak reality is that few people have the ability nor the discipline to save on their own. In India, the average household – not the average disadvantaged household but the average household overall – only has the equivalent of 400 USD in savings. If you’re a farmer, one year of drought and you’re wiped out.
Why do consumers need to be financially included?
It’s far less expensive and less risky to be banked than unbanked. A U.S. consumer at poverty level will pay a minimum of $750 per year to cash checks – twice the cost of a checking account. And, an individual earning the median income will pay at least $1,500 a year for cashing paychecks at alternative financial services outlets, according to the National Consumer Law Center.
Next, add exorbitant interest charges for payday loans, rent-to-own and pawn shops plus the cost of deepening debt for those who miss a payment. Unbanked consumers who miss a payment can easily fall into a cycle of debt, which moves them further away from creditworthiness.
Finally, there is the hidden cost of money potentially disappearing without a safe and secure place to keep it.
Why are two billion consumers still unbanked?
Around the world, unbanked consumers spend from six to 20 percent of their income on alternative financial services, according to the World Bank. For a person in poverty, that’s huge. But, while impoverished people cannot afford to be unbanked, they also cannot afford to be banked. The no. 1 reason that unbanked consumers don’t have a bank account is lack of money, cited by nearly six out of 10 people.
We will be speaking on the topic of financial inclusion at the Inaugural P20 Conference, held on October 9-10 among global payment trailblazers.