A Call for Better Language

You might think that the people who show up to a conference called Microfinance USA would know what the word microfinance means, but as journalist Adam Davidson pointed out during one of the plenary sessions at last week’s event, there is still a battle about what exactly is and isn’t microfinance. The context for that comment was an internationally focused panel discussion about the differences between commercial and not-for-profit lenders. Yet, it’s easy to imagine plenty of other divides. Is lending to small and medium enterprises microfinance? And where does microfinance stop and consumer finance begin?

The question isn’t trivial. Language not only expresses thought, but also shapes it—not to mention goals, definitions of success, and the boundaries of regulation. When Davidson made his comment, the members of the panel had plenty to say. One suggested that microfinance be rebranded. Compartamos co-founder Carlos Danel heartily disagreed. The chance to redefine the conversation, he argued, has passed.

That’s probably true—at least in the developing world.

The U.S. might be another matter. Classic microfinance—that is, lending to small-scale entrepreneurs who otherwise probably wouldn’t have access to credit—has been in the U.S. for decades, but the term “microfinance” doesn’t take up the oxygen in a room here as it does overseas. The Microfinance USA conference included panels on credit scoring, consumer-protection law, and student loans. In the country with the world’s most sophisticated financial markets, the conversation was, well, sophisticated.

Yet, oddly enough, we still have deep issues with terminology. In recent years, the U.S. has seen the rise of a new nexus of conversation, one that often gets described as “financial inclusion” or “economic empowerment.” This discussion includes access to credit and other financial products, but also cultural constraints, regulatory knock-on effects, and the behavioral science of decision-making. Long-term concerns around redlining, predatory lending, and even poverty factor in prominently, but the context for talking about these issues is new and distinct. 

Interestingly, we’ve yet to come up with a term to describe this conversation in a way that’s as immediately recognizable as “microfinance” is internationally. The closest thing we have is “unbanked” and its cousin “underbanked,” which refers to a person who has a checking or savings account but who also at least occasionally uses a non-mainstream financial services provider.

While these terms have served a useful purpose—for example, by giving the federal government a frame for beginning to collect statistics—they are quite narrow, not to mention normative in a potentially uncomfortable way. For example, it has become quite trendy to bash check cashers, but few talk about how big a business check cashing is for mainstream banks—or for Wal-Mart or grocery stores, which often don’t charge for the service at all. When it comes to check cashing then, what, exactly, is the problem that “unbanked” and “underbanked” are trying to capture? High check-cashing fees? Limited customer options? Consumers who prefer convenience over low cost? Small businesses daring to compete with multinational banks?

Clearly, we need better definitions to guide how we think about these issues. The good news is, unlike in the international sphere, the U.S. doesn’t already have a 800-pound-gorilla of a term like microfinance floating around. Those of us doing research, making policy, and developing products have the opportunity to craft a new set of terms so that we don’t get stuck with a one-size-fits-all word like microfinance—and the battles for ownership that come with it.

Barbara Kiviat is a David Bohnett Fellow at New York University's Wagner Graduate School of Public Service.