Financial Inclusion: Not “Yes” or “No”, but “How?”Peter Shortall |
Since the 2008 U.S. financial crisis, the financial services industry has subtly adopted new terminology for the consumers at the center of the storm. These consumers used to be “subprime”; now they are “underbanked” or “underserved”. But in the course of this terminology shift, we seem to have forgotten the needs of these consumers. We do so at our peril from many perspectives: risk, product development and public policy to name just a few.
Pre-crisis, the industry and government imperative was to enable subprime consumers to purchase their own homes. If home ownership was an unequivocal good, more was better: home ownership rates leapt from a historical average of 63 to 66 percent to a peak of 69 percent in 2004.
In hindsight, we have come to understand there were significant unintended consequences of the “more is better” assumption in subprime mortgage lending: unserviceable debt, labor immobility, collapse of neighborhoods and indeed the near collapse of the U.S. economy.
Are we heading in the same direction with “the underbanked”?
Possibly the best talking shop for underbanked issues is the annual Underbanked Financial Services Forum sponsored by American Banker. It’s becoming clearer that the “more is better” assumption is in play again.
From qualitative financial inclusion research MasterCard Advisors has conducted with underbanked consumers, a few insights emerge that can help bankers and regulators avoid the problematic “more is better” assumption with respect to financial inclusion.
Many underbanked consumers are underbanked by choice—they know the terms of the banking relationship and simply choose not to play that game. They are making a conscious choice, much as many prefer to rent instead of own a home. At the same time, alternative financial service providers offer value that the banks can’t touch:
- Real time settlement—no waiting for the check to clear
- Location and time convenience—shift workers actually prefer to pay bills close to home late at night
- Fee transparency—two percent may seem like a hefty check cashing fee, but if the check is only $120, the $2.40 fee is much less than a potential $30 bank overdraft fee if the account becomes overdrawn before the check clears.
Prepaid can solve for some of these needs but can’t be the only answer – there is still plenty of room for innovation. Let’s start with consumer needs.
It may be time to pause and reflect. Let’s not forget the risk of those unintended consequences…