Understanding the “Unbanked”

Worldwide, there are 1.7 billion people who are currently “unbanked,” or who have no ties to traditional financial services.  There exist a further 1 billion adults who have bank accounts, but who never use them: that is, nearly one out of every five bank account holders worldwide.

Furthermore, the simple existence of a person’s bank account does not imply that the person actually uses this account: many people but choose not to use these accounts for the majority of their transactions. This leaves an estimated $4.2 trillion in savings money in this informal sector worldwide: a figure larger than the entire US consumer credit market.

This doesn’t mean, of course, that this group–nearly half the world’s population–does not use financial instruments at all. On the contrary, among this population there is a complex web of informal financial instruments: the average household uses four.

This includes a complex web of systems such as cash, barter, pawn shops, payday loans, informal lending, and other situations that vary widely according to necessity and local culture. Many of these financial instruments represent interactions with local, informally trusted individuals.

For various reasons–from distrust of institutions to intimidating paperwork to illiteracy–these people have simply chosen not to rely on traditional financial services and for reasons ranging from the cultural to the practical, they may actually be opposed to doing so.

The obvious problem with informal financial instruments is not just that they are nearly impossible to regulate and represent untold billions in lost tax revenue, but that they also leave the unbanked vulnerable to predatory situations without any sort of certainty or recourse to legal protection. In fact, the World Bank suggests that there is a direct relationship between financial exclusion and poverty.

However, as mobile technology has spread across the globe, we see the possibility of how a technology platform that could turn this tide. Access to mobile technology presents an opportunity to marry the informal economy with protected, regulated financial services.

It is important that these new services understand and work with the motivations of the unbanked. There are several things to consider: unless there exists a clear advantage to changing financial habits, the unbanked are unlikely to do so. It is also vital to maintain a connection to the local community, since the abstraction and impersonality of the financial institution pose a significant barrier to entry for the unbanked.

The ideal solution will marry widely available mobile technology, the convenience and trust in local systems, and the safety and reliability of traditional financial institutions.

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