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Banking the unbanked

The banking system is not particularly popular with the common man or woman at the moment. Banking is seen as self-serving through the apparent desire to soak up rescue and recovery dollars by the billion, without doing what a majority of the population would like to see: drip feed some of that cash back to the people and small businesses that need it to survive. So when I read the WBJournal's story by Livia Gershon, about efforts to open the banking system to more low income people, I had to try hard to keep an open mind.
The western world is absolutely dependent on a healthy banking and financial services industry. The governments of the world outsourced (or maybe never really took control of) the infrastructure for handling money at the level of individuals, so the bail-outs that the banks benefited from are not surprising - without banks, we all suffer. The way that the bail-outs was sold to the taxpayers though does not fit what many are seeing in practice, with lending a flow of money as bad as ever. At the level of the unbanked (those who can not get a bank account or where it is financially impractical to do so), the problem is likely to seem irrelevant. If the banks don't appear to be handing out money, you probably don't care if you couldn't even get a bank account to put your money into.
According to the WBJournal story:


“We see people that are just still not using mainstream financial services, and they’re being taken advantage of in many ways,” he said.

In Massachusetts, 4.1 percent of households are unbanked and 11.4 percent are underbanked. Among households with incomes under $15,000, 24.8 percent are unbanked, and another 18.1 percent are underbanked. Nationally, 7.7 percent of all households are unbanked, and 17.9 percent are underbanked. The national numbers for households under $15,000 are 27.1 percent and 22.3 percent.


So, Massachusetts does better than the national average on persuading people that use of the mainstream system is better for them, but there are still huge numbers of people without access to those services. As a comparison, the United Kingdom, with a population of 61 million people shows 0.89 million individuals live in a household without access to a bank account. This equates to approximately 1.5%. This isn't about national competitiveness, just a number to help show that there is still room for improvement.
For banks to ever meet an acceptable level of social and local community responsibility in their provision of banking services to all there are several things that have to happen:
  1. Banks need flexible account opening procedures, to handle the less common cases, especially where an individual does not have a history of bank usage, or has unusual identity documentation
  2. In order to keep the costs to customers at close to zero, the efficiency of back office processes needs to be kept high, to keep transaction costs low
  3. A change in attitude may be required, to help banks see the new potential customers as a long term investment, rather than a burden they feel resentful of welcoming to their customer ranks
Quite frankly, #1 and #2 are easy to handle - with streamlined and well managed business processes that cut much of the waste and time-lags from a process, while ensuring the flexibility to handle complex cases. If a bank or credit union needs help understanding the opportunities here to help all customers, not just the unbanked, there are many resources available describing process improvement for financial services. The blogroll on my blog links to many of them. When considering these approaches, banks will be aware that keeping costs down is not about cutting jobs; its about opening their available market to a broader segment of people.
#3 is harder though. Attitudes can be changed in any business when appropriate information is made available. If it can be seen that in the long term, previously unbanked customers are responsible account users, and eventually become profitable borrowers through mortgages and loans, perhaps banks will be more likely to extend a welcoming hand. This is more likely to happen if banks have a full customer profile available, and can see that on average customers falling into this segment make decent business sense. Without information on the whole profile of a client, any business is likely to make rash decisions at an individual and group level.
I hope to see these numbers again in another twelve months and see the number of unbanked much lower.


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