On Twitter, I quite often respond to posts about financial inclusion with my “bumper sticker” summary of the issue, which is “unbanked isn’t the problem and banks aren’t the solution”.
I was interested read about Wells Fargo’s new initiative on financial inclusion in America. They point out that according to FDIC data, some 12% of Hispanic households, 14 of Black households and and 16% of Native households do not have access to a mainstream checking account (compared to only around 2% of White and Asian households). Overall, more than seven million households are unbanked. Now, while these numbers may be surprising, they actually reflect a downward trend. They actually represent the lowest level of individuals and households without a checking or savings account since the FDIC began tracking a decade ago but, as I will explain, I think that the figures mask underlying problems.
First, let us note that the absence of a bank account is a severe impediment to life in the modern world. I was reminded of this by a recent BBC documentary tackling the issue of money mules, teenagers who are recruited by drug gangs, fraudsters and scammers want to use a the kids bank accounts used as transit stops for laundering the proceeds of crime. One of the teenagers who had stupidly allowed her account to be used in this way said that the consequences were devastating because now she was blacklisted and unable to obtain an account at all, which proved a considerable barrier to her rehabilitation and in fact the rest of her life.
It’s not just about financial services and getting a loan in the future. In London, lobby groups are complaining that people without a bank account won’t be able to easily buy travel tickets (while proposing, as we will see, the wrong solution of demanding that the transit system keep accepting payment by cash). Note the source problem here: people haven’t taken up the option for a free basic bank account would help reduce poverty by removing the cash penalty from unbanked transactions, while also making access to public transport easier.
The pandemic has revealed other problems. For example, the government struggled to get stimulus funds to certain groups during the pandemic as Sarah Grotta from Mercator pointed out at the time. She identified two key problems: some people didn’t trust the government with their account details and others didn’t have an account at all.
This is not an American problem. All around the world, in both developing and developed countries there are hundreds of millions, billions of unbanked and underbanked people. But why are so many people back to? It can’t be because there is a shortage of banks as there are more banks, challenger banks, neo-banks and near banks than you can shake a stick at. So why do the unbanked and underbanked shun banks and their services? Even in the UK there are more than a million adults without a bank account.
So should the regulators, the legislators and the commercial banks be working together to bring the number of unbanked down to zero? No. It’s the wrong goal. Banking the unbanked shouldn’t be the goal of any national or international financial services strategy. The goal of a modern and forward-looking strategy should be (as my good friend Lisa Wade reminded me) to unbank the banked!
Let’s divide the population into four groups for the purposes of this analysis. I am compelled to do this because of a career in consultancy which leaves me only able to think in 2×2 matrices. On the one axis we have people who can have bank accounts and people who cannot. On the other axis, we have people who want a bank account and people who do not.
First of all then, there are people who want a bank account but can’t get one because they lack the necessary identification documentation. These are the unbanked. This is a problem that isn’t really anything to do banks because it is set up by the regulators. It seems unfair to hector the banks about reaching unbanked populations when they are prevented from doing so by the regulators themselves. A good friend of mine recently experienced this firsthand trying to deal with the estate of the deceased parent who had neither a passport nor a driving licence.
Second there are all the people who could get a bank that don’t want one because they can’t afford the charges. These are the underbanked. Bank accounts are quite expensive things to run (as they should be, because banks should be heavily regulated). In some countries the banks are forced to offer a basic bank account to anybody who can jump the identification hurdle to get one. But a great many of these customers won’t be very profitable and it cost the banks a lot to serve them. Offering them pseudo-bank accounts in the form of prepaid cards doesn’t help much either because the charges associated with such cards are significant. If you don’t have much money and you’ve been hammered by a bank for going overdrawn for a few pounds then you’ll think twice about ever having a bank account again in the future. Plus, you find yourself trapped in a cash economy which is actually more expensive but way
The third category is people who can get a bank account but don’t really want it and don’t use the services offered because the bank account is an 18th-century product designed for a bygone age. These are the underbanked. Professor Lisa Servon wrote a brilliant book about this a few years ago, based on her experiences working in a check caching operation in New York (I cannot recommend this book highly enough).
Fintechs are stepping into the gap here to provide products that are moving more suited to the 21st-century to meet the needs of freelancers, gig workers, independent professionals, creators and so on. At right now, in the absence of digital currency infrastructure, help building this as a layer on top of the existing banking surface that is in effect the loose topsoil sitting on top sediments so of fossilised mainframe processes, COBOL procedures and patched up magnetic tape routines. As Wired magazine pointed out, basic bank accounts (which are mandated by the UK government) are accessible to those with poor credit histories, while challenger banks including Revolut and Monzo do not usually ask potential customers for proof of address in order to open an account. So it seems reasonable to ask why almost two million British adults do not have a bank account.
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The rise of tech firms and capital markets is mostly good news. Access to banks can be costly. Some 7m households in America are unbanked, relying on cheque-cashing firms, pawn shops and payday lenders. Credit and debit cards levy fees of 1-4% on merchants, which are remitted to the rich via air miles and credit-card points.
From How fintech will eat into banks’ business | The Economist:
Finally, there are the anti-banked. These are the people who don’t want a bank account and couldn’t get one even if they wanted to. They are outside the banking system, which never interacts with them in any way.
What the unbanked, the underbanked, the nonbanked and a fair few of the banked need re not banks but new kinds of regulated financial institutions that deliver the more sophisticated services needed to support a 24/7 always-on economy. Banks have to be heavily regulated because they create credit, the gas that powers the economy this blowing up mishandle if not quite safely around the system. You are regulated institutions that handle payments candy, and should be, regulated in a very different way where the protection of consumer funds is paramount. This
If we work on first principles and assume the main purpose of the regulation of consumer financial services is to increase the overall health of the overall financial health of the population then we must find a way to include all of that population in the system. That is not the same thing as making a will have bank accounts.
In their excellent new book “The Pay Off—How Changing the Way we Pay Changes Everything”, Gottfriend Leibrandt (who was CEO of SWIFT from 2012 until 2019) and Natasha de Teran write that “while access to a banking system is seen as a crucial part of a country’s development and necessary for lifting people out of poverty, it is not as basic a need as the ability to pay”.
You a great many people would be well served by a simple digital wallet, as evidenced by the success of Square Cash in the United States, for making and receiving payments. I am an enthusiastic user of Wise, for example, which gives me a multicurrency account that provides “bank accounts “in the UK, US, the EU, Australia and New Zealand. That if I do some work for a client in Australia, they can send us Australian dollars through the banking system to my Australian dollar account. I can manage pounds wanted this casts UK headcount and a nagging transcript out to a UK bank account I wanted or I can use the wise debit card so thoughtfully provided by the company. Under the Bank of England’s groundbreaking thin tech regulation, Wise has access to a settlement account at the Bank of England which means I have access to the payment systems without having to go through a bank that’s making them more efficient cost. Since the Bank of England is about to take things a step further by offering omnibus accounts to thin text to allow them to hold risk-free central bank money on behalf of clients rather then, as under existing electronic money regulations, holding Tier 1 capital which generally means commercial Bank money.
Forcing the banks to offer money-losing accounts to people who don’t want them, and then blocking them from getting those accounts anyway because they don’t have a passport and utility bill, makes no sense and isn’t going to help towards the goal of financial health for all.
Snippings 