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Where's the bank? Proximity is critical, so why aren't academics writing about it?

posted Dec 16, 2011, 12:54 AM by Ignacio Mas   [ updated Dec 29, 2011, 1:20 AM ]

 [From blog, 28 September 2011, with Jake Kendall] 

Judging by what we see in their working papers and books, economists don't see much value in researching the roles that geographic distance and cost of access play in preventing the poor from accessing financial services. (By "cost of access," we mean all of the costs associated with getting to a distant financial institution, including transport fees and time diverted from productive activities).

Most academic papers on access to finance focus on behavioral economics and product design issues and skip over proximity and cost of access.  For example, 

  • Dean Karlan and Jonathan Morduch's chapter on microfinance in the Handbook of Development Economics doesn't discuss the issue at all, noting, "Our eye is on contract designs, product innovations, regulatory policy, and ultimately economic and social impacts";
  • Jacob Appel and Karlan's More than Good Intentions includes only a few anecdotal mentions of proximity and cost of access; and
  • Abhijit Banerjee and Esther Duflo's recent Poor Economics highlights the challenges posed by bank fees and minimum balance requirements but doesn't call out proximity as an issue except tangentially in a half-page discussion of M-PESA in Kenya.

There are no dedicated studies that we know of that explicitly address the issue of proximity either.

Yet if there is one common element in all successful microfinance schemes it has been that each found ways to get closer to their customers: 

  • BRI attracted millions of customers in Indonesia through the unitdesa system, which put a branch in nearly every village;
  • Grameen, BRAC, ASA, and SKS could not have been successful without hiring hordes of staff who conducted weekly village visits;
  • Part of Equity Bank's success came by rolling out one of the most extensive branch networks in Kenya;
  • Banco Azteca initially grew by installing mini-branches in 1,000 stores spread over Mexico;
  • Bradesco/Banco Postal in Brazil leveraged the postal network and its agents to reach nearly every municipality in Brazil;
  • More recently M-PESA in Kenya has leveraged the reach of all kinds of retail outlets and "mom and pop" stores.

On the flip side, one can't cite any financial product that was so good that clients signed up in large numbers despite the inconvenience of having to travel very long distances. Informal financial practices teach us the same: people are often willing to pay high fees to deposit collectors who come to their home or place of work.

The importance of proximity and cost of access is roughly consistent with the findings of some of the RCTs that have been conducted as well, even if that's not often how the results are presented. In two randomized control trials of commitment savings products conducted by Ashraf, Karlan, and Yin (2006) in the Philippines or Brune, Gine, Goldberg, and Yang (2010) in Malawi, people could save right at home in a lock box or through direct deposit respectively. So it is not clear how much of the impact would have occurred without making it easier to deposit savings. (Here the key might have been offering a much lower transaction cost to make a deposit than to make a withdrawal).

And on the credit side, in the Hyderabad study by Banerjee et al, the intervention is putting new branches into neighborhoods. This is proximity/cost-related intervention.

A recent, as yet unpublished study by Jack and Suri (2011) on M-PESA shows that the product allowed people to extend their financial networks beyond their local communities, likely due in large part to the reduction in geographic access costs. (M-PESA fees to move money across the country are lower than other alternatives and the network of more than 28,000 agents reaches an order of magnitude closer to the average client than, say, the 3,516 combined bank branches and ATMs in the country).

It's not clear why researchers don't place much importance on proximity and cost of access in their research, but we have some hypotheses. (We should note, Yang et al, mentioned above are planning to launch a new study – funded by the Bill & Melinda Gates Foundation – that will help test the role of the direct deposit element in generating impacts. Disclosure: Jake Kendall is a project officer with the foundation).

First, academics may not think that research in this area will teach us anything new. Academics tend to be in the business of developing and testing theoretical models. (In a future post, we will bemoan the lost art of simple measurement). Some economists with whom we have spoken don't seem to feel there is a deeper theoretical question around the issue of transaction costs beyond an Econ 101 price elasticity story. By comparison, product design plays on people's perceptions, incentives, and behavioral triggers in complex ways that can be used to test and apply the latest theories in these areas.

Also, economists might not think that new research in this area will make any difference, whereas the product design innovations that they produce might. Their view may be: Banks would need to make huge investments in expanding the physical branch network, which clearly isn't profitable, or come up with dramatically new technical innovations to overcome the distance issue, which isn't likely, whereas product innovations can be implemented easily, if the right product tweak is found.

Economists sometimes view innovation and the advancement of technology as being something exogenous, something that "just happens." This view may make transaction costs somewhat uninteresting as a topic of study because they are not something that economists believe they can easily affect. They may also feel that no policy decisions would be affected by better knowledge in this area.

Also, the fact that distance is difficult to overcome without technical innovation could also make it difficult to do meaningful studies in this area. Even if economists wanted to explore the issue, varying distance to a branch experimentally - for instance - is difficult to do without building new branches in random places.

If these are the reasons economists are hesitant to study the impacts of proximity and cost of access, we think they should reconsider. First, discovering the nuances of how distance-as-market-wedge changes behavior could have important consequences for practitioners and policy makers. There is also a natural sequencing that seems to be reversed when the focus is placed primarily on product design. Understanding and removing distance-based barriers is a necessary first step before much of the product design knowledge can come into play.

Perhaps more importantly, innovation in the reduction of transaction costs is not exogenous. There are quite a few efforts underway at the Gates Foundation and elsewhere in the financial inclusion field and private sector to tackle this problem. (Not enough, in our estimation). Better understanding of how these barriers affect usage would both encourage new work and sharpen the work that is being done. Similarly, proximity and cost of access are relevant issues in the policy domain, where regulatory policy often limits geographic expansion in subtle ways.

Whatever the reasons, the lack of attention in regard to proximity and cost of access is biasing academic discussion toward issues of product design and consumer education which, while relevant and interesting, are only so once the basic barrier of cost and proximity has been addressed. Academics may not always realize it, but the conversations they start around their work reverberate through the field of development and can refocus resources and thinking on the issues they bring up. Most of the time, this is a good thing, but when they neglect an issue as important as proximity in financial inclusion, this can bias the rest of the development field to do so too!