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In the developing world, more than half of all adults do not have a bank account. Of those that have an account, less than 10 percent make at least three withdrawals a month. For the unbanked, it can be a challenge to increase savings, improve credit, and accumulate assets when managing money outside of the traditional financial sector. For financial institutions, it is a struggle to understand this untapped market of consumers and aid them in money management.
At the March 1 conference “Bridging the Gap: How Can Banks Reach the Unbanked?” more than 50 scholars, government officials, and banking leaders from around the world convened at Harvard Kennedy School (HKS) to discuss new opportunities and challenges in bridging the gap between the unbanked and the banking sector. The event offered participants an opportunity to assess over 30 years of research on financial services for low-income households and evaluate the latest alternatives to reach the unbanked and underbanked.
Bank Accounts v. Pockets
Elizabeth Rhyne, managing director of Accion’s Center for Financial Inclusion, set the framework for the conference’s discussion by comparing the different money management habits of the banked and the unbanked. While 90 percent of adults in the developed world actively use their bank accounts as the central hub for all money management activities, adults in the developing world follow a completely different “pocket theory” model.
Under the pocket theory, low-income adults typically manage their financial lives by compartmentalizing funds—often in cash—in a series of different “pockets”. If they have a bank account at all, it only serves as one player in a complex web of different types of transactions among a host of diverse players.
Bank Account as On Ramp to Financial Inclusion?
The predominant assumption that the unbanked must adopt the bank account model is controversial. Rhyne challenged, “Is a bank account really an on ramp to financial inclusion?” Timothy Odgen of the Financial Access Initiative added, “People aren’t waiting around for money management, they are already doing it with the tools they have. Instead, we should be asking what’s wrong with our products if they can’t compete with the ‘terrible’ alternatives offered by the informal sector.”
Yet, as more and more people move from the lower class into a swelling middle class over the next decade, Rhyne suggested that the pocket theory of money management may prove inadequate as the unbanked population’s economic activity increases. And the timeframe by which banks need to develop a long-term relationship with this audience is narrowing. As Drs. Ayse Zoodsma-Sungur of Nederlandsche Bank (Dutch central bank) quipped, “people change phones, wives, husbands, and cars more than they change their banks.”
Read full article on the Ash Center website