Financial inclusion? Merely opening physical accounts in banks as flag posts of financial identity won’t help

By Moin Qazi*
For decades, balancing one’s checkbook has been the cornerstone of personal finance for conscientious adults in the developed world. I remember when I first opened an account of my own in my college days, I received a little booklet, the ubiquitous passbook, in which every deposit and withdrawal was acknowledged by the bank staff. I learned that keeping track of the bank balance was the personal hygiene of finance, like brushing your financial teeth. The implicit message, not just for me, but I think for society at large, was that the bank account was the locus of money management. All one’s main financial transactions would pass through the account, and the account would serve as a mirror of or financial health, showing not only income and expenses but also measuring solvency.
This philosophy has been the cornerstone of personal finance for adults in the developed world. And it is now the key focus of governments in developing countries. Financial institutions are now engaged in a vigorous battle to enlist the poor as their clients, not just for their business but to open a window for the poor which allows the global development winds to touch their lives.
Financial services are like clean water and electricity — they are essential to leading a better life. The frenetic global effort for bringing those outside the financial planet into it are part of a philosophy popularly called ‘financial inclusion’ .What exactly is financial inclusion .it is providing people access to high-quality financial tools —tools that they can afford, that are safe and properly regulated, that they can access conveniently from institutions that treat them with respect . With access to financial services, people can help families improve their lives in critical ways -- start businesses, send kids to school, provide better nutrition or simply put a roof that doesn't leak.
They provide an opportunity to people to move out of poverty and are also necessary to help them stay resilient through life’s worst moments without being pushed deeper into debt. They enable them to save and to responsibly borrow—allowing them to build their assets, to improve their livelihoods and to invest in education and entrepreneurial ventures. The term most buzzed in this respect is “the unbanked”— usually defined as people who don’t have a traditional savings account. These are the people who have to be brought into the orbit of formal finance.
Improved access to finance increases savings, reduces poverty, promotes employment and improves overall well-being. The poor need to set aside money in times of plenty and draw it out in lean times. Without a safe place to save money, it’s difficult to cope with the unexpected or to plan for the future. Financial services allow you to insure for health care, save for children’s education, and borrow for wedding or funeral costs. Improved savings and loan services and inclusive insurance plans are necessary for people to take control of their lives when life feels most out-of-control. These are the key elements of financial health.
Greater financial inclusiveness is a gateway for more balanced development and growth and a more cohesive society. With billions of people already using mobile phones, the means to introduce them to formal banking and financial services already exist. Technology has enabled contact with villages half a day away, unreachable by road. This has transformed both business and social and family life.
There are basically three financial needs of the poor:
  • Life cycle needs. Life cycle events that impose financial burdens include: births, deaths, marriages, education, home-making, widowhood, old age, and the need to leave something behind for one’s heirs.
  • Emergencies. Impersonal emergencies are caused by floods, cyclones, and fires etc., while personal emergencies include illnesses, accidents, bereavement, desertion and divorce.
  • Financial and life-style opportunities. The need for augmentation of family income can require large sums of money for starting or running businesses, acquiring productive assets (including land and housing), or buying life enhancing consumer durables (fans, radios etc.).

Access to a transaction account is a first step towards broader financial inclusion. As accountholders, people are more likely to use other financial services, such as credit and insurance, to start and expand businesses, invest in education or health, manage risk, and weather financial shocks, which can improve the overall quality of their lives.
Merely opening physical accounts as flag posts of financial identity won’t help unless they are actively used by people for managing their money. To make this possible people have to be imparted an ability to understand and execute matters of personal finance, including basic numeracy and literacy, budgeting, investing, and risk diversification.
This skill is known as financial literacy. It is a combination of financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately enhance their financial well-being.
Traditional ways of doing business make it difficult and costly for commercial banks to manage the small balance accounts that low-income families need. So banks often fail to recognize that low-income people could actually be viable customers—with some creative adaptations to business as usual.
Innovations in technology and financial services are enabling previously “unbanked” people to gain access to credit and financial services at an unprecedented scale and velocity. Although digital technology is opening new channels for delivering financial services, challenges persist. Sparse populations, inconsistent network coverage, lack of trust, or insufficient capital for building new business models, can stand in the way of success, particularly in connecting remote or underserved communities.
To blunt the potential risks of security, it’s important to properly equip customers, particularly the newly banked, with the financial literacy. They need to save, borrow and move money prudently and to keep themselves away from schemes that can get them into trouble. Point of service biometrics are fast catching up and introducing critical levels of security to transactions and also providing access to the many consumers who can’t read.
The challenge of financial inclusion is to understand what is best about all the different ways to reach underserved customers. It’s about understanding what works and building on it. The rapid spread of mobile phones is the game changer that can make the economic benefits from digital finance possible. Fortunately, mobile phone penetration is growing far more quickly than access to financial services.
Many can’t afford regular banks. Many have dropped out of the banking system after getting burned by increasing hunger of banks for fees and penalties, much of which focuses on people who least can afford it. Private Banks chooses to extract more money from those at the low end of their customer base, and many walk away rather than face a barrage of fees. Excessive documentation requirements and the perception that financial institutions as “rich people’s clubs” are among the most persistent obstacles. Many banks charge fees for a wide range of things, from low balances, to frequent deposits or withdrawals. You might even get dinged if you want a paper statement, or want to use an ATM from another bank. The new stipulation of fees for even simple needs and keeping minimum balances in accounts is another deterrent for the low income users in getting into the formal banking fold.
To use financial services to their full potential, the low income people need products well suited to their needs and appropriate training and education for adapting to these financial services. Bringing this about requires attention to human and institutional issues, such as quality of access, affordability of products, familiarity and comfort in use, sustainability for the provider of these services, proper training and outreach to the most excluded populations.
The issue is lot more nuanced than what we see today. Nuances change from culture to culture and consumer segment to consumer segment. Consumers will come into the formal financial sector and embrace the new opportunities believing that if they change their behaviour and exert the effort to get into the new world then certain specific pains will disappear. We must strive to develop tools for lower income people take charge of their financial health. We have thus to address real pains, not just offer benefits. If the industry’s priorities are tweaked even slightly in favour of the poor, barriers to inclusion would fall.