> Posted by Sonja E. Kelly, Fellow, CFI

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

Recently, as part of the Extreme Inclusion Conference at the Fletcher School at Tufts University, I watched a debate between industry leaders on whether financial inclusion means formal financial inclusion. It was a debate that had me slightly uncomfortable. To impose such a rigid definition of financial inclusion seemed cruel, given that there are informal products in existence that meet many financial needs. On the other hand, I myself have seen the superiority of well-designed formal financial products in better addressing the financial needs of people living in poverty.

There was one exchange during the debate that clarified the issue for me. In defense of informal financial services, Daryl Collins waved a $10 bill in the air and thanked a Tufts PhD student for lending her the money to pay her parking fee the day before. She remarked that without this informal financial service (a short-term, no-interest loan), she would have had to find an ATM—an inconvenience when she just wanted to leave the parking lot.

While the example was effective in showing the audience that they use informal financial services every day, there were a few things that do not allow us to generalize it to those who operate largely in the informal sector. First, it isn’t dependable. While convenient, the exchange relied on the fact that this was a one-time occurrence with a great deal of trust between the two parties. If Daryl were to ask to borrow $10 every day from this PhD student, the student would likely start to say no, or would charge some kind of a fee (I know that if I were a PhD student regularly lending money to Daryl Collins, I might ask what kinds of jobs she has open in her Financial Diaries work!). Second, it is a relatively small amount of money by U.S. standards—it isn’t an exchange that is scalable. $10 might buy lunch here in the U.S. or lattes for two. Finally, and most importantly, it ignores the possibilities of technological or environmental change. If, for example, Daryl could have paid with her credit card rather than with cash, she most likely would have chosen her credit card and not have consulted the kind student. I personally operate cashless whenever possible.

Beth had a clever response to Daryl that provoked more than a few chuckles from the audience: “Daryl herself proves that informal financial inclusion’s only role is to get us out of the parking lot.” Beth was exaggerating for effect, of course. But she nicely turned the parking lot example into a metaphor. Beth’s reframing of the argument offers that there is a role for informal financial services – it is just one that becomes less and less central if formal services are available.

In a perfect world, our formal financial services and the environment around us would be ideally suited to our financial needs. Every person who used formal financial services would be treated with dignity, and their rights would be respected.

Unfortunately, we do not live in a perfect world.

We do need informal financial services to get us out of our own financial parking lots so that we can increase our speed and efficiency in managing our money, saving for the future, and insuring against risk. Informal financial services play a very important part in the financial inclusion game, but it isn’t our ultimate goal—it’s just part of the journey.

A big thanks to Kim Wilson for putting together such an engaging debate—I came away grateful for having been able to listen to the conversation. For more on this topic, stay tuned to this space as we’ll be sharing a post from Beth Rhyne that summarizes her own argument in support of the proposition that financial inclusion means formal inclusion.

And in case you were wondering, I voted for the pro-formal team.

For more information on Financial Inclusion 2020, sign up for campaign updates.

Have you read?

Scaling Up Formal Savings: Lessons from the SEEP Annual Conference

Promoting Formal Financial Savings: Know Your Goal, Know Your Competition

A Holistic Approach to Money Management