I have always been a little wary of the increasing focus on financial inclusion.
Call me a sceptic, but when profit-generating institutions speak of creating products to serve the poor, I get apprehensive.
Being part of a formal financial system is undeniably helpful. Dealing in cash comes with security risks and being banked leads to the building of a financial profile that makes it easier to access credit to smooth cashflows or to put towards investment in education or a business.
I need no convincing that society requires people to be part of a formal financial system in order to thrive, nor that exclusion, whereby products and services are not available or are unaffordable, needs to be addressed.
But it feels like financial inclusion has been engulfed by a focus on payments and transactions that misses its larger aim. In the World Bank’s commitment to universal financial inclusion, are we just trying to get the two billion people around the world who are unbanked into a financial system so they can transact with greater ease, or are we trying to help them step out of poverty?
I had thought it was the latter, but the latest data from the World Bank’s Global Findex report concerns me.
Since the last report three years ago, some 515 million individuals have opened an account and 69% of adults are with a bank or mobile money provider. That’s up from 62% in 2014. This seems like progress. But over those three years, the percentage of people putting money aside has not increased – in fact it has decreased slightly. The percentage of people accessing credit has also not budged, indicating that those coming into financial services are not using them other than for transactions.
Account inactivity also seems high – some 13% of them have been not been used for 12 months.
It is the savings data that is the red flag to me, suggesting we need to reassess our current approach lest we end up with a global payments system and little else to show for all that pushing for financial inclusion.
A look at developed countries should encourage us to be more mindful about encouraging financial inclusion in developing economies.
According to a 2016 GoBankingRates survey, 35% of all adults in the US only have a few hundred dollars in their savings accounts, while 34% have none at all. Total US household debt rose to an all-time high of $13.15 trillion at the end of 2017, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data – equivalent to about 78% of GDP.
In the European Union, the household personal savings rate has crashed since 2010. It is now about 10%, down from 13% eight years ago, and the lowest it has been since 1999, although personal debt has come down since the financial crisis.
What is obvious when we look at developed economies with close to 100% financial inclusion is that access to financial services does not equate to financial health – something that Elisabeth Rhyne, managing director of the Center for Financial Inclusion at Accion, says we simply aren’t talking about enough.
I cannot help but hold banks and financial institutions responsible. I met with a large US bank recently that is striving to serve low- to middle-income customers. In a bid to bring the under-banked into a formal banking system, it offers free deposit accounts. That is very commendable – although let’s not forget the value to the bank of collecting deposits.
But what about savings accounts? I asked.
Savings accounts can be opened with just $25, the bank replied.
But here is the catch: it costs $8 a month to keep that savings account open until it hits a minimum balance of $500. Given that 34% of Americans have nothing in their bank account and another 35% only have a few hundred dollars, who is incentivized to get on the savings ladder with those kind of charges? They are better off keeping it under the mattress.
To me, this is financial exclusion and is something that must not happen in developing economies as more people come into the system.
It is why this trending focus on financial inclusion makes me apprehensive. It is in the financial institutions’ interest to create products that allow for transactions and deposit collection because they are profitable. It is not in their interest to create low-margin savings products.
That disconnect will scupper what I consider to be the original aim of financial inclusion: to help individuals save so that they can, at the very least, withstand emergencies, as well as preserve and grow their wealth.
So it is my hope that we don’t just congratulate ourselves that more people are in the system than three years ago, as the 2017 Findex report indicates, but that we revisit the aims of financial inclusion so that the 2020 report will show that financial services are truly helping the poor, rather than just helping them move money.