Can Banks Really Meet the Financial Needs of the Poor?

I don't know that it is fair to say the banks have "no interest" in trying to serve the poor. They do, though, have a primary focus on managing return on capital according to market and shareholder expectations. The potential contribution of the technology industry is creation of tools and products that actually serve the poor in a way that at least meet the minimum returns the banks' masters require. We're still quite a way from that though.

Short answer is that banks certainly CAN meet the needs of low-income consumers, but decades of purposefully excluding them shows that they WON'T.  Besides, the products and services offered by traditional banks fail to meet the unique needs and wants of non-traditional consumers. Once governments and central banks understand that trusted local, community/village businesses and organizations need to be integrated into the delivery of financial products and services, enfranchisement of low-income consumers can take place. 

Jim historically you have been right that banks have shown no interest in meeting the needs of the poor. I think there are many reasons. Understanding of what financial inclusion will take has evolved steadily over the past couple of decades, and only recently have there been solid attempts to design appropriate products. But more significantly, we simply haven't had the technology necessary to make unit costs for small transactions viable from a commercial bank's shareholders' perspective So while there have been some microfinance investments, and other experiments by banks such as Citi and Barclays, there hasn't been a shareholder-friendly business case. That starts to be possible with emerging technologies.

Mobile fintech is moving rapidly towards the huge population of unbanked. I dont think banks are agile enough to pursue new avenues like this one. Smaller companies will continue to prove the value of the unbanked financial market. 

There are some good examples of inclusive services through branchless banking in Bangladesh, Pakistan, India and many other countries.

Interestingly in Pakistan, Mobile operators have acquired microfinance banks as a way to achieve this. A key factor in all these countries has been whether mobile operators and banks have been able to really work together effectively.

Charmaine, interesting point. We'll see some strange bedfellows before we're fully done with financial inclusion! I wonder how well telecommunications and banking regulators are getting on together too in some places?

Love what the Reserve Bank of India is doing.  It realized that banks clearly were not going to be the answer to financial inclusion, so it has offered to license new, non-traditional, special purpose & payment banks, as well as encouage various agents and banking correspondents. Common sense finally occurring in a national central bank. 

Interesting and provocative post, Graham. I believe that your first point is the most challenging. Where do we define the crossover between actual cash and notional cash? One can envisage a system whereby salary, for instance, is paid into an account and drawn out at an ATM. Here the actual and notional cash are the same. But when an underbanked person attempts to overdraw, clearly the bank has to advance cash against a notional security (future salary). Do we mean that the real problem is constructing a credit system for the unbanked? Is this where it gets really difficult to include the unbanked?

Chris - thanks for a great comment. Do we not have flavors of the risk you describe here in existing consumer loans that are either secured against future income streams, or not secured at all? Having said that, the risk model is going to be different and needs some attention. Underwriting is typically a rather expensive exercise, leading to high loan fees that would not be appropriate for a very small short-term loan. Pricing of the kind of risk you describe is also challenging if we're to avoid prohibitive up-front fees for short-term loans. This is no doubt why true APRs for microloans are so much higher than the advertised nominal interest rates would suggest.

Critically important to remember that the population we are discussing deals primarily in cash. These consumers know precisely how much they have to spend and, more importantly, when they cannot spend. They borrow money only when needed as a conscious and considered decision. It is grossly unfair to saddle thess consumers with a financial instrument with the potential to drive them into debt by accident, no matter how well-intentioned the effort may appear to those who are more affluent.   

Yes, Jim, I agree. Hence lines of credit like an overdraft line need to be offered with extreme caution, and underwriting of individual loans needs to take into account ability to repay so far as information is available to support it. I suspect there is still a lot of work to do to come up with credit risk management models that protect the customer and the financial institution, while still allowing flexible loan products with acceptable pricing. Even defining what is acceptable pricing is context-driven and can't be easily generalized.

Graham - Banks have turned overdraft credit into a pernicious and predatory offering in industrialized countries. It would be cruel to allow banks to inflict this practice on the vulnerable population we are discussing. I believe the M-Shwari product, which encourages (requires) savings before one is eligible for credit, is a far more effective and humane way to introduce credit to this population. It neither encourages people to spend more than they have, nor allows them to go into debt by accident.