HomeBusinessFinanceUnbank The Banked

Unbank The Banked

Maybe “unbanked” isn’t the problem and maybe banks aren’t the solution.

All around the world, in both developing and developed countries, there are hundreds of millions, billions of unbanked people. But why are so many people unbanked? It can’t be because there is a shortage of banks as there are more banks, challenger banks, neo-banks and near-banks than you can shake a stick at. There must be some other problem and, as the old saying goes, where there is a problem there is an opportunity.

It’s a pretty big opportunity, frankly. The Economist summarises the situation in America as follows: access to banks can be costly and seven million households are unbanked, relying on cheque-cashing firms, pawn shops and payday lenders. (They also note that credit and debit cards levy fees of 1-4% on merchants, which are remitted to the rich via air miles and credit-card points.)

The American Bankers Association (ABA) and the Federal Deposit Insurance Corp (FDIC) have called on more banks to provide “basic bank accounts” to serve unbanked consumers. Yet many banks already offer these accounts (eg, Citi, Bank of America

and others) so it is not obvious to me why consumers would be moved to open an account at the First Bank of Wherever when they have already decided not to use Wells Fargo

or JP Morgan Chase


Unbanked And More

What should be done? Let’s start by talking about the people who want a bank account but can’t get one because they lack the necessary identification documentation or perhaps other skills needed to function in that mode (eg, literacy). These are the true unbanked. As Wired magazine pointed out, those basic bank accounts (which are also mandated in the UK ) are accessible to those with poor credit histories, while niche banks including Revolut and Monzo do not usually ask potential customers for proof of address in order to open an account. So it seems reasonable to ask why almost two million British adults still do not have a bank account, never mind adults in emerging markets or America!

Maybe it’s because banks don’t provide anything useful for them. After all, think about the large numbers of people who are banked (but also use the products and services provided by fintechs, such as myself) and the people who are underbanked: the people who have a bank account but don’t really want it and don’t use the services offered because the bank account is an 18th-century product designed for a bygone age. Professor Lisa Servon wrote “The Unbanking of America” about this a few years ago, based on her experiences working in a check-cashing operation in New York (I cannot recommend this book highly enough), and the bank experience hasn’t changed much since then.

There’s a very interesting take on all of this in Charlotte Principato’s note on “How the Roughly One-Quarter of Underbanked U.S. Adults Differ From Fully Banked Individuals” over at Morning Consult. This goes into the demographic details of the fully banked, unbanked and underbanked U.S. population and is serious food for thought. In her survey, underbanked people were defined as having done at least one of three activities with a provider other than a bank or credit union in the past year: purchased a money order, paid bills or cashed a check. It is interesting to note that most (58%) of underbanked consumers say they could manage their finances just fine without a bank. What they need to improve their financial health are not traditional bank products but better access to their own money via earned wage access.

(Almost two-thirds of underbanked adults say they would be able to manage their finances more easily if they could access their paycheck at any time, a market opportunity that fintechs are already starting to exploit.)

Banks are really not providing what people need. Over at the Financial Brand, Jim Marous observes that because new accounts can be opened quickly without closing existing accounts, traditional banks and credit unions do not understand just how the primary banking relationships are being fractured. Customers are opening checking accounts with Chime, investment relationships with Acorns, expanding their payment options with Wise and taking out loans with LendingClub

in growing numbers. So not only the underbanked, who use their account only to deposit a pay check and draw out cash, but also the banked are turning away from that bank to get the services they want.

We have a situation where some of the banked, most of the underbanked and all of the unbanked are turning to alternative providers because banks cannot or will not deliver the services that these customers want. Let’s together label these the “underserved”. I think the majority of adults are now underserved (prove me wrong!) and therefore continue represent an astonishing range of scale and scope opportunities for non-banks.

Now let’s rephrase the problem: the issue is not banking the unbanked, but serving the underserved. And their is no reason to imagine that banks are, or should be, the solution.

