Calling B.S On Banking The Unbanked

Financial inclusion, banking the unbanked - call it what you will but, in a nutshell, the gist of these initiatives can be expressed as follows:

People wish to borrow money only from banks; people wish to deposit their savings only in banks. But, since they can't access a bank, they're forced to dealing with loan sharks and blade companies. To protect people from such undesireable elements of the informal financial sector, banks should spread out all over the country such the common man can find a bank around the corner.

The fundamental flaw with this approach and the premise upon which it's based were both apparent to me when I recently visited several small towns in Tamilnadu and Andhra Pradesh, two states in South India. Virtually every high street I saw was lined with banks, ATMs, Western Union agents, pawn shops and gold loan companies. In short, wherever I went, I found formal and informal providers of the entire spectrum of financial services peacefully co-existing with one another.

Despite being able to access banks, why're people going to loan sharks and blade companies?

Before I give my take on this, let me from quote from The Debanked Are For Real, a blog post from Aite Group analyst Ron Shevlin on a related topic: "...there are consumers who are truly giving up checking accounts as their primary financial account. Not because they have to, not because they’re under-served, ... But because they want to" (italics mine). While Shevlin refers to the US market, his declaration could equally well be applicable to India.

The clue to resolving this apparent conundrum lies in two drivers of basic human behavior: Speed and greed.

People enter a pawn broker or gold loan shop, pledge their belongings and walk out with cash. No credit check, no KYC, no empty promises of "we'll get back to you in 7 working days". No nothing. Just. Hard. Cash. So, the informal financial sector delivers speed. And, by no means is it restricted to India: According to this Boston Globe article, "Pawnbroking has been part of Western civilization at least since ancient Rome". 

When people can park their surplus cash in insured bank accounts, why do they trust their savings to a blade company? For the uninitiated, the monicker refers to fly-by-night operators that - ahem - fly below the regulatory radar and attract deposits at 200-300 bps higher than bank rates. They promise these inflated interest rates by claiming to invest in eucalyptus tree plantations, emu bird farming and other "rapid surefire routes to riches". History is full of examples of blade companies - from Abhinav Plantation in the mid 1990s to Sarda Group last year - going bust in highly publicized flameouts, leaving their depositors high and dry. Despite their abominable track record, the next blade company is just around the corner. Why? Because they stoke greed. The Bernie Madoff Ponzi scheme illustrates that their ilk isn't restricted to third world countries or to illiterate segments of the population.

Can banks use technology to match the informal financial sector in delivering speed and pandering to greed?

As a technology marketer, I’m tempted to grab every opportunity to position IT as the solution for everything. But, in this case, reality dictates otherwise.

As regulated entities, banks are subject to stringent capital adequacy norms. Technology can help banks collect loan applications really fast but their risk management policies will reject them even faster. Hello next door pawn shop. Interestingly, according to the aforementioned Boston Globe article, pawn broking actually grew by 9% between 2012 and 2013.

The GFC has curbed the banking industry's ability and / or appetite to invest in risky assets in the pursuit of higher returns. While banks can surely use technology to reach a wider audience from whom to garner deposits, their inability to offer higher interest rates would render them unattractive to greedy depositors. Hello next door blade company.

Because of speed and greed, no matter how widespread financial inclusion becomes, banks won't be able to drive away the informal financial services sector anytime soon.

Which may not be such a bad thing, seeing as how the common man is happy to patronize both of them side by side - or one on top of the other, as I noticed on one occasion!