There are over 2.5 billion people that lack access to basic financial services, a group which is labelled the “unbanked”. In a recently released report, to coincide with the World Economic Forum, Capco and Ashoka look at the issue and consider ways in which the traditional banking system can open its doors to accommodate in a customer oriented way the unbanked multitude.
In a recent white paper collaborated on by Capco and Ashoka*, titled “Financial Inclusion – 4th Generations Solutions for Low Income Banking”, the traditional banking system is challenged to consider creating a “4th generation” banking model that is more inclusive of the unbanked, those lacking access to a bank account. The report analyses the current state of the world population’s access to banking services and considers ways in which traditional banks may come to access those not yet under their dominion.
While in the UK banking services are enjoyed by most, globally more than a third of the world population, some 2.5 billion people (50% of the adult population), do not engage with traditional backing services: they are the unbanked. While the expectation may be that this stems out of abject poverty, the trend is considerably more complex; with many not living in subsistence poverty, and represent a potentially bankable population. In the US for instance, which is a considerably developed country, more than 25% of households lack or do not use a bank account.
The consequences of not having a bank account are complex. In the US for instance, the unbanked use a variety of subsidiary services, such as pay day loans, that often require the user to pay a considerable and burdensome premium. With the average US household having an annual income of about $25,000, almost 10% of income is spent on fees and interest charged by alternative providers. In many developing countries the consequences of being unbanked affect the possibility of accessing the credit required to improve or scale up their businesses, such that farmers can’t obtain credit for seeds and fertilisers; or women can’t become productive members of the economy because the means to access banking services are out of reach.
Banking without the bank
The reasons for being unbanked are complex and multivariate, with both the client and business side facing issues. The collaborators find that the failure stems from a combination of rational market failure coupled with what they describe as an irrational unwillingness to innovate ways of engaging 35% of the world population. In terms of profitability, offering branch services to rural areas simply lacks a clear case for a reasonable return on investment, with the report noting that “Profitability is low because the unbanked have few deposits to lodge and because retail bank overheads are so high. The ‘traditional’ branches are less attractive than ‘human engagement points.” Furthermore, the poor are hard to assess for risks, making loans to already poor people that cannot handle high interest rates, highly risky and unprofitable.
For the unbanked themselves there are considerable issues with engaging with banking institutions, the reasons for which are complex and differ greatly across economic zones. Key problems are trust, with the unbanked having so little which may be needed at short notice that having it close to hand feels safer; costs, the transfer and bank fees eat into what is already small incomes; permission, especially women are prevented by social institutions to participate in finances; financial literacy, the lack of knowledge and skills to make rational financial decisions; identity papers, the lack of complete identities; lack of physical access to services; and cultural preference for lending circles.
Bridging the gap
One group that has attempted to bridge the gap between traditional banking services and the unbanked are social entrepreneurs. These organisations offer services, often run on a not-for-profit basis, seeking to connect the unbanked with financial knowledge as well as lower the barriers toward inclusion in the financial ecosystem. There are generally four kinds of approaches to engaging the unbanked. For instance, “aggregators”, start grass root movements to assess and bring together a community, such that the risks to banks are better understood and the group becomes more attractive to the bank.
4th Generation Banking
Yet while social entrepreneurs have a place in the wider ecosystems of solutions to open up financial services to 50% of the world population, the authors suggest that traditional banks need to consider moving toward a “4th generational model” for banking. A model in which the unbanked are not seen merely as a social responsibility project, but in which they play a central role in the core business of the bank, with the bank considering ways in which to include this financially marginalised group.
Transforming banking this way will require addressing the key problems faced by those outside the traditional financial system. For most of these issues, a 4th generation banking model is needed that accommodates the needs of the unbanked demographic. The report identifies that extreme customer focus will need to be leveraged to overcome the barriers the unbanked face, such that both parties can benefit from the relationship.
* Ashoka, founded by Bill Drayton in 1980, is a global community of the world’s leading Social Entrepreneurs - Ashoka Fellows - who deliver system-changing solutions to some of the world’s most urgent social problems.