Nov 12, 2008

Financial Access and What the Poor Really Want

by Laura Starita

More than a billion people around the world do not have a bank account, or any other formal relationship with a financial institution—a deficit that may not seem like such a bad thing in these uncertain times. The poor do use lots of informal services provided by money lenders, savings collectors, and funds transfer networks. These services are very expensive, however, and they carry a great deal of risk. They also provide a very limited buffer against ‘shocks’, such as illness or unemployment, or any opportunity to amass significant savings. For these reasons and others, experts have long believed that integrating the poor into formal financial networks is one key lever to help people move, and stay, out of poverty.

To that end, a number of countries have been working to make banking more accessible and friendly for the poor. In Mexico, the partially government funded BANSEFI, a banking association, is working with its rural banks to offer accounts to remittance recipients so that they can receive their funds through formal banking channels. One of the country’s Cajas, similar to a local credit union, is similarly experimenting with offering automatic transfers of a portion of every remittance transaction into a savings account.

Both of these efforts seem promising. But there perhaps are lessons to be gleaned from the U.S., where a consistent 10 percent of the overall population—and more than a quarter of the country’s immigrants—continues to live a cash-based, bank-free life. A recent New York Times Magazine piece about check cashing outlets highlights the needs of this group. Check cashing service providers convert checks into cash for a fee for people who don’t have bank accounts. They also offer payday loans—loans given on post-dated checks—and fee-based funds transfer services, among other things. In recent years they have been accused of usury and loan sharking because of the high interest rates they charge on very short term loans, rates which, if calculated over an entire year, may reach 800 percent or more.

But according to those interviewed in the article who use the service of Nix Check Cashing, in the Watts neighborhood of Los Angeles, they don’t see Nix as exploiting them. They use Nix because the service is convenient, flexible, and they always know what they are going to be charged and when, something that those who have used banks cannot say of more formal institutions. There is a similar situation in microfinance—even where microfinance is prevalent, money-lenders still do a brisk business. A shockingly high number of microfinance clients continue to also borrow from money-lenders, noting that money-lenders are much more flexible in their loan terms than microfinance.

The criticism of services like Nix, as well as of informal financial service providers in the developing world, is usually based on the seemingly exorbitant fees charged for services the poor could, in theory, receive more cheaply from a bank. But according to a recently launched database developed by the IFC and the World Bank that criticism may also not be true. The database presents data on remittance transfer fees over 120 remittance corridors. In aggregate, the data show that it is more costly to remit through banks than non-bank transfer services. There is some variation by country. For example, it is relatively inexpensive to send money from the United States but expensive to send money from Germany or the Netherlands. Overall, however, it shows that campaigners for financial inclusion may need to pay more attention to the fees actually charged by formal institutions, driving down those fees, making them simpler to understand, and the services offered more convenient.