Staked to the Ground in a Savings Junkyard
On the whole, banking for the poor disappoints. With better access to banks, low-income people might enjoy the confidentiality and security of formal financial services right next to the informal services of their mattress, local lottery or nosey neighbor. As it stands, the poor are financially staked to the ground. They can’t free themselves from the mattress, the lottery, or the neighbor. They have nowhere to go.
Some are lucky enough to belong to well-run savings groups. But these groups rarely meet short-term needs for withdrawal or long-term needs of retirement*. Members are stuck as savings tweens if groups are their only option.
One reason many are trapped in a savings junkyard is the mountain of paperwork currently required for even mundane banking activities. You’ve seen it. We’ve all seen it. Much of this hassle results from mandates imposed on banks by regulators attempting to meet international benchmarks. These standards and the various regulations they spawn are to a large degree meant to deter money laundering and terrorism. But, such rules beg an obvious question: are they fostering financial exclusion? I argue – yes, and some of my colleagues involved with the Alliance for Financial Inclusion would agree.
One expression of faulty regulation is KYC – Know Your Customer. It sounds pleasant enough, no? Who should not know a customer, and thus serve her well? But KYC makes no pretense at encouraging banks to understand customers or their needs, as a route to better service. Its aim is to force banks to know just enough about customers to trace tricksters and terrorists. Yet in seeking to meet this goal, diligence officials within banks insist upon identification requirements that cannot be met by the most vulnerable segments of a given market.
A fear of the nefarious has thrown regulators off track. Yes, the bad guys are out there, but their financial activity is only neferarious in the moments when they attempt to do something bad with their money. Not in the moments when they save.
The act of saving is harmless. To do harm, sinister savers must purchase something, pay someone, or make a transfer to something illicit. So let that harm be stopped, not the act of saving itself. There are already regulatory caps on amounts withdrawn or transferred. Those rules can stay in place. What should be removed is the identity hurdle associated with bank accounts.
Regulators already make exceptions. Playing the lottery – a financial strategy that targets the poor – is curiously exempt from the tough standards of identity. Expensive prepaid cards also require less ID, as do the pricey services of money transfer. Are lawmakers negatively biased toward banks? If so, they should not be. Banks and credit unions are one of the few places that savers can earn an insured return on deposits.
Lawmakers should focus on getting as much savings as they can into a connected system for two reasons. First, money lured into a digital account allows analysts to more easily trace sinister activity. Once in the system bad guys can be detected and snared. Analysts cannot do such detective work if menacing targets use cash. Cash is difficult to trace.
Second, in coaxing money into the digital system regulators can start to help the good guys, those small savers looking for ways to get their money out of the mattress and into safer, cheaper, and more profitable services.
That means regulators must lift KYC rules for savers. KYC need only come into play when a saver does something serious with her savings. Not a moment before. At the point when a saver makes transfers of more than a few hundred dollars or makes a purchase of similar amounts, we feel sure she will be more motivated to master KYC paperwork. Up until the point, the saver is only that, a saver. A pin-code and a thumbprint should do for ID.
In short, banks need not know their savers. Let savers go unknown and un-hassled. Let them out of the savings junkyard and into the ranks of the financially included.
* For an exception, see this paper, Pray for Money.
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Reader Comments (3)
Great post, Kim.
The silliness of KYC is underlined by the issuance of the totally unnecessary 500 euro note, sometimes nicknamed "Bin Ladens", because of the way they enable illicit money movement. Why hassle small savers if you're facilitating drug barons and arms merchants?
Sun, October 16, 2011 | Paul Rippey
Kim, as I work my way through the latest addition ― the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 ― to the many compliance hurdles for my mates at AWHI Credit Union in New Zealand’s gorgeous Bay of Plenty (now facing a stranded ship oil disaster), I’ll make a diary note to ensure that the next time I’m chatting with the BIS big-wigs I’ll ask them to tweak the rules to let savers-only off the proof-of-goodness hook.
Seriously, whilst I couldn’t agree more with your point ― and so do the women in the stellar example of small-town indigenous peoples’ inclusive finance that is AWHI ― I fear the inability of regulators to look beyond the paranoia of today’s global politics and give the harried low-balance saver a fair go.
The rules are made for the vested interests with the power to influence the rule-makers. Why else do tax havens still exist? Why else was the Glass-Steagall Act mutilated in 1999? From where did the idea come that financial institution supervisors should move away from a proactive inspection model to the fashionable idea of market-based self-regulation, where 'informed' consumers and rating companies (!) would exercise sensible restraint upon deposit-takers?
Banking for the poor is, unfortunately, only on their radar in the context of a war on this and a war on that ― creating, unsurprisingly, a war on the poor too.
Tue, October 18, 2011 | Greg Pirie
Kim,
Are you familiar with Aadhaar the Unique Identification project of India which has as its goal collecting biometric data from all 1.2 billion Indian citizens? As you are very aware those without identifies in India get nothing from the government and have no ability to even open a bank account or buy a mobile phone. So people subject themselves to having their fingerprints and irises recorded and then they are given a document that verifies that they exist. Little skin off their backs civil rights wise since they started from a point of not even existing to the state to being one in 1000 million in a database. Anonymity in numbers.
While I can see that kind of data collection would make the civil rights folks flip out here in the U.S., in India having this kind of official ID means people can participate, even if only in small ways like opening a bank account or getting cash transfer supports from the government.
I wonder if this kind of system could satisfy the regulators need to know who a person is enough to replace KYC (at least for savers).
The bigger issue you raise is that the banks themselves generally don't have a strategy for assisting low income people who want to save even if they do meet the KYC requirements. And I worry that data collection for national IDs can be used in nefarious ways if the wrong people get a hold of the data.
Thu, October 27, 2011 | Bill Maddocks