Under- Banked Essay

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The  underbanked are  physical  and  legal persons who  do  not  have  appropriate  access  to  mainstream   (retail)   banking/financial  services   and hence are exposed to providers  of nonmainstream financial services (loan sharks, car title lenders, payday  loan  stores,  rent-to-own stores,  financial predators, etc.).  The  term  underbanked and  the associated  term unbanked are predominantly used in  the   United   States  and   are   rarely   found   in finance and banking  literature outside  the United States. In the U.S. context,  the banking  and financial services offered  by nonmainstream providers are  referred   to  as  alternative  financial   services (AFS). In the  United  States,  the  market  for  AFS amounted to $320  billion in 2009.

Although   underbanking  is  usually   associated with what is traditionally called economically  nonviable individual  customers, the  underbanked can include small and medium enterprises, especially microenterprises  that   do   not   have   a  long  and credible financial  history  and consequently may be categorized  as being “too  risky” and denied access to finance. Although  the phenomenon was initially associated with developing countries, and especially with   the   least   developed   countries,   the   underbanked  population can be found  in both  developing  and  developed  countries.  For  instance,  more than  15  percent  of  the  population in  the  United Kingdom is considered  to be underbanked or unbanked, while in the United  States, one-third of the entire population is either unbanked or underbanked   (more  than  10  million  households). The underbanked population are subjected  to (partial) financial exclusion; however, in contrast to the nonbanked  (who are not offered any banking  or financial  services),  the  underbanked are  offered  some banking   and/or   financial   services.  Underbanked (and  underbanking) as a term  appeared more  frequently  in  the  literature in  the  1990s,  when  the broader term financial exclusion  was coined. Underbanking as a phenomenon is, however, older, as access to finance and the lack of it were studied in the 1960s and especially in the 1970s.

Microfinance and microcredit organizations, community  development banks  and  institutions, and  mutual   credit  cooperatives have  been,  to  a greater or lesser extent, community-driven responses  to  the  challenges  of  underbanked and unbanked populations (both  individuals  and businesses). The reasons  why someone  is underbanked can be economic,  political,  geographical, cultural, social/societal,  and/or  gender  induced.  In the case of developed countries, economic criteria will quite often be predominant, with some influence of geographical  barriers,  while in the case of developing countries,   cultural,   gender,  and  political   factors may  contribute more  to  underbanking. Financial exclusion may affect individuals,  households (families), entire communities, individual  entrepreneurs, businesses, and, in some cases, regions.

The underbanked do have limited access to services, but they do not use them on a regular  basis. For instance, an individual  may have an open bank account, but  he or she may, in fact, be using predominantly  cash;  hence,  the  account   is  seldom used or is dormant. Also, the person  may be using nontraditional providers  of financial services— check-cashing   agents,  pawnbrokers, and/or   loan sharks   (nonlicensed   providers   of  financial   services).  As  these   providers   do   not   report   their activities, it is very difficult to assess the volume of operations and  the  size of that  parallel  industry. However,    thanks    to   the   phenomena   of   the unbanked and  underbanked populations, primarily in  the  developing  countries,  the  microfinance industry  was born.  With  the establishment of the Grameen  Bank in Bangladesh  to support the economic enterprise  of the disfranchised strata  of the society, the international trend of microfinance organizations began.  Microfinance organizations offer  some  banking   and/or   financial  services  to those who do not have access to mainstream banking services; they also provide,  as a rule, technical assistance  and  better  loan-monitoring programs, assisting   the  customer   to  deliver  the  projected results.

The  underbanked can  also  be  defined  by  the type of services they use occasionally,  despite having access to it arranged. The underbanked do not have  the  right  to  access money  transmission services (including, but not limited to, payment,  cash, or debit and credit cards), insurance (especially home—building and  contents—insurance), short-term credit, and long-term  savings facilities. Quite often, access to short-term credit is crucial for the unbanked and  underbanked populations. In  the case of the poorer  people  in a society, short-term credit is needed for maintaining financial  liquidity and is increasingly seen as part of societal/financial participation.

