India has made rapid strides in assuring financial access to a large section of the population. Yet the hard truth is that many bank accounts that have been opened remain dormant and inactive. MOIN QAZI argues that unless these accounts are actively used they will remain deadweight. Their regular use can help create financial histories which can open the doors for their owners to larger benefits from the formal financial system.
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THE last year has been filled with tremendous challenges. The task of building a financially inclusive world was never more difficult, or more important, than now, when low-income and underserved people around the world are struggling to cope with COVID-19 and a deep recession. An important lesson for the financial-inclusion community is that their efforts need far greater traction to make universal financial inclusion a reality.
Unprecedented technological advancements and corresponding innovations in business models have helped financial inclusion evolve beyond just connecting people to a bank account. Yet while progress in financial access has been remarkable, the use of these accounts has been comparably sluggish. Robust and active usage of digital financial services remains a challenge as high inactivity and limited engagement persists.
The vast numbers of inactive accounts underline the importance of creating products and engagement strategies that are better designed to meet the needs of people. Access just is one data point among many; it cannot serve as the ultimate objective of financial inclusion.
“The progress in financial access has been remarkable, but the vast numbers of inactive accounts show how important it is to create products and engagement strategies that are designed to meet the needs of the people. Access just is one data point; it cannot serve as the ultimate objective of financial inclusion
It is widely argued that prosperity is not derived directly from standalone ownership of a bank account but its consistent and appropriate use. At the same time, access is an important part of the financial inclusion equation and should remain important on the agenda. Several societies may have "solved" the access issue and moved onto usage as the next frontier, to include those people who could benefit from financial services but are excluded.
The first step towards financial integration is identifying the financial needs of people. These needs can be broadly classified into three main categories: life cycle events, emergencies, and opportunities.
Being able to access a transaction account is the first step toward broader financial inclusion, since such an account allows people to store money, and send and receive payments. The next frontier in financial inclusion must then be to move to active, consistent, and informed usage of financial products and services.
Several emerging markets have achieved significant levels of account access, yet account usage remains very low. Overall, developing economies have been slow to close the usage gap with high-income economies.
A transaction account serves as a gateway to other financial services. Transactional regularity of accounts helps build a financial history, which is a prerequisite for accessing formal credit. Greater transactional engagement also creates knowledge, which in turn creates greater confidence.
When more people can access affordable and high-quality financial services, they get more opportunities to thrive. This is especially true of women, who are often underserved by traditional financial institutions. They require financial products and services that understand their experience and perspective.
Financial inclusion enhances women's self-confidence and places the power of financial decision-making in their hands, and the result can be large development payoffs. It is often cited as an essential tool to help women rise out of poverty.
There is a need to apply innovative customer engagement strategies to expand the use of savings products to build safety nets. Women are still not aware of existing services or are not using these services due to many barriers. Most financial service providers are gender blind, have a limited understanding of women customers, and do not see the business case in actively serving this market.
It is well-established that standalone ownership of bank accounts does not accrue real benefits. That comes from the appropriate and consistent use of these accounts. Similarly, benefits do not always accrue directly to the users of financial services but are distributed across local markets or communities, including among those who did not take up a financial service. For example, the more widespread use of bank accounts makes it easier for governments to pay social benefits directly to households instead of offering them subsidised food or guaranteed employment.
Fulfilling the promise of financial inclusion for boosting prosperity and for improving financial resilience and health requires engaged usage of digital financial services. After all, access is inconsequential if people do not use the services available to them. Without engaged usage, digital financial services will not achieve the commercial viability necessary to achieve scale nor enable financial health and resilience.
There is a need to shift the focus of interventions from simple access-oriented measures towards utilisation and engagement-oriented measures. It is vital to keep in mind that financial inclusion is a means to an end, not an end in itself. It is only when people use financial tools to make their lives better and help their community grow that financial inclusion will achieve its real purpose. Arguably, the best way to increase usage of accounts is to fully digitise payments for government transfers of social benefits.
With the digitisation of government-to-person transfers, user frequency is expected to increase. This will give people a reason to use the accounts they have opened. But experiences belie these expectations. Wherever this has been done, such accounts have remained merely a payment channel rather than bring a fundamental change in customer's use of financial services.
As access increasingly becomes a reality, the second generation of challenges emerges—how to capitalise on the openings that are made possible by access to offer products and services that truly improve lives. We have to go beyond mere physical accounts if we want to catalyse financial inclusion into broader economic and social growth. People who regularly use a bank account are more likely to be financially literate than those who do not as there is a direct correlation between financial knowledge and financial services.
“We have to go beyond mere physical accounts if we want to catalyse financial inclusion into broader economic and social growth. People who regularly use a bank account are more likely to be financially literate than those who do not as there is a direct correlation between financial knowledge and financial services.
Without this, equitable economic growth, growing, and successful businesses, and improving financial security and prosperity—will remain elusive.
As part of government fiats, banks are forced to meet humongous account-opening targets to bring the unbanked population into the fold of the financial system. There is always a promise that they would become a source of revenue. However, when many accounts remain dormant (record no transactions) they inevitably become economic deadweight. Banks cannot afford to lose money servicing them.
Services are sustainable so long as intuitions can cover their cost of delivery. There has to be a business case for every financial service to remain sustainable. Perforce, banks have to levy penalties and ultimately shut these accounts, sending their owners out of the financial system to where they came from—the unbanked. Thus, a counter-revolution set in.
Customers end up back where they began their financial journey from. Such poorly-thought-out policies and programs demoralise all the actors in the ecosystem—customers, bankers, economic observers, media, academics, and NGOs working for financial empowerment. It also dissipates the enthusiasm of those who propel the entire effort.
Finally, it reinforces the prevailing myth that the banks are anti-poor. We must all understand the limits of the financial inclusion revolution, and we must make sure it does not turn into a rough-and-tumble gold rush that ultimately hurts consumers and financial institutions. It is true banks must be cognisant of the social dimension of financial inclusion but sourcing accounts and processing them involves time and costs which pinches revenues.
Financial services should be provided on the simple principles physicians follow: diagnose the ailment and prescribe the appropriate medicine. We must know what customers need, then suggest products that would help them. Lack of proper understanding can make a person borrow money while all she needs may be an insurance product or a savings account. This can set off a vicious cycle of indebtedness.
“Financial services should be provided on the simple principle of a physician: diagnose the ailment and prescribe the appropriate medicine. We must know what customers need, and then suggest the products that would help them. Lack of proper understanding can make a person borrow money while all that she needs may be an insurance product or a savings account.
In his book, The Paradox Of Choice, sociology professor Barry Schwartz talks about how excessive choice contributes to consumer misery. Too many similar-looking options confuse consumers, making them adopt the status quo rather than take a proactive decision. Every financial product has a cost embedded in it and we require some insight to unravel the costs and understand the risk post-cost return.
Today, both financial and non-financial markets are flooded with agents who hawk a bewildering array of products with a highly-aggressive sales pitch. These are not backed by cutting-edge consumer protection systems. Innovators are highly impatient with regulation and oversight, but they must understand that lessons of the past cannot be ignored. Far too many lives have been ruined in the name of innovation and entrepreneurism.
The challenge of financial inclusion is to understand what is best about all the different ways of reaching underserved customers. It is about understanding what works and building on it.
(Moin Qazi is a well-known development professional. The views expressed are personal.)