Promoting Financial Services in Vulnerable Populations
Which are the best mechanisms for implementing efficient financial services for vulnerable populations?
People who are in vulnerable circumstances need services that will relieve their imminent situation of risk and inequality. A clear example of the type of services that can help improve living conditions in this population are financial services. However, these services characteristically have a series of access barriers that prevent people who are in vulnerable circumstances or at risk of economic exclusion from enjoying them. This is known in the specialized literature as the unbanked, and, according to Global Findex statistics (2017), 1.7 billion adults do not have access to financial services, which is almost 25% of the world population.
Financial services designed for unbanked populations, among other aspects, must have the capacity to break down the barriers created on the supply and the demand sides. A group of barriers that are undoubtedly insurmountable on the supply side consist of physical and economic accessibility and eligibility, which is commonly called exclusion from access. This concept refers to users’ lack of knowledge of financial products, as well as the non-availability of financial service providers’ physical infrastructure close to those who live in popular neighborhoods, in areas far away from the city or in the countryside, where having to access to transport services implies high transaction costs.
Exclusion from access brings additional obstacles (barriers on the demand side), such as this population group’s mistrust of financial systems or their low level of engagement with service providers, due in part to their lack of skills or knowledge about such financial services. In this sense, for financial services to perform well, they must presumably be co-produced by various entities that partner to break down the barriers which lead to exclusion.
A study that I published a few years ago, A transformative perspective of financial services for the unbanked, accentuated the way in which the co-production of services involving financial institutions and commercial entities related to popular neighborhoods or rural areas, and a high level of involvement of the end user, served to develop a financial service format capable of providing access to various segments of the population traditionally excluded from the system. It also sought to highlight a key aspect: the empowerment of financial service users, a factor that improves customer participation and satisfaction, as well as their trust in and commitment to the service. Which are the best mechanisms for implementing efficient financial services for vulnerable populations?
Greater interaction with the bank agent and the support perceived by customers are fundamental factors in creating trust towards the financial service. The customer’s financial empowerment is also crucial to building deeper interactions with the service provider. Consequently, institutions should promote these relationships, ensuring that account agents seek to improve their customer engagement in the more significant stages of co-creation that will have a greater impact on customer well-being.
This study also highlighted the importance of dividing population segments by their level of confidence in their financial skills, so that services can be customized. Low-scoring customers tend to observe signals from other members of the service to verify their competencies. Thus, their relationship with the bank agent will remain up-to-date.
Lessons from Banco del Barrio (Banco Guayaquil)
An illustrative example of this dynamic is the recent case study I wrote about Banco del Barrio (BB), a channel of Banco Guayaquil (Ecuador) for traditionally excluded populations. The case study was recently published in the Social Enterprise Knowledge Network (SEKN), and seeks to underscore how the bank managed, across its 11 years of operations, to provide low-income populations with easy, quick access to the banking system, overcoming the barriers to financial inclusion that are traditionally found in said market segment.
This service was offered through neighborhood bankers (non-banking correspondents), who were assigned -according to their profile- a line of credit or an account with their own capital in which the banker chose the amount that allowed him or her to manage the stock of money to process deposits, payments and collections. Approximately 60% of neighborhood bankers were women, aged between 40 and 45, on average. But how could the neighborhood bank format, led by neighborhood bankers, grow financial inclusion and increase the use of financial services, such as credit or savings services?
In this context, the case study is designed in such a way that MBA students can understand the dilemmas faced by executives and delve into the essential aspects of financial inclusion. Even though the BB had succeeded in providing access to financial services, of the total number of accounts opened in this bank service, only 35% remained active and, of that percentage, the frequency of use of the different financial instruments was very low.
This implies a significant challenge since access, on its own, does not offer a solution to the financial inclusion of vulnerable populations and those at risk of exclusion. Debate on this case should produce a new plan for the BB, with students actively participating and efficiently discerning how to:
- Make financial services fairer, more inclusive and participatory so that they would have a greater impact on multidimensional phenomena, such as financial inclusion.
- Evaluate strategic decisions on transformative services that would impact the financial inclusion of vulnerable populations or those at risk of exclusion.
The dilemmas faced by the BB executives reveal the multiple challenges of the financial inclusion of unbanked populations in Latin American countries.
The author is a research professor at EGADE Business School.
