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There’s been a lot of buzz around Bill Gates’ challenge to bank the unbanked, set out in this excellent Verge article. Naturally I agree with the sentiments, but the use of the word “unbanked” bothers me.

There are billions of people around the world who have no access to financial services and are thus prevented from taking steps to move them out of poverty. This is a real problem. But if we call these people “unbanked”, we set up a mental framework in which the goal is to get them them banked. But I don’t think this necessarily makes sense for them or the banks. I’ll use the example of India to explain why. In India, there is a massive push on right now to bank the population.

The prime minister, Narendra Modi, launched the initiative at the end of August, setting a target of 75m new accounts by Republic Day, January 26th. The scheme’s initial goal has been surpassed: 120m accounts have been opened.

[From Banking in India: Downwardly mobile | The Economist]

Whether these are accounts are, or will ever, be used is a different issue. I strongly suspect that many of the accounts will be used only to withdraw the balances from ATMs. This makes them an expensive proposition for banks.

Although two-thirds of the new accounts are empty, Mr Jaitley says 330 billion rupees in transfer payments and wages from a rural employment scheme will soon flow into them.

[From Banking in India: Downwardly mobile | The Economist]

As in the case of the “basic bank account” in the UK, this amounts to bullying banks into providing a money-losing account to people who don’t want it. The legacy infrastructure, regulatory burden and customer service requirements around banks mean that the cost model just does not make sense.

Banks have been told to cap the charge for withdrawals related to transfer payments at 1%, up to a maximum of 10 rupees. But research suggests a charge of 2-3% is required to cover the cost of managing cash.

[From Banking in India: Downwardly mobile | The Economist]

And that figure does not take into account the losses to the poor trapped in a cash economy. So how do we get around this? Well, I’ve written at length before about why India has been such an interesting case study as the regulations have been progressively relaxed to build the mobile payments base. India recently made a very important change to the regulatory environment by allowing non-banks to get involved.

Indian telecom groups such as Bharti Airtel and Vodafone are set to be given greater freedom to take on the country’s banks by offering enhanced mobile payment services, as part of forthcoming rule changes from the Reserve Bank of India.

[From Reserve Bank of India moves to enhance mobile payments market – FT.com]

Gates highlights the role of M-PESA is creating the new “mobile money” world, but in my opinion one of the key reasons for M-PESA’s success is that it isn’t run by a bank. Banks use it (and there are far more banked people in Kenya today than before M-PESA) but it isn’t a bank product. I think this regulatory light touch has been of great benefit to the population.

My point, really, is that calling people “unbanked” frames the problem incorrectly. It rather suggests that banks are the solution but providing money-losing services to people who don’t want them is a lose-lose. The first step on the ladder to financial inclusion is what we might alternatively term a transaction account. This could be a basic bank account, or it could be any other form of pre-paid account (e.g., M-PESA) or even an interest-bearing pre-paid account as with Tigo Pay in Tanzania.

Tigo, a unit of emerging markets telecom group Millicom Cellular International , has started a mobile money service that pays interest on balances, tapping into an underdeveloped market for financial services in Tanzania.

[From Tanzania’s Tigo launches interest-earning mobile money service | Reuters]

It took a year to get central bank approvals for this service, yet within a few months it had millions of customers. As of today, they have 3.7 active million users and have been paying approximately 10% interest on balances. And, again, it’s not a bank.

The problem is not that people are unbanked but that they are excluded and new technology is giving us many different options for including them. In different countries and different circumstances, different options might be best. But it is really not clear to me that banks are the best option, even for the banks themselves.


  1. Let’s say the MNOs rule the mobile money world with air time. The gap then is moving up the financial value chain. The vast majority of economies are pass through. The Brixton pound proved this.

    In a rural area, the vast majority of economic activity is generated by the MNCs (e.g. Starbucks).

    Plugging these supply chains into mobile money is a huge opportunity (and heck, plenty are trying)… but who’s to say Airtel’s minutes are from a valid source? And how much is one Airtel minute worth? How many KGs of coffee bean to the minute?

    The on and off ramp between the mobile money world and the MNCs is the inflection point and the one that interests me most these days.

    Of course identity and a database that is provably unedited, that everyone could access would help greatly here too.

    I heard somewhere that on average mobile minutes make 1.5 hops before being turned into cash (except in Sudan where that’s 3 hops)…So mobile money has started to make a difference, but it’s not so much financially included people, as changed the shape of the finance that was already happening.

  2. Hey Simon,
    Airtel says whether Airtel airtime is good. The way it tends to work is that a set of exchange providers is set up across the country. These businesses will literally exchange the local mobile unit for some other unit commonly used in trade.

    Safaricom have blazed the trail with nearly 100,000 of these businesses. In Kenya every second shop advertises it. So one of the barriers to entry for the other telcos is to also sign up enough exchanges to compete. Recently, the ‘tied’ clause of Safaricom’s contract was struck down, so it’s obviously a bit wild over there.

    You can see the same development in the Bitcoin world, and historically this trail of open exchange market was originally explored by the e-gold community in the period 1999 onwards.

    In terms of actual trade, mPesa is mostly used over the phone, at a distance. Then it is turned into cash because most businesses don’t hold inventory of mPesa for long.

    As to how to integrate MNCs at the on ramp, and identity, and so forth, that’s many whiteboards.

  3. Banking the unbanked is not financially viable or the banks would have made more of an effort to do it already (they have sufficient non-financial incentives).

    What do you think the knock-on affect will be of forcing the banks to open up standardised APIs (as is currently proposed in Europe)?

    Would you agree that a similar approach in developing economies is better than forcing the banks to do everything end to end as it allows more lean and agile service providers to step in and offer the required financial services while at the same time protecting the consumer with a regulated and insured bank account backing the services?

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