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September 26, 2013

Who Will Pay for Financial Inclusion?

By Timothy Ogden

A dinner I attended on Monday night previewed the upcoming Financial Inclusion 2020 Global Summit in London. The Summit’s ultimate goal is to include 2.5 billion more people in the formal financial system by 2020.  It was an interesting (off the record) conversation. Without violationg the rules of engagement, I want to focus in on a topic I raised: Who is going to pay for financial inclusion? 

Providing financial services to poor households has been and will continue to be expensive. While technology (like electronic payments) and innovative approaches (like KGFS) can reduce costs, they cannot make serving poor customers cost- or profit-competitive with serving wealthier customers.  The bottom line is that including 2.5 billion people in the financial system is going to cost money. Someone will have to pay.

To date, the microfinance movement has been heavily subsidized en route to reaching 200 million customers so far. But the enthusiasm for funding microfinance was largely driven by the message that it was a powerful poverty-fighting measure. The messages around financial inclusion will be more humble and less likely to capture the world’s attention. I think the willingness of external funders (be they governments, aid agencies, development finance organizations, social investors, foundations or average donors) to subsidize the sector is going to fall.

There is, of course, another potential source of funding for financial services for poor households: the poor themselves.  It struck me that we might have asked  back in the 1990s, "Who will pay to extend mobile telecommunications to the poor?" But by the time anyone thought to ask the question, it was already answered: the poor  paid for it. But while no one is subsidizing the cost of cell phone minutes for poor households, unlike financial services, you almost never hear complaints that the poor are being gouged by greedy, profiteering mobile networks. As far as I know, there never was a vigorous debate in the telecom world about subsidies and the pros and cons of for-profit versus non-profit network operators.

Why? One reason may be the way we talk about telecom versus financial services. This thought was spurred by a line in a new infographic from Tufts University about the cost of cash: “The ‘unbanked’ are four times more likely to pay fees to access their own money. [emphasis mine] When stated this way, these fees sound grossly unfair on two counts: the poor are charged more, and the poor are charged for something they shouldn’t be charged for.

I’m looking forward to reading the full Tufts report (I’m genuinely puzzled by the persistence of cash) and this is no indictment of the report in general, but the statement in the graphic simply isn’t true in important ways. No one is paying fees to access their own money. Users of financial services are paying fees to have that money moved quickly and securely from one place to another and for the cost of fraud when that security fails. In other words, users, poor and otherwise, are paying to avoid the substantial tangible and intangible costs of moving money in cash that the report itself documents.

But that’s not the most interesting thing about the statement. Think for a moment how strange it would sound to say, “The poor are four times more likely to pay fees to access their own relatives on the phone.” But this is just as true. The poor tend to pay for mobile access as a transactional per minute fee. Wealthier households tend to pay a flat rate for bundles of minutes and data so that a large portion of their usage doesn’t feel like it is being charged on a per minute basis.

When it comes to financial services, there is a similar difference in pricing structures. Poor households tend to pay fees per transaction (and there is good reason to believe they prefer this, because there are less likely to be hidden costs in transactional pricing) while wealthier households have their costs hidden via other pricing mechanisms.

I think the differing pricing models but particularly the language used to talk about the cost of financial services is limiting the possibility of extending financial services to poor households. The bottom line here is that the poor seem in many cases to be willing to pay for the financial services that they value. Given the profitability disadvantage likely to persist in offering financial services to the poor, even if the poor pay for the services themselves, subsidy will likely be necessary to fund infrastructure and outreach. Getting those subsidies to flow may well require finding a new language to talk about the pricing of financial services that doesn’t strike people as grossly unfair. 

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