Call BS on the bank of the unbanked
Financial inclusion, banking for the unbanked – call it what you want but, in a nutshell, the gist of these initiatives can be expressed as follows:
People want to borrow money only from banks; people want to deposit their savings only in banks. But, since they cannot access a bank, they are forced to deal with loan sharks and blade companies. To protect people from these unwanted elements of the informal financial sector, banks should expand across the country so that the common man can find a bank around the corner.
The fundamental flaw in this approach and the premise on which it is based were both evident to me when I recently visited several small towns in Tamilnadu and Andhra Pradesh, two states in southern India. Virtually every main street I saw was lined with banks, ATMs, Western Union agents, pawn shops, and gold lending companies. In short, everywhere I went I found formal and informal providers of the full spectrum of financial services peacefully coexisting with each other.
Despite the possibility of accessing banks, why do people go to loan sharks and blade companies?
Before giving my opinion on this, let me quote from The discharged are for real, a blog post by Ron Shevlin, Aite Group analyst on a related topic: “… there are consumers who are really giving up checking accounts as their primary financial account.” Not because they have to, not because they are underserved, … but because they want to. “(Emphasis mine). If Shevlin is referring to the US market, his statement might as well be ‘apply to India.
The key to solving this seeming conundrum lies in two basic drivers of human behavior: speed and greed.
People go into a pawnshop or a gold lending store, pledge their property, and come out with the money. No credit check, no KYC, no empty “we’ll get back to you within 7 business days” promises. No nothing. Fair. Difficult. Cash. Thus, the informal financial sector offers speed. And, by no means is this limited to India: according to this Boston Globe article, “Pawn shops have been part of Western civilization at least since ancient Rome.”
When people can put their excess cash in insured bank accounts, why are they entrusting their savings to a blade company? For the uninitiated, the moniker refers to short-lived traders who – ahem – fly below the regulatory radar and attract deposits 200-300 basis points higher than bank rates. They promise these inflated interest rates by claiming to invest in eucalyptus plantations, emu ranching and other “fast and secure routes to wealth”. History is replete with examples of blade companies – from Abhinav Plantation in the mid-1990s to Sarda Group last year – going bankrupt in high-profile extinctions, leaving their depositors dry. Despite their abominable track record, the next blade company is just around the corner. Why? Because they stoke greed. Bernie Madoff’s Ponzi scheme illustrates that their ilk is not confined to third world countries or illiterate segments of the population.
As a technology marketer, I am tempted to seize every opportunity to position IT as the solution for everything. But, in this case, reality dictates otherwise.
As regulated entities, banks are subject to strict capital adequacy standards. Technology can help banks collect loan applications very quickly, but their risk management policies will reject them even faster. Hello, the pawnshop next door. Interestingly, according to the aforementioned Boston Globe article, pawnbroking actually increased 9% between 2012 and 2013.
GFC has curbed the ability and / or appetite of the banking sector to invest in risky assets in pursuit of higher returns. While banks can certainly use the technology to reach a wider audience to collect deposits from, their inability to offer higher interest rates would make them unattractive to greedy depositors. Hello, the blade company next door.
Due to the speed and greed, however deep the financial inclusion may be, banks will not be able to drive out the informal financial services sector anytime soon.
Which might not be such a bad thing, considering the common man is happy to hang out with them side by side – or on top of each other, as I once noticed!