We often talk about whether banking the poor can be profitable, as though that’s the only thing stopping banks from providing the financial services the poor need. But in reality, the bigger challenge is that standard consumer financial services simply won’t
do. Even when poor households have access to formal or semi-formal financial services, they use them as just one more tool for managing the inadequate and unpredictable income stream, and unplanned financial shocks, that are an everyday part of their lives.
What would banks need to be able to do in order to have the potential to meet the complex financial management needs of poor households? In a short blog post, of course, we can’t cover everything. But here are some ideas. What is interesting is that emerging
non-bank financial technology providers are already working on most of these, though some of them are focused (understandably) on developed economies. Notice that the items on this partial list overlap and interact significantly – this is typical of the financial
management approach of poor households.
- Digital money with cash options. The advent of digital banking undoubtedly offers some promise for accessible financial services for the poor (as is amply demonstrated by M-Pesa and M-Shwari among an increasing array of digital services). The hard
part, though, is still the cash element. Most poor people live, and will continue for many years or decades, to live in cash economies. Cash-in and cash-out facilities need to be highly accessible and reliable. Banks will need to partner with agent management
organizations (which could be specialized, or could be multi-purpose like an MNO’s agent network).
- Peer lending services. Most lending and borrowing occurs between family members, friends and trusted associates. That isn’t going to change quickly. But for poor households, though convenient and not needing heavy paperwork, this can be unreliable,
unsafe, and sometimes socially challenging. Mobile-driven and digital peer lending services, with known participants and perhaps even unknown (e.g. with some bank underwriting), could significantly improve existing purely informal mechanisms.
- Flexible credit products. In an emergency (such as illness or accident), a poor household will typically need to borrow, but likely won’t have a single source with sufficient lending capacity or the right terms. The ability to seek several small
amounts of credit without necessarily needing to go physically to each friend, relative, or semi-formal source would ease the stress associated with the emergency.
- Targeted financial management tools. This may be the place needing the most research, but may also have the most value. For example, a poor household may today be spending money on an informal deposit-taker for short term savings. Easily solved,
you might say, by a reliable cash-in facility for a digital account. But the real value of the deposit-taker may be that (s)he comes every day for a very small deposit. Some services (e.g. M-Shwari) can already send a daily text reminder to make a savings
deposit. Will this be enough? That remains to be seen. Other examples would include automated distribution of electronically received regular payments (government payments, wages, etc) between loans, savings, current account, family (remittances or loan repayments),
bill payments, etc.; and additionally tools to give visibility into the household’s current and anticipated cash positions.
- Needs-based product options. One of the more complex aspects of household financial management is selection of the “right” saving or lending tool for a particular purpose. A mobile tool that will check on available sources (e.g. peer lending funds,
terms and interest rates, or available deposit instruments, or even demand from reliable peer borrowers, for short, medium or longer term savings) and make recommendations based on the consumer’s needs for liquidity, return, etc.
Many other categories of product need could be cited (and are encouraged in comments to this blog post). The most important job for large organizations seeking to advance financial inclusion (such as CGAP and the Bill & Melinda Gates Foundation) is to facilitate
the bringing together of the right partnerships – research, technology, financial institutions, NGOs, poverty advocacy groups – to bring clarity to what the poor need to help them manage financially, and what is feasible given financial institution economics
and technology capabilities, and then to facilitate development and deployment of such products wherever they are needed (and all by 2020 according to the G20 FI2020 initiative!)
The content of this blog and associated comments reflects my personal views and is not reflective of The Norman Group, World Renew, the CRCNA, or any of their partners.