Only about one-quarter of households living in developing countries have any form of financial savings with formal banking institutions. Even in countries that have experienced substantial development over the last decade or two, this statistic remains stuck stubbornly at a level that would not be acceptable for any other measure of socio-economic development: 10% in Kenya, 20% in Macedonia, 25% in Mexico, 32% in Bangladesh.
Access to financial services –whether in the form of savings, credit or insurance— is a fundamental tool for managing a family’s well-being and productive capacity: to smooth expenditure when inflows are erratic (occasional work, seasonality of crops), to be able to build up purchasing power when expenditures are lumpy (school fees, buying seeds), or to protect against emergencies (natural disasters, death in the family).
But in the same way as access to clean water is more than being able to buy a bottle of water, access to finance is more than being able to get the occasional loan. Much like the national grid, access to finance really involves being connected to a national payments system. Once I have a transactional account in a “payment grid”, I can receive and repay loans, save up and withdraw from a savings account, and use the proceeds to pay for what I need. This transactional account gives me a financial history, and is the basis from which I can manage my financial life.
To achieve universal access, banking practices will need to adapt to a low-value, high volume transactional environment. Low-value transactional accounts –which are merely the gateway to a range of banking services for the poor— should involve lighter regulation because of the lower risks and the relative simplicity of the product. And banks offering these accounts should be able to build a more flexible, scalable retail network of points at which people can conveniently pay into or cash out from their transactional accounts. It is unlikely that banks will ever achieve ubiquitous banking by deploying branches ubiquitously due to the high cost that would entail, so they must take advantage of the many stores that already exist in the remotest communities.
We can now use technology to ensure that banks and their customers can interact remotely in a totally trusted way through local retail outlets. For instance, customers can be issued with bank cards with appropriate PIN-based or biometric security features, and the local store can be equipped with a point-of-sale (POS) device controlled by and connected to the bank using a phone line, wireless or satellite technology. If a customer wishes to make a deposit at a store, swiping his card puts him in direct communication with the bank. The bank automatically withdraws the equivalent amount from the store’s bank account to fund the deposit, and issues a paper receipt to the customer through the POS device. The store keeps the cash in compensation for the amount taken out of its bank account.
If the next customer wishes to make a cash withdrawal, the opposite happens: the store provides cash from the till, but is compensated by an equivalent increase in its bank account. Of course, the store manager will at some point need to go to the bank to balance the till. In effect, the bank customers have ‘delegated’ to the store manager the bothersome (and, in some cases, risky) job of having to go to the bank to balance the community’s net cash requirements, and for that he gets a commission per transaction.
This is now happening. Brazil has seen 90,000 such “bank correspondents” open up, most in the last five years, with the result that all municipalities are now covered by the formal banking system. In Philippines and Kenya, payment services by mobile operators rely on their broad prepaid card distribution networks to double up as cash in/cash out points. The model is being adopted in South Africa, Colombia, Peru, Mexico, Pakistan and India.
This system must and can be made to work across many banks, otherwise we have only created a patch-work of local banking monopolies which will not serve the needs of the poor. As long as the store has one bank account and that banks are connected through an inter-bank payments system, this account can be used to service the transactional needs of customers of all banks who walk into that retail outlet. This would be analogous to how VISA and MasterCard work: the bank that “acquires” the merchant services the cards issued by any bank in the association.
With such arrangements, we envision a world where people are able to make small deposits into their bank account through a variety of cash handling outlets right in their neighborhood. Depositing and withdrawing money from your account should be just another product that your local store offers, along with toothpaste and mobile prepaid cards. Retail stores could work for all banks, and neither the depositor nor his bank need to have trust in the store, beyond what they would normally expect when buying toothpaste or a mobile prepaid card. Banks, like Colgate with its toothpaste, can concentrate on product quality and marketing –i.e. branding—, and can leave retail operations to local players.