The SWIFT Institute, in partnership with the Ash Center for Democratic Governance and Innovation and the Mossavar-Rahmani Center for Business and Government, held its first conference at the John F. Kennedy School of Government at Harvard Kennedy School on Thursday, February 28 and Friday, March 1, 2013. The topic was financial inclusion, and several academics presented their research findings to an audience of commercial bankers, central bankers, regulatory experts and other financial industry specialists.
Financial inclusion has been widely researched, yet many questions are unanswered, and how to structure the financial system to include the excluded in an appropriate and cost-effective way is unclear. It is thought that nearly three billion people worldwide do not have access to a bank account or any formal banking services, and many more of the world’s poor who do have a bank account either rarely or never use it. The majority of the unbanked population is located in low- income countries, so while this is predominantly a developing world problem, there are also significant numbers of excluded or unbanked adults in developed regions, including Europe and North America. For the unbanked it is a challenge to gain access to banks and the services they offer. For banks it is a challenge to reach the unbanked.
In a keynote dinner speech on Thursday evening, Dr Guillermo Ortiz, Chairman of the Board, Grupo Financiero Banorte, and member of the SWIFT Institute’s Advisory Council, said financial inclusion was “a fundamental issue in terms of economic growth and a basic concern for poverty alleviation”. A key theme running throughout his speech was that the strategy of importing existing models to provide specific financial services is unlikely to advance the financial inclusion agenda successfully.
Elizabeth Rhyne, Managing Director of Accion’s Center for Financial Inclusion, has looked in depth at the informal money management models of the poor and found that their financial requirements are complex and often involve many cash transactions of small amounts. There is no bank account hub at the centre of their money management model, but rather a ‘pocket’ system, where money is kept in different places according to its intended use. She doubted that having a bank account would encourage an entire set of money management habits to change, but recognised that the pocket system would not be sufficient for handling higher level of economic activity as someone becomes better off.
Financial institutions need to consider informal services as their competition, proposed Professor Guy Stuart of the Harvard Kennedy School, and to think about what value could be offered to a low income customer. Timothy Ogden, of Financial Access Initiative, continued this thought by asking what is wrong with banking products and services that they are so much worse than the informal models: why would someone prefer to take a remittance in cash than via a bank account? Ruth Goodwin-Groen, of UN Better than Cash Alliance, stressed the importance of looking at the wider picture other than simply ‘poor’, and include other variables such as religion and cultural differences, India/Africa, rural/urban, or men/women when assessing the needs of the financially excluded – they vary greatly and a ‘one-size-fits-all’ approach is clearly very difficult to apply.
Roger Voorhies, Director of Financial Services for the Poor at the Bill & Melinda Gates Foundation, suggested that the “if only we knew more” approach to understanding the behaviour of the poor may not be all that helpful in helping us address financial inclusion, because poor people are as irrational in their behaviour as anyone else. Picking up on this point, Ros Grady, Conjoint Professor and CEO of the Centre for International Finance and Regulation, emphasized the importance of financial education and helping people to understand what financial products can do to help improve their financial situation.
Leila Rispens-Noel, of the WIMLER Foundation in Hong Kong, focused on the financial arrangements of the migrant workers of South East Asia and the Middle East who send money home to their families, and she, too, highlighted the importance of financial literacy. The culture of dependency on migrant workers can last a long time, and the families at home receiving the money need to understand why they are saving, and for what. She said there needs to be a more determined effort in this area, as a three-hour training session is not enough to change deeply ingrained financial habits, and more importantly to reach a stage where the cycle of dependency on a migrant worker can be broken.
Although the unbanked population is a large and relatively untapped market, it is not easy for banks to make smooth inroads into this space. As the banking industry becomes more tightly regulated, and ‘know your customer’ processes are long-term investments and expensive to implement, there is a danger that banks will avoid the risk of getting involved with the unbanked altogether. It is difficult to balance outreach to the unbanked with the need for banks to be safe and sound. The irony of this can be seen in the remittances business, particularly in the Middle East, where the challenge is to keep payments flowing through official channels. Cost is another issue for banks: the poor do not want to pay transaction fees but neither do the banks. Mobile services have emerged strongly in parts of Africa as a low-cost way of managing money and making payments, and these present both opportunities and challenges for banks. Mobile transaction costs are lower than traditional banking transaction costs, but mobile services are able to exist completely outside the established financial sector making it difficult to integrate with other financial services offered by banks. This raises the question; at what point should mobile payments come into the regulatory environment?
Jay Rosengard, Director of the Harvard Kennedy School’s Financial Sector Program closed the day by acknowledging the growing consensus of the positive relationship between financial sector development, economic growth, and poverty alleviation.
The challenge facing banks is to identify the point of convergence between their need to make money and consumers who want to be able to use a financial service that’s meaningful in the context of their lives.