The Center for Financial Services Innovation (CFSI) does really good work on theoretical banking solutions for unbanked people. I call it theory because we won’t know whether these ideas work until society tries them on a large scale. I suspect many of the market-based approaches to reaching the unbanked population will fail for reasons that have little to do with market size or product scalability. They may fail because of the quality of the people involved.
Smartphone adoption is very high among the same low-income demographic common to the unbanked population. The problem is that they are unable to harness the full effects of mobile technology because they can’t afford or don’t understand the monthly data plans they must also purchase to download apps and use them in commerce. This indicates to me that the unbanked are terminally parochial and even stupid. I can understand a reluctance to buy something unaffordable for lack of financial resources. Hey, I’ve been there myself and I still can’t afford a yacht or private jet. I just cannot understand paying hundreds of dollars for a fancy smartphone knowing that the full data package needed to use its apps is unaffordable. I think many unbanked people just make impulse purchases for shiny things. The cargo cult mentality dictates that the outward trappings of technology are sufficient to generate a high-tech lifestyle. This translates to the unbanked crowd as “get smartphone, look like rich person.” Marketing cheap banking solutions using mobile tech simply won’t reach the unbanked who have to stop paying for cable TV and landlines just to afford food!
Startups who think they can change human nature while salivating over the size of the unbanked market must read a copy of The Unheavenly City Revisited several times. Most of the poor will stay poor because they are at the dumb end of the bell curve and lack impulse control. They are constitutionally incapable of using a high-tech solution. Banks learned hard lessons in the last decade by pushing stored value cards and other prepaid solutions to the unbanked. The poor forgot that they had dormant accounts, or never learned how to use them, or forgot how to use them once they learned the steps, or never accepted digital deposits as real money because they couldn’t hold the digits in their hands like hard cash. That cargo cult never left the beach, if you know what I mean. Don’t even get me started on Bitcoin as a solution; those transactions can’t be reversed and the unbanked are too immature to safeguard their part of the encryption key. Pushing mobile apps and other tech solutions to the poor is like feeding sushi to a goat. They just can’t acquire the taste.
The unbanked do use some rudimentary financial services, specifically those that use low-tech interfaces. Migrant labor from emerging economies to developed nations creates a huge market for money remittances. I’ve blogged before about how Google (GOOG) Wallet gives users the ability to literally email money as an attachment. Such a simple technology attains full value as more than a remittance mechanism. It may be a way to store multiple currencies in a single account as a hedge against hyperinflation in a single country. It may even be a way to avoid capital controls because it doesn’t transmit via monitored wire transfer architectures. That’s all too advanced for our unbanked friends, but I had to throw it out there.
I have a humane solution to the problem of the unbanked population lacking access to real banking solutions. I want every state in the United States to charter its own public option bank. The public banks would be much like the Bank of North Dakota. They would offer no-cost checking and savings accounts and low-interest loans. They will not offer advanced merchant services, commercial banking, capital markets trading, or wealth management because a public bank cannot replace the private sector. The public bank fills a gap in financial services that is mostly unreachable. It can even enable poor people to establish credit histories through microlending, along the lines of Grameen Bank. Once the banks are stable with a large client base, they represent a contract opportunity for cheap “white label” insurance plans.
A public bank account can also be a conduit for deposits from social service payments: unemployment payments, workers’ compensation insurance, SNAP/EBT, and other such programs. Mandating these deposits for a public bank account helps monitor their use. Payments can be conditioned on completion of financial literacy classes, parole obligations, and other duties that public assistance recipients owe the taxpayer.
The private sector is well aware of the high cost of customer acquisition for unbanked customers, given their technological illiteracy and low profitability. A public option bank can reach its customers in channels where they spend much of their day. Street teams are a well-developed marketing tactic for generating word-of-mouth buzz among early adopters. Let’s adapt this concept for the bottom quintile. I would have the public bank hire its best customers to run street team patrols at county welfare offices, unemployment offices, day labor pickup sites, courtrooms that try petty offenses, drug treatment centers, halfway houses, and DMV offices. The street teams can partner with social workers and parole officers to increase their chances of contacting the unbanked.
The parts of the unbanked population that hail from countries where the rule of law is weak are naturally reluctant to trust big, impersonal institutions like private banks. That makes personal contact through trusted channels all the more imperative for the public bank. I’m not being facetious at all. The next US financial crisis will once again weaken private banks and private payment mechanisms, and whatever outreach they made to the unbanked prior to that crisis will have been for naught.
I maintain that the public option bank is the best solution a capitalistic society can offer its least financially able participants. It is part deus-ex-machina governing humans too inept to govern their own affairs. It is part social control mechanism for a permanent underclass that is otherwise a source of pre-revolutionary instability. Forget about pushing high-tech unbanking solutions through hackathons and competitions like FinCapDev. Those won’t work until the unbanked underclass is herded out of the underground economy and into a nanny state solution like a public bank. The poor must at least go through the motions of capitalism until they are habituated to responsible decision making, or at least a reasonable facsimile. I would not fund a startup pitching financial services to the unbanked unless it allows for adoption by a state’s public bank. Entrepreneurs need to spend some time at inner-city convenience stores watching the unbanked “invest” in lottery tickets and malt liquor before they try a high-tech solution to poverty. People are hard to change, but give them a public bank as their new cargo cult and they’ll at least adopt the proper rituals.