WARWICK SNEIDER: Helping the unbanked enter the financial system benefits everyone

More than ever, access to financial services is crucial for basic economic stability and personal growth. However, millions of people around the world remain shut out from the global financial system. These people, often referred to as the “underbanked”, have restricted access to simple financial services that many take for granted, such as checking accounts, credit cards and loans.

By the World Bank’s estimates, about 1.7-billion people all over the world, a fifth of the global population, are either unbanked or underbanked. These people face many obstacles that hinder their financial progress and their lives. If they were to be integrated into the financial system, think how much better their lives would be and how this could transform society.

The term “underbanked” refers to people or households who may have the most rudimentary of banking services, such as a cheque or savings account, but still lack essential financial products or services. Because of this, they may have to call on alternate banking services such as pawn shops, payday loans and cheque-cashing outlets to get by. This doesn’t help them and could send them into an even deeper financial hole. Because many underbanked people lack access to credit, there is no way they could make a serious purchase like buy a house or car or start a business. The system conspires against them and they are shut out because of their poor credit history and have no formal identification or tertiary education.

Why financial exclusion is systemic

For those who are underbanked there are a number of hurdles that appear insurmountable. They often they live in poor socioeconomic areas far from the big cities. Because of this there may not be an actual bank branch or ATM close to them. Even if they live in a town that has these things, being in a low-income bracket with a poor credit history and even worse spending patterns traps them in a cycle they can’t escape.

The banking system looks at them and will be inclined to discriminate against them based on their current financial situation. Even if they have a bank account, the account fees could penalise them disproportionately. If they require an overdraft they will incur more fees, which they cannot afford. Because of this, they see little point in having a bank account and sadly they’re right. 

There are so many benefits to bringing the underbanked into the financial system — not just in terms of their finances but also how it can affect their standard of living and way of life. Once they can access products such as loans and insurance, they can manage their finances in a superior way, start to plan for their future as well as their children’s future, and they can try to insulate themselves against the threat of unforeseen financial misfortune.

The underbanked live a lifestyle that is financially liquid. Money comes in and then it goes out even quicker. There is no such thing as savings, though when there are savings, unexpected repairs or medical expenses can take them all.

Once they can start to save, they can start to invest and start amassing wealth. Being part of the financial system means they can take out loans or have a line of credit. This could allow them to start a business, and if the business is a success they’re on their way. How many Fortune 500 businesses started off in this  fashion? If they hadn’t had access to credit before they could make it, history would have changed.

Things most people take for granted, like buying a property, couldn’t happen without a mortgage. Most people, even those with wealth or savings, don’t have the wherewithal to buy property with cash, and need to take out some sort of loan. If the property appreciates in value and they sell it, they can make a profit, because they had access to the financial system. 

Insurance is one of the biggest industries in the world and is worth somewhere in the trillions. On an individual level, insurance is a bet that makes sense for the individual. This is the case whether it’s life, property, car or health insurance. If there is an emergency and you are facing a crippling expense, the insurance coverage will look after you.  The underbanked will save money by not paying for premiums, but if there is a health scare, their lives are turned upside down. Not only do they have the stress of a loved one dealing with a serious life-threatening health issue, they also have the stress of worrying how to pay for it. 

Once they become more financially literate their decision-making will improve. They will make more sensible financial decisions. They will be more prudent with their money and less inclined to sink it in get-rich-quick schemes. They will have the patience to make investments that might pay off only years from now.

Improvement to community

Once the financial system is open to underbanked communities they collectively experience significant gains. Businesses will be open to providing them with a diversity of services. As the community grows and more people are pay taxes, the municipality will gain access to funds it can put into schools, roads, parks and other communal infrastructure. In turn, the improved standard of living can result in less violence and crime in the area.

Helping the underbanked helps everyone, and that is why there should be a moral obligation to do so. Bringing people into the financial system is the first step to breaking the cycle of poverty, which appears to be getting worse in SA rather than better.

• Sneider is a financial services and regulatory technology consultant.