Are we at a crossroad in regards to bank accounts and financial services?
Bank accounts might not be the first thing that comes to mind when thinking about ending poverty. Clean water supply, education, the right to unionise; all these things are perceived to be greater priorities, and perhaps for good reason. One may ask, what use is a bank account if you do not have clean water to drink, or a job to go to? But, as countries continue to develop, concern must move beyond the satisfying of individuals’ most basic needs to dealing with other, perhaps less pressing, concerns.
Granting people access to financial services is one such concern, a concern which has been emphasised recently in India. What exact shape these financial services are going to take in the future is, however, yet to be determined.
In today’s world, around 2 billion of the adult population lack a bank account or a similar financial service. The vast majority of these people live in Africa, Asia, Latin America and the Middle East, and the implications of this situation are numerous. First of all, saving for the future becomes significantly harder due to risk of inflation and theft. People living from hand to mouth more often than not lack any buffert to protect themselves from future financial shocks like disease or natural catastrophes. In the absence of a saving account, the elderly are forced to depend upon their children, in turn reducing their ability to make better lives for themselves.
Additionally, without a bank account, not only does it become harder to save your money, it also becomes very difficult to get a loan. Without credit, getting funding for investments becomes more challenging and this limits individuals’ ability to, for instance, buy a machine, open a shop, or perhaps even get an education, all activities that would enable accumulation of wealth over time. If people can not borrow money, their possibility of supporting themselves via anything else other than the most low-skill, low paid wage labor is significantly reduced.
Studies have found that employment, business ownership, and incomes tend to rise when financial services are offered to people of lower income levels. This goes to show the large impact bank accounts can have on the development of a country. Of course, not having a bank account also means not having an electronic bank account. Having access to such a service brings with it even greater benefits. With our modern technology, transferring money, paying bills, or receiving your salary has been made extremely cheap, safe and fast. Doing these things without a bank account, or with merely obsolescent methods of banking, can be a troublesome enterprise.
So what prospect is there of actually supplying the 2 billion “unbanked” people with, preferably electronic, bank accounts? While there are things that stand in the way of this objective – absence of proper telecommunications, lack of financial knowledge and illiteracy – current data indicates that these problems are being eradicated, even if at a somewhat varying pace. Still, the progress made in these areas is shown in the statistics of financial inclusion. Indeed, between the years 2011 and 2014 the number of holders of electronic financial accounts of any sort increased by 700 million, corresponding to a remarkable 20% drop in the number of “unbanked”. If this rate is sustained, the number of “unbanked” could be halved in just seven years.
Considering this remarkable growth and the remaining market potential, the future should look bright for the large banks. However, things might not be what they seem, for while traditional electronic bank accounts indeed have a number of strong selling points, they are no longer alone in the business.
The mobile phone might be the true panacea of our time.
One great example of new competition faced by the old structures is the mobile payment system M-Pesa. Initially launched in 2007 by a mobile-network operator in Kenya, this service was intended to allow certain loan repayments to be made via text messages. It has since expanded drastically and now offers ordinary money transfers from phone to phone, which includes receiving salaries and paying bills and loans and saving products. Today, more than half of Kenyan adults use the service. The concept of mobile money accounts has been a big success and has spread across the continent. In countries like Tanzania, Uganda and Cote d’Ivoire, there are more people using mobile payment solutions than there are using traditional banking. In the Sub-Saharan Africa as a whole, 12% of adults have mobile money accounts, compared to 2% globally.
Another alternative to traditional bank accounts that has sprung up is having your money stored in a so-called crypto-currency, with bitcoin being the most prominent example. These currencies exist on the internet and are accumulated by their own users, making them international and decentralised, and thereby out of the reach of any state or central bank. There are numerous disadvantages with crypto-currencies, such as big volatility in exchange rates and relatively few retailers accepting them as means of payment, plus internet is required to access them. But, they also enjoy some unique features that could prove to be especially useful in certain cases. For instance, migrant workers wanting to send money home could do so without having to pay exchange fees, which can otherwise be very costly. In some countries, like Malaysia, there have even been fees on remittances themselves, with the purpose of reducing outflow of the local currency, something which could also be circumvented by using the decentralised crypto-currencies.
Bitcoin has yet to see a massive breakthrough, but if that breakthrough comes, it will probably change the concept of money as we know it.
If these alternatives to the traditional banking sector truly grow to become fully established on the financial service market remains to be seen. The wide spread use of mobile phones might very well work in favour of newcomers like M-Pesa. Governments trying to supervise the flow of money could spur people to turn to different kinds of money altogether, something that hasn’t been practically possible until recently. No matter what particular solution developing countries adopt, the rapid development in this area ought to at least contribute to a more positive future. Maybe the end of poverty is closer than we think?
Jan Novotny
