[From CGAP Blog, 29 October 2012]
The ideal of financial inclusion is increasingly under fire (see this article and these comments to a blog post). We might be able to reasonably agree that finance is vital for poorer people in the informal economy (full argumentation here), but the next question is whether those needs are already sufficiently well met by existing informal mechanisms that people are comfortable with and use every day. I.e. why does it need to be formalized?
I don’t know that we have the answer to that, but I don’t know that we need to have one either. Aren’t current choices always good enough until something better comes along? Who can confidently argue that the set of informal options that people already have represents a full basket? One might have an opinion of how difficult it will be to design formal services that ‘beat’ informal options, but only a deep pessimist can declare the effort useless.
M-PESA should be a cautionary tale to those who’d like poor people to be left alone to deal with their finances in traditional ways. Five years ago few voices argued that domestic payments were a sore need for poor people. Yet innovation unlocked it. The development of microcredit is probably in the same category of an innovation that exposed a patent gap in people’s (informal) financial portfolios.
I interpret the current financial inclusion drive as being an attempt to do for savings and insurance what Safaricom did for payments and Grameen did for credit.
Unfortunately, there is little evidence of success on this front. Sure, one can point at increasing numbers of account-holders but all the evidence that I see suggests that most of these accounts are either inactive or hold very small balances (see here, here, here). They might be useful from time to time, but it would be a stretch to describe them as effective buffers between household income and expenditures. Today’s formal savings options fall well short of the mark in terms of customer demand, never mind impact.
Why is that so? It goes back to the innovation point. We are not seeing much of it, and what little there is tends to be misdirected. If you want to displace informal savings options, you need to at least incorporate those features that people really like about informal options, and then you need to add a compelling argument to switch. Yet, I don’t know of a single formal savings account that incorporates the kinds of psychological features that people use to budget and discipline themselves: fragmentation of balances by purpose, mental labeling (thinking of something as an investment rather than as mere savings), social display and peer pressure, indivisibility, putting mental and physical distance between you and your money, etc. Banks can discipline you, and that they do by denying you access to your money for a specified period of time. People resist that: if nobody guarantees them any income, why should they guarantee the bank any money? What banks don’t do is play along with your mental discipline games.
I don’t think the main issue is that we don’t know enough about how poor people manage their money, much as the emerging quantitative research industry is pushing us to believe (who can’t be against collecting more data, or, as it’s now called, evidence?). The problem is that nobody has figured out what to do with all that information. (Here’s where I would start.)
The real problem is that innovation is not in the DNA of banks who know they will make more money by financing one more road than by banking millions. Innovation is also not in the DNA of mobile operators, for whom what generally passes for innovation is bundling a new ringtone and a new game coinciding with the release of the latest James Bond movie with the latest handset (the M-PESA counterexample notwithstanding). Innovation is certainly not in the DNA of banking regulators, for whom change is risk, especially if the purpose is massive change for a massive number of people. And innovation is certainly not in the DNA of the donor community which is today priming the financial inclusion industry.
So I am a in a pessimist frame of mind right now, but I’ll continue to work on it. And to the critics, I’ll say that my objective is not to see to it that everyone is included financially, but to expand the range of choices available to people – and let them decide.