Every time I stop and withdraw cash from an ATM or use my credit card to buy something online, I wonder how many people in Asia have access to such services. In fact, these simple transactions are beyond the reach of 45% of adults in East Asia and the Pacific alone. They are excluded from the formal financial system and will remain so until they open a bank account.
To ensure ongoing economic growth in Asia and for the poorest to have a chance to benefit from the region’s growing prosperity, we must prioritize bringing financial services readily and cheaply to the “unbanked”.
Across the region, governments are starting to realize the benefits of giving the poor access to basic banking services. Conditional cash transfers—an increasingly effective and popular way of targeting subsidies to those who need it—are best transferred via individual bank accounts, avoiding middle men. In India, for example, Prime Minister Narendra Modi has managed to provide 75 million people with savings accounts in only six months, mobilizing up to $1.7 billion in savings that were previously outside the formal financial system.
But financial inclusion is much more than just handing out bank accounts, making loans, and encouraging financially illiterate people to put their life savings in the hands of strangers. Without the right market infrastructure, access to credit will never be affordable—or safe—enough for those who need it the most, and will not become a true game-changer for development in Asia and the Pacific. So moving forward, there are three ways we can make progress on serving the region’s huge unbanked population.
1. Expand consumer data to boost true risk-based lending.
Finding and using traditional data—basic information like the amount of bank loans, mortgages, credit cards, and retail credit—is relatively easy for banks and financial institutions. But so-called “alternative data” such as education loans, utility payments, and microfinance loans, which provide a more comprehensive view of a consumer’s debt levels and ability to repay, is much harder to harvest.
With more alternative data, banks would be better able to assess would-be borrower’s credit risk. This would make them more willing to extend credit to those they may have discounted previously. At the same time, a fuller credit picture would prevent borrowers from taking on debt they cannot repay. This has been demonstrated in the US where use of alternative data in risk assessment has helped reduce account arrears, and improved cash flow to give consumers much-needed liquidity.
Greater use of alternative data must, of course, be accompanied by adequate protection of consumer rights so that customers are reassured that personal information remains private.
2. Maximize the range of collateral to back secured transactions.
The more collateral that is available, the better the chances of securing a bank loan. That’s why borrowers should be able to present not just physical collateral but also “reputational” collateral where good past credit history, for one, can be used as an asset.
Governments can help expand collateral-based lending by developing user-friendly electronic registries to log moveable assets like raw materials or machinery. This is already reaping benefits in the Solomon Islands, where a new Secured Transactions Act and online business registration system is helping companies apply for loans using boats, cars, or farm equipment as security. Other Pacific island nations are doing the same to improve the business climate and encourage investment.
3. Use digital finance to provide financial services.
Digital finance through mobile devices makes it easier and cheaper to use bank services and can be a way for commercial banks or governments to reach far-flung populations. Bank Indonesia is working on a digital program for conditional cash transfers after a 2012 survey showed that only 48% of Indonesian households had access to a savings account. The Philippine Central Bank has teamed up with mobile providers to offer mobile money services to over 50 million clients. Mobile banking has also put hundreds of rural women in business in Papua New Guinea, and brought savings and credit to distant rural communities in Vanuatu.
Digital finance, though, is no silver bullet. It exposes less financially literate clients to greater risk, so policymakers and their private sector partners must figure out the best way to reach more people but at the same time keep them safe from phishing, spam, and scams. One important way to overcome this challenge is to work with schools so the consumers of tomorrow can learn the basics today and make good financial decisions – using all banking services available – when they become adults.
If the end result of all this means that I might have to queue behind new customers the next time I go to the ATM, that’s a longer line I’d be happy to wait in.
This article was first published by ADB Development Blog.