Financial Inclusion: Beware False Prophets

A recent American Banker article entitled “Is Regulation the Stumbling Block to Reaching Underbanked?” asked the right question. Unfortunately, the answer as presented was not as right. The article described a U.S. Treasury Department forum to help the banking industry accelerate financial inclusion. Financial inclusion is a term describing the unbanked or underserved consumers’ need for access to basic financial support. In short, consumers need deposit accounts so that checks can be cashed on payday sans high fees and small-dollar personal loan accounts can be available to help with financial emergencies—oh, and along the way, some education that can help them better manage their incomes and financial situations. So far, so good, right? 

One of the key barriers of entry to excluded consumers in many countries and to the financial institutions that want to help them is regulation and regulators’ refusal to recognize and support small or large FIs that truly want to help solve the problem. What U.S. retail credit executives (from large and small FIs) have been saying—especially those in areas where payday lending, loan sharks, and the like flourish—is that FIs need relief from one-size-capital-risk-assessments-and-profit-requirements-fits-all-situations compliance. The article, however, led and finished with a different but familiar opinion; new market entrants must be let into the banking system—that will make everything right.

That argument kind of works in countries such as the U.K., where four big banks held 75% of consumer credit and new banks hadn’t been on the horizon for 100 years, and where the EU encourages ramping back on requirements for smaller regulated FIs (including retailer banks). In response, the U.K. began approving new market entrants, aka challenger banks, which look less like banks than digital finance companies (think marketplace or alternative lenders). These newest U.K. FIs seem intent on serving the underserved, but only consumers with good credit, increasing fears of another economic bubble as credit card balance transfer offers fly out and “buy to let” mortgages flourish—the financially excluded forgotten for profits. Now back to the United States.

In mid-2015 there were 12,420 insured, regulated banks and credit unions with more than 70,000 branches to serve 123.2 million households. Contrast the U.S. need with that of the 26.7 million households in the U.K., fewer than fifty FIs, and four very large banks providing three-quarters of the retail credit. At many existing U.S. FIs, there is opportunity and willingness aplenty to help out the excluded population.

What’s needed? What the forum showed is that regulators need a better vision of who is pushing what agenda. Lack of demand for retail credit and artificially low interest rates are driving forces behind the hype for new FI entrants—especially those with capital to invest in credit solutions and tools. Forget the forums. Regulators and FIs need to talk to each other about how to make inclusion work and then take action. That way everyone wins—especially excluded consumers.

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