> Posted by Panthea Lee, Principal, Reboot

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

Citizens at the bottom of the economic pyramid in China lack even the most basic means to save for their children’s education, make purchases on credit, protect their homes through insurance, and send and receive money. Financial exclusion prevents many of them from realizing their potential and improving their livelihoods.

How can better financial services be designed to meet their needs?

With the support of the Institute of Money, Technology, and Financial Inclusion at the University of California at Irvine, Reboot undertook a study to understand the daily lives of China’s marginalized and answer this question.

We learned that the issue of financial exclusion in China has come to the fore relatively recently and that informal financial services have proliferated to meet the needs of these populations. We concluded that by understanding informality China could “get it right” in deploying market-based financial services targeting the country’s most vulnerable citizens.

Currently, 64 percent of China’s rural population is “unbanked” – i.e. they do not have an account at a formal bank. Over the last five years, China’s “Big Four” banks have closed a combined 30,000 branches in poor and rural regions, as a result of market pressures and an increasing focus on high-margin, low-risk populations. On average, rural residents have 0.36 banking outlets per 10,000 people, far below the national average of 1.34. Even in urban areas where banking outlets are numerous, services are designed for middle- and upper-middle class markets, providing low income residents little utility at best and stigmatizing them at worst.

Financial exclusion for these populations is compounded by a weakening of the social safety net. Retirement benefits, which were formerly provided by the state, have declined to a point where many need to supplement them with personal income. Workers who suddenly lose their jobs have a difficult time seeking social subsistence payments.

Given the need for financial services to fill the gaps left by the retreat of government, many have turned to informal service relationships, mostly through existing community connections. Migrant workers, for example, rely on their laobans, or labor bosses, to keep their wages safe and send money home. Others turn to gao li dai, or loan sharks, to meet their financial needs. In the absence of formal loans, these informal alternatives—providing credit based on reputation rather than physical collateral—become a natural solution, even in the face of interest rates far above the official lending rate.

While these informal services may meet needs, they can also be exploitative, insufficient, or overpriced. Citizens with few resources have little choice but to accept these meager offerings. When challenges arrive, they have no reliable channel for redress.

Surely, better options exist.

Globally, there have been widespread efforts to reach the 2.7 billion people who are unbanked. If Kenya can score a tremendous success through its mobile payment platform M-PESA, surely the high mobile penetration rates, extensive agent networks, and an intensive reliance on remittance payments in rural areas suggest that the Chinese market is similarly primed for the deployment of a national, mobile-based remittance system. Analysts believe many of these same characteristics contributed to mobile money success stories like Tigo Cash in Paraguay and GCash in the Philippines.

But the lessons of China’s informal services may also be instructive. Despite their shortcomings, these services are foremost rooted in trust and long-lasting relationships. Built on mutual reliance and born of a vacuum of competitive alternatives, both service provider and user have something to gain. Too often service providers create new offerings with a narrow focus on terms and conditions, cost, or market opportunity. While these factors are important, the most critical—and often neglected—consideration is that adoption may require people to change how they protect, send, and save their hard-earned money. For inclusive financial services to become successful, they must take current practices—as well as the motivations behind them—into careful consideration. New services should recognize and complement existing, informal ones.

In the case of China, this is not simply a moral imperative, but also a significant market opportunity. China’s migrant population alone numbers 250 million and sends an estimated $132 billion across the country each year. Designing inclusive financial services for these populations could quickly transform into a growing and sustainable consumer base for savvy, forward-thinking service providers who can recognize the latent potential and make strides to meet their diverse needs.

By understanding the lives of China’s most vulnerable, and by designing services that align with existing behaviors and networks, millions of Chinese citizens can be lifted into stability.

Panthea Lee’s work focuses on the practical applications of design and technology in global governance and development. Having designed and deployed programs in over 20 countries, including Afghanistan, China, Egypt, and Sudan, she oversees Reboot’s client engagements and creative work, leading a team of ethnographers, designers, technologists, and subject matter experts to translate field data into effective solutions. Before co-founding Reboot, Panthea was with UNICEF’s innovation practice working on a variety of technology for development initiatives in highly political and sensitive environments.

Image credit: Reboot

Have you read? 

The “Lucky Three”: Tailored Products for the Rural Poor in China

Post Offices Fill Financial Inclusion Gaps

Behavioral Insights to Advance Financial Inclusion