Banking the Unbanked: Is it a promising frontier for financial inclusion?

According to the World Bank, Unbanked are individuals that do not have access to financial services and are forced to rely on inconvenient and often risky means to manage their money. There are more than 2.5 billion people around the world that do not use any type of financial services in their lives. 62% are adults located in East Asia, Middle East, Latin America and Africa. They do not belong to any financial institution including microfinance organizations.

Studies reveal that the main reason for the existence of a large population of unbanked adults is not the lack of access to financial services in these regions but the big barriers in usage. Surprisingly, socioeconomic and demographic factors do not entirely determine the financial inclusion of the unbanked.  There are approximately 800 million that use formal financial services and live on less than $5 per day. Some of the main reasons to be unbanked are:

• the requirements from financial organizations to open an account are very bureaucratic and time consuming
• there is a lack of alternative channels to contact banks because traditional banking models are based on branches
• government restrictive regulations, such as amount of deposit, limit the access to financial services
• corruption in the system negatively affects the trust of potential customers
• products and services offered by the bank are complex, and there is no financial education available to have a better understanding of them
• unbanked population feel unwelcome in traditional banking branches

But, why banking the unbanked is important? What would be the benefit of financial inclusion? We have seen in our lives that credit score to get a loan or a credit card and access to financial services in the form of deposits is usually necessary to buy a house, open a new business, give education to our children, and open many other possibilities. Additionally, a study performed by the World Bank in 2009, shows that poor people prefer to save outside the home to avoid the temptation to spend and divert funds from other family members. Thus, they tried to find informal saving groups in their community.

These informal groups can offer both benefits and risks. However, financial institutions can offer a safer financial environment for their customers balancing return and risk. Current situation is that financial institutions charged high interest and fees for offering their services, but here is the thing: it doesn´t have to be expensive to give financial services to the unbanked.

The following two examples reflect innovative and cheaper ways to access financial services. These two examples are focused on deposits; nevertheless, the trend is that financial organizations are starting to be co-opetition to offer both deposit and loans in a more accessible, flexible and reasonable way.   

WIZZIT

WIZZIT is a provider of basic banking services for the unbanked in South Africa. Its services are based on the use of mobile phones for accessing bank accounts and conducting transactions, in addition to a debit card that is issued to all customers. The company does not operate any branch, but it partners with Barclays and South Africa Post Office that act as bank agents. The brand is owned and operated by a group of independent entrepreneurs and it only recruits unemployed people. WIZZIT is now partnering with microfinance institutions to give a wider bank offering.

Vodafone M-Pesa

Vodafone Money Transfer is the most successful money transfer service that enables millions of people who have access to a mobile phone, but do not have access to a bank account, to send and receive money, top-up airtime and make bill payments. Customers register for the service at an authorized agent, often this is a small mobile phone store or retailer, and then deposit cash in exchange for electronic money which they can send to their family. Once they have registered all transactions are completed securely by entering a PIN number and both parties receive an SMS confirming the amount that has been transferred. The recipient, who does not have to use the same network, receives the electronic money in real-time and then redeems it for cash by visiting another agent.

In Kenya for example, Water Company customers use M-PESA to buy credits which are 

transferred from their phone to their key fob which is then used to pay for fresh, clean 

water when they need it.

It is estimated that by 2016 there will be 1 billion of mobile phones in Africa. Using technology could give access to millions of people to cheaper financial services. However, low incomes, illiteracy and large signal black spots are all obstacles to the sale and use of mobile phones. Taxes, which can be as high as 30% in countries like Tanzania and Uganda, are also a disincentive. Financial institutions still need to work on breaking barriers to bring better solutions to the poor, but it is certain that the industry is expanding to serve this segment. 

Sources:

International Bank for Reconstruction and Development. (2009). Banking the poor. The World Bank, doi: 978-0-8213-7755-0

Economist Intelligence Unit. (2011). Banking in sub-saharan africa to 2020 promising frontiers. The Economist. https://www.eiu.com/public/topical_report.aspx?campaignid=africanbanking

Chaia, A. (2009). Half the world is unbanked. In Financial Access Initiative. doi:www.financialaccess.org

The World Bank. (2012). Who are the unbanked? (infographic). Retrieved from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTFINANCIALSECTOR/0,,contentMDK:23174014~pagePK:210058~piPK:210062~theSitePK:282885,00.html

WIZZIT Webpage. (2012). Company information. Retrieved from http://www.wizzit.co.za/

Ogunlesi, T. (2012). Seven ways mobile phones have changed lives in africa. Retrieved from http://www.cnn.com/2012/09/13/world/africa/mobile-phones-change-africa/

http://intelligentinclusion.com/wp-content/uploads/2012/08/Mpesa-infographics-with-Logo.png

Vodafone Group. (2014). What is vodafone money transfer?. Retrieved from http://www.vodafone.com/content/index/about/about-us/money_transfer.html