The ‘unbanked‘ or the ‘under-banked’ are typically those who either reside in remote areas or who are poor. These folks do no have ready access to banking facilities.
Why? As I have said before, that is mainly because the banks do not perceive these folks to be profitable customers. Private banks will not touch these customers and then onus then lies on the state-run banks to reach out to these customers.
Even for state-run banks, despite having numerous branches in far flung corners, rules and regulations make it difficult to sign up every person in their area as their customers. There are multiple reasons as to why the banks are unable to sign up poor customers. Some of them are –
- Very difficult to prove identity. No license. No voter registration card etc.
- No valid address or frequently changing addresses
- Lack of stable income source therefore no significant deposits
- No (or lack of sufficient) property or collateral
- Increased default on personal loans
The poor, on the other hand are mostly illiterate and feel intimidated by banks and their processes. So, they tend to avoid banks and as a consequence, their financial transactions are conducted via informal shadow networks.
Micro-finance has thrived in many developing countries for this reason. But micro-finance also has its deficiencies and can only scale so much. One key observation that is of import is that most micro-finance networks are women run and cater to the needs of women (who ostensibly understand the needs of their households more than men). This is not a bad thing, as more women are taking charge. But they are more comfortable in settings more conducive to them – among other women. Banks offer a very officious setting and are typically male run – creating invisible barriers for women who want to take control of finances.
On the other hand, the financial transactions of the poor are mainly micro-transactions characterized by their high-frequency but low value. The perceived economic value of these transactions are in fact quite high for the poor. But, for the banks these are extremely low value transactions. Each transaction adds costs and therefore, for banks on a net-net basis this section of the population is ‘unprofitable’.
The notion of ‘Branchless-Banking’ is quite interesting. To increase financial inclusion, much like the pre-paid phone revolution, a vast network of agents, shop-keepers etc can be used to operate virtual bank-branches. These agents could be associated with either one or several banks and could serve as facilitators of financial transactions.
This will save the banks from the high fixed costs of operating a branch and instead they could extend their reach at the neighborhood level. The poor on the other hand now have the flexibility of using these outlets/agents on the go.
Since the agents in the neighborhood will know their customers intimately and the ‘identity’ issue will be solved despite lack of adequate paperwork. Mobile phone numbers can be used as the customer identifiers.
Furthermore, the operating model for banks can now be transaction based as opposed to ‘float’ based. In traditional banking, customer deposits are loaned out at higher interest rates (float) for the banks to make money. Transaction banking will be ‘deposit-less’ and based on ‘Pay-as-you-go’ model. Every transaction could potentially be profitable. In addition, this could be augmented by small deposits stemming from crop-sales or sale of land-holdings or inheritances or even weekly cash-paychecks.
Customers will now have the flexibility to deposit or withdraw money from any agent. Nominal interest rates can be paid on deposits or there could be schemes to incent customers to deposit/save for longer terms in exchange for higher interest rates.
In addition to broad-base financial inclusion with transactional branch-less banking, I see an added societal benefit in that this could potentially decrease corruption. As an example, in India, NREGA (National Rural Employment Guarantee Act) is a right-to-work scheme that mandates at least 100 days of unskilled work for the poor. This is to ensure that seasonal workers have a means to earn an income during the non-season. It is a popular program and has helped augment incomes for many low-income families. But, it is also riddled with corruption and fraud as it is a predominantly paper based program. For example, the worker roster may contain fictitious workers or the workers may be paid rates much lower than what is registered in the paperwork.
If the workers are paid using their mobile phones numbers, the instances of fraud will dramatically reduce and workers will be paid their fare share on time. This will also allow the government to account/budget for tax-payer monies in a better manner and allow for accurate reporting of program statistics.
And workers can then get paid at their branchless bank as opposed to being at the mercy of the bureaucrats who run the program. It will be a win-win for everyone.