Serving The Underserved

Bank accounts are quite expensive things to run (as they should be, because banks should be heavily regulated). In some countries the banks are forced to offer a basic bank account to anybody who can jump the identification hurdle to get one. But a great many of these customers won’t be very profitable and it costs the banks a lot to serve them. Why continue to force banks to provide money-losing services to people who don’t want them anyway?

So what are the alternatives? Half of the unbanked use prepaid cards, but offering underserved people pseudo-bank accounts in the form of prepaid cards doesn’t help much (the charges associated with such cards are significant). What the underserved need are not banks or cards but new kinds of regulated financial institutions that deliver the modern services needed to support a 24/7 always-on economy.

What are those services? As the economist John Kay noted in his recent paper on “A Robust and Resilient Finance” for the Korean Institute of Finance, while “many aspects of the modern financial system are designed to give an impression of overwhelming urgency… only its most boring part – the payments system – is an essential utility on whose continuous functioning the modern economy depends”. Whether payments are boring or not I will leave to the imagination of the reader, but the point is that the crucial utility (that is, the service that should be provided to all) is not banking, but payments.

In similar vein, in their new book “The Pay Off-How Changing the Way we Pay Changes Everything” Gottfriend Leibrandt (who was CEO of SWIFT from 2012 until 2019) and Natasha de Teran write that “while access to a banking system is seen as a crucial part of a country’s development and necessary for lifting people out of poverty, it is not as basic a need as the ability to pay”. Indeed.

In other words, the fundamental need and the basis for inclusion in society is not a bank account or anything like it, but a safe and secure way to get paid and to pay for goods and services. And this is not a revelation! We already have a detailed case study that shows us what a non-bank approach to inclusion can do, which is not the blockchain but mobile phones: M-Pesa in Kenya. M-Pesa has just reached 50 million monthly active customers, cementing its position as Africa’s largest FinTech platform.

(Launched more than 14 years ago in Kenya, M-Pesa is today available in Kenya, Tanzania, Mozambique, the Democratic Republic of Congo, Lesotho, Ghana and Egypt. If you are curious to learn more about the foundations of M-PESA, have a look at this piece from 2012.)

It seems to me that great many people would be well served by a simple digital wallet, as evidenced by the success of Square

Cash in the United States (which generates half of Square’s revenue and has 36 million active users) for making and receiving payments. Perhaps the utility solution will be something like Facebook’s

Novi wallet that will launch soon in the US. David Marcus, who leads Facebook’s wallet initiative, said in a recent memo that it is ready come to market with regulatory approvals in “nearly every” US state and this will offer “free person-to-person payments both domestically and internationally” and went on to describe Facebook as “a challenger in the payments industry” (which it surely is).

Banks Are Not The Solution

If we work on first principles and assume the main purpose of the regulation of consumer financial services is to increase the overall financial health of the population then we must find a way to include all of that population in the system: that is, we must find a utility solution.

A utility solution is not the same thing as making everyone have bank accounts, which is where fintech can make a difference. Anthony Thomas, Chairman of Momo, suggests that it should be the goal of fintech to reach the underserved with a wider range of services. As he says “access to payments provides convenience” and is the basic and essential need, but it also to the first step toward delivering access to a range of financial services that fundamentally reduce risk — such as credit, investments, and insurance — and help people to look after their financial health and, as Anthony says, are what “truly improves lives.”

Banks have to be heavily regulated because they create credit, the gas that powers the economy but that can blow up if mishandled. This means that bank accounts are an expensive and inflexible way of solving the problem of the underserved. So we should let the banks focus on their important role in society and let others take care of payments. Forcing the banks to offer accounts to people who don’t want them, forcing people to have bank accounts to get a pay check (and then blocking them from getting those accounts anyway because they don’t have a passport or a utility bill) makes no sense and isn’t going to help towards the goal of financial health for all.

Should the regulators, the legislators and the commercial banks be working together to bring the number of unbanked down to zero? No. The goal of a modern and forward-looking strategy should be not to bank the unbanked but to unbank the banked.

Stay Connected
Must Read
You might also like


Please enter your comment!
Please enter your name here