It’s unfortunate that to describe people with limited or no access to financial services we use terms like unbanked or underbank, suggesting some sort of unmet need. While hearing about the undernourished should draw our sympathy, for the unbanked, apathy would be an acceptable response.
Financial inclusion, is a desirable goal, but framing financial exclusion as unbanked or underbank implicitly suggests that the solution is to bring the bank to the unbanked, just like nourishment is the obvious solution to the undernourished. This has been the direction that policymakers have taken to address financial exclusion: incentivize, nudge or coerce banks into extending services in ways that make little economic sense to them.
Misguided carrots and sticks
Why should a bank invest in an expensive branch in a low-density, low transaction volume location? Lack of interest from banks is only a problem if we insist on the criteria that banks are necessary to bring financial inclusion. As suggested in other post, telcos are better positioned to help in financial inclusion, Safaricom, a mobile operator, has demonstrated this in Kenya. Rapid mobile penetration, in Indonesia exceeding 120%, is given telcos, thru their subscriber base, accessibility unreachable to bank branches or national post offices.
FinTech startups could also be unleashed to accelerate financial inclusion. The obstacles startups are facing in solving the financial exclusion challenge are not technical but legal and regulatory. The UK is setting an example in this area, UK regulators have streamlined the licensing process resulting on the main stream entrepreneurial types to tackle niche markets where traditional banks have neglected such as extending services to new immigrants into the UK.
An added benefit to policymakers is that these non-banks groups need little incentive, competition and commoditization is already putting pressure on telcos to find other sources of revenue FinTech startups require even less incentives, there is plenty of fund backing, (12 billion in 2014 according to the Economist) what is needed is help on the regulatory front. Simply categorizing and relaxing regulations for transactions under $1,000 would trigger more targeted innovation to financially marginalized areas. Dilip Ratha, from the World Bank, has called for relaxation for sub $1,000 remittances, arguing concerns of money laundry, terrorism and similar side-effects are overstated for such small-sized transactions.
The missing layer
For regulators, the advantage of banks is the control point they provide, telcos and unregulated startups can act as an ‘adapter’ layer to the banks providing the services where banks are inefficient or uninterested e.g onboarding of individuals, cash-out. This layer can also provide an aggregation point to more cost-effective transaction volumes to banks but with the advantage to get individual/transaction level data. Distributed Ledger platforms, can provide this level of granularity in an audit-able, and forge-resistance manner to push upstream for the banks to integrate with their compliance machinery.
Compete when you can, partner if you can’t
Banks themselves need to be more proactive at this type of collaboration as the trend of bank disintermediation and unbundling, seen in p2p lending, payments, crowdfunding, and other services continuous to erode into traditional revenue streams. Fortunately, some banks have already reached this conclusion, Jamie Dimon, JP Morgan CEO in a recent shareholder newsletter sounding the alarm of fresh silicon valley encroachments into traditional banking turf voiced the need to compete but wisely, suggested the cooperation route “… we also are completely comfortable with partnering where it makes sense”.
sources
- The economist: Jan 17, 2015 New Banks, Ripe for disruption
- Indonesia, Telecoms, Mobile, Broadband and Forecasts. Budde, Peter Evans, 2014 Indonesia –