> Posted by Elisabeth Rhyne, Managing Director, CFI

The following post was originally published in the Guardian Development Professionals Network DAI Partner Zone.

When the Global Findex, an unprecedented demand-side survey by the World Bank and Gallup, was released last year, it marked the first time financial inclusion statistics from the demand side were available on a globally consistent basis. The headline: 2.5 billion adults (including 59 percent of adults in developing countries) are “unbanked” — that is, they do not have an account at a bank or other formal financial institution.

Why is having a bank account the top indicator of financial inclusion?

Setting aside the obvious point that bank accounts are among the easiest indicators to track, the policy focus on “banking the unbanked” seems to rest on the premise that bank accounts have a special role in financial inclusion. Three important functions ascribed to bank accounts are: a place to save, a money management hub, and a way to establish an ongoing relationship with a formal financial institution (an “on-ramp” to other services). These assumptions appear to underpin much of financial inclusion thinking and policy.

If a bank account is a money management tool – a central node through which a person’s financial transactions flow – it will be used regularly. This is the way most people in the developed world (and, I suspect, most financial inclusion policy makers) use bank accounts. However, many accounts in the developing world are relatively inactive. Taking the frequency with which people make more than two withdrawals per month as a proxy for operating an account as a money management hub, the following chart divides the “banked” into low – and high – activity accounts.

Bank Account Ownership and Activity, by Country Income Groupings

The chart suggests that as a measure of genuine inclusion, the number of people who have accounts (“banked”) is deceptively high. If instead we define financial inclusion as having an active account, inclusion in the developing world is far lower than generally understood. Nearly two-thirds (64.2 percent) of adults in rich countries have accounts and use them actively; in the poorest countries, only a quarter of adults have an account (23.7 percent), and only 3.8 percent of adults are active account users. There is a profound difference in the way people in the developed and developing worlds manage their money.

Progress toward real inclusion requires a deeper look at the role of bank accounts in people’s financial lives and money management is a central concept for that purpose. Financial inclusion policy makers and providers must understand how financially included and excluded people manage their money, because improved money management is in itself one of the main objectives of financial inclusion and because wrong assumptions about money management can lead to failed products and client indifference.

What is money management?

Everyone manages his or her money somehow. Client research, such as reported in Portfolios of the Poor (Daryl Collins, et al., 2009) and the Financial Diaries, shows that even very poor people conduct complex financial lives – as suggested through the term portfolios. To deal with low and uneven income streams, they utilize many kinds of financial arrangements. As Collins says, “They keep savings at home; join savings clubs and savings-and-loan clubs; transact with family, friends and neighbors, and employers; and, where doing so is feasible and attractive, sign on with formal licensed providers.”

This kind of money management contrasts with that practiced by an “included” middle-class person in a developed economy. With apologies, I draw on my own experience. My bank account is my main money management tool. All my significant routine transactions pass through the account, including salary, debit card purchases, major payments (taxes, insurance, mortgage), and monthly bills. Credit card purchases are incorporated when paid as a monthly bill. Even cash transactions are consolidated as ATM withdrawals. For my personal balance sheet, I consult a few additional documents, like mortgage, pension, and investment records. My bank account is the central node for my transactions and a tracking device for my financial life.

What happens when people operating in the informal sector are offered bank accounts? They do not shift abruptly from informal to formal money management. Many people continue tracking informally; the bank account is just one transaction type in the mix. Many people in developing countries appear to use their accounts simply as a way to receive money such as a salary or government benefits. This may cost less and be more secure than cash, but it is often the payer rather than the payee who benefits most from this shift.

The transition from an unwritten form of money management with multiple transaction types to one based around a bank account is unlikely to be swift or easy, and would not be completed in one leap. While we acknowledge that a bank account puts people on a path that can lead to financial inclusion, we cannot be at all certain that they are proceeding down the path.

I once interviewed coffee farmers in the hills of Uganda who were frequently attacked by highway robbers on their way home from receiving their proceeds. They traveled most of a day to town where a coffee marketing company clerk handed out envelopes with their payments in cash. On the way home they were prey to attackers who knew their pockets would be full. Then the system improved: the coffee marketing company arranged with a cooperative bank to distribute the payments into bank accounts in each farmer’s name. But the farmers still traveled to town, stood in line at the cooperative bank, and took most of their cash home. Why? Because they could not use the money in their village if it was sitting in the bank in town. They were still prey to robbers, and their lives changed little. However, they would now show up in national statistics as “banked.”

Only if the cooperative bank puts a branch, ATM, or a banking or mobile money agent in the village will the farmers’ money management habits change significantly. The most relevant factors include who the farmers do business with, where they are located, and what kinds of payments they accept.

Does technology help money management?

Technology has the potential to allow financial transactions to take place without cash, in more locations, and at any time. Technology-enabled financial services (cards and mobile money) can provide enormous benefits in cost, convenience, and security. But can they assist money management?

As currently configured, these services often focus on individual transactions. The customer brings cash to an agent, the money is moved electronically, and the recipient withdraws cash from another agent. End of transaction, end of relationship. Clients who keep track of their financial status in their heads may want nothing further. However, if financial inclusion policy is interested in assisting people to keep track more effectively or make better money management decisions, it might ask for more – such as the ability to store money for multiple transactions and review transactions records over time.

At present, few technology innovations integrate tracking features to assist with money management. (Ironically, there is excitement over provider use of the electronic traces of transactions for “big data” analytics.) In his article on “Making Mobile Money Daily Relevant,” Ignacio Mas proposes a system he calls PayPlan that would allow people to personalize mobile money accounts to make recurring payments or set portions of their income aside (Social Science Research Network, March 18, 2012). Mobile accounts can play the money management role usually associated with a bank account, he believes – possibly even better as the information would always be at a customer’s fingertips.

Two conditions are necessary to make this shift, and both should receive more policy and provider attention. The first condition is consolidation of most of a person’s transactions onto a single platform, so that account activity becomes a good proxy for personal cashflow. This requires penetration of the surrounding merchant environment. The second is the electronic provision of ready and useful information about a customer’s financial status.

Advice for policymakers

While possession of a bank account may be a step toward inclusion, it should not be confused with genuine inclusion. The chasm between a policy goal of “banking the unbanked” and a description of a financially capable person is wide. Policymakers must pay close attention to usage and the factors that influence it and employ indicators that reveal such patterns.

Policymakers and product designers must be careful not to assume that everyone wants to change their money management methods to emulate those of middle class people in rich countries. If we wish to assist people to use more formal financial products tomorrow, we must reckon with how they manage their money today.

Image credits: Alamy; DAI 

Have you read?

Seven Trends to Watch in the March to Achieve Full Financial Inclusion for All?

What’s Wrong with “Banking the Unbanked”?

Microfinance vs. Financial Inclusion: What’s the Difference?