On average, about 2.5 billion people in the world don’t have access to formal banking services.¹ It may seem as though this problem really only affects the developing countries, yet the 93 million Western Europeans² who don’t have everyday banking services available to them would probably beg to differ.
The reasons for financial exclusion are diverse, ranging from poor credit rating or not having enough money to meet the minimum balance requirements, to voluntary exclusion because some feel they don’t trust banks. But the irony is that the mere cost of paying for things is noticeably higher for the financially excluded than it is for the banked population.
The cost of being unbanked
Everything is more expensive for those without access to formal banking services. How much? £1,280 a year, to be exact, and the cost rose by almost £300 from 2007 to 2010.³ It’s more than 60% of a monthly average wage in the UK. Cashing cheques, paying bills in cash, relying on payday loans and using prepaid cards are all tied to hefty charges that a person in the mainstream banking system doesn’t need to worry about. Not to mention the time and money spent running around making all these physical transactions.
In addition to that, money is becoming more and more digital, which means that there are less places that accept cash. Not having a formal banking account also means it’s harder to make bigger purchases, such as buying a car or a house, or taking out a business loan to start your own company. The unbanked simply don’t exist in the formal banking system. And the truth is, the majority of the underserved are in this situation simply because of a misfortunate turn of events, which means it could happen to virtually anyone.
How long is the road to exclusion?
It is a widely spread misconception that the financially excluded are individuals living on a few pounds a day and forced to keep their money under a mattress. In reality the factors behind the inability to access formal financial services are not always obvious and not always tied to bad financial history.
One of the shortcuts to becoming unbanked is moving abroad. Whether you’re a student or a professional looking to start a new chapter of your life in a foreign country, you can quickly find yourself off the banking high street. Not being able to provide adequate proof of ID, residency or employment means you can be a successful businessman with millions on your account at home and still be unbanked abroad.
Another way is to hit a bump in the road that severely affects your financial situation. In a recent documentary called Spent: Looking for Change, the filmmakers highlighted the reality of about 70 million Americans who lack access to the financial system. In the movie, three families and an aspiring entrepreneur explained how they were pushed out of the mainstream banking system. They all had the same story: they were forced to take out loans because of social circumstances, and the more they did, the more they were charged, which resulted in the banks booting them out of the system for not being able to pay back the debt the banks themselves helped create. In this situation, the smallest rocking of the boat can send the family to a downward spiral of payday loans, selling their assets and compromising on their family’s well-being in order to make ends meet.
Still, there are some people who have decided to break free from the banking system voluntarily to escape the opaque fees banks charge for transactions and for maintaining the account. Although they would be eligible for a bank account in the mainstream, they choose to keep an eye on their finances through a more old-fashioned approach – cash. But considering the higher cost of every transaction for the unbanked, it makes you question whether it is a sound decision. Well, at least you know, what you’re paying for, right?
Where to from here?
Having a look around, it’s obvious that not hopping on the technology band wagon is becoming more and more difficult. Besides the fact that money is moving towards greater abstractness as the digitisation of the financial world continues, our online presence is a form of our identification as well. And that includes a trackable financial history, which is only possible through a formal bank account. If you don’t have it, it will only get harder to do the things banked people do, not to mention do it as cheap as they.
At least, it only makes sense that if being banked is becoming an inevitability, the choice between the providers is growing and the access will become less restricted. Also, it’s not the big banks single handedly running the show anymore. The consumers have long been demanding more transparent and accessible banking services, giving the new FinTech challengers a push to find better solutions and reinvent the way we bank. They’ve shifted their focus from profit through innovation to innovation through customer centricity that eventually turns into profit. It’s safe to say the big players need to up their game and start fighting for their customers.
1. Banking the unbanked. Prepaid cards, mobile payments, and global opportunities in retail banking. Deloitte, 2012
2. Europe’s Financially Excluded Unmasked in New Report, 2013
3. Save The Children – The UK Poverty Rip-Off, 2012