Financial  exclusion  can  also  be  initiated  as  a result   of  access  exclusion,   condition  exclusion, price exclusion, marketing exclusion, and self-exclusion.   In  the  case  of  access  exclusion,   the potential customer  may be prevented  from  enjoying the full range of banking/financial services due to the strict  application of risk management policies of a financial services provider.  Condition exclusion  happens  when some characteristics of a financial   product  make  them  inappropriate  for some sections of society (e.g., offering classical financial  products to the  highly religious  Muslim population, without even considering  offering any Islamic  banking  alternative). In the  case of price exclusion,  the  financial  products are  priced  in  a manner  that,  from  the very outset,  makes  it clear that  the potential target  population cannot  afford them. Marketing exclusion is triggered by an inappropriate  marketing approach that  alienates the  target  population. Self-exclusion  is the  most difficult  to  battle,  as the  potential customer  self-limits  himself  or  herself  and  refrains  from  using some financial  products and services.

The  underbanked population is usually  represented  by the  unemployed, those  unable  to work due to ill health  or disability,  single parents,  single retirees,  and  members  of various  minority  groups (ethnic, gender, etc.). These groups  are quite often described as vulnerable and/or marginalized. Financial   education,  specially  targeted   to  reach them, can, in the medium to long run, improve the “bankability” of these groups and ensure that they participate  in  mainstream  economic  life.  In  the case of ethnic groups, in many countries, these communities are closed and very inward  looking— hence  the  resistance   to  the  use  of  mainstream banking and financial services. Ethnic minority communities are well known  for developing  alternative  social  support networks, which  may  also provide some kind of mutual  economic support to their members.  Research  has suggested that  growing up in an environment where banking/financial services have been used significantly  increases  the probability that  as  an  adult  the  person  will  be using  the  banking/financial services offered  by  a mainstream banking/financial services provider. Financial  education, as suggested, may contribute to better  financial  inclusion  and the increased  use of mainstream financial  services by the marginalized population. AFS, in developed countries  (most notably  the  United  States),  and  microfinance, in developing countries, may alleviate the situation in the short run but would not necessarily address the major  issues of financial  exclusion.

The term  underbanked can also be understood to refer to the situation in which an underwriter is unable  to sell securities, usually due to the chronic lack of interested  investors,  and  consequently the placement  of  securities  fails.  However,  the  main use of the term is the one described above.

Bibliography:

  1. Beal, Diana and Deborah Ralston.  Economic and Social Impacts  of the Closure of the Only  Bank  Branch in Rural Communities. Toowoomba, Queensland, Australia:  University of Southern  Queensland, Centre for Australian Financial  Institutions, 1997.
  2. Bradley, Christine, Susan Burhouse,  Heather Gratton, and Rae Ann Miller. “Alternative Financial  Services: A Primer.”  FDIC Quarterly, v.3/1 (2009).
  3. Connolly, Measuring  Financial Exclusion in Australia.  Sydney: University of New South Wales, Centre  for Social Impact,  for the National Australia Bank, 2013.
  4. Meadows, Pamela, Paul Ormerod, and William Cook. “Social Networks: Their role in Access to Financial Services in Britain.” National Institute Economic Review, 189 (2004).
  5. Saunders, Peter and Kayoko Tsumori. “Poor Concepts: ‘Social Exclusion,’ Poverty and the Politics of Guilt.” Policy, v.18/2 (2002).
  6. Seidman, Ellen, Moez Hababou, and Jennifer Kramer. Getting to Know  Underbanked Customers:  A Financial Services Analysis.  Chicago:  Center  for Financial  Services Innovation, an Initiative  of ShoreBank Advisory Services, 2005.
  7. Stegman, Michael A. “Banking the Unbanked: Untapped Market Opportunities for North Carolina’s  Financial Institutions.” North Carolina Banking  Institute Journal, v.5 (2001).

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