Stop Using the “L” Word

Dear Reader,

Let’s try an experiment, shall we? Think for a second about this question:

Are you linked to your bank?

I know you have a bank account, and you might even have several bank accounts. But… are you linked?

Most people wouldn’t use the word linked to describe their relation to a bank, or a phone company, a supermarket or any other company that sells them services. They would say they use a certain bank, or they have an account with a certain bank. But linked? No, we don't say that.

So, what’s all this “linkage” about? What's the difference between a Savings Group that has a bank account, and a Savings Group that is linked to a bank? One way to answer that question is to ask, Who’s initiating things, and whose interests are being served?

When you and I opened our bank accounts, it was, for most of us, a completely free choice. We needed banking services so we found a bank. Before we committed to the bank, we probably shopped around some, asked friends and colleagues what bank they used, checked to see what the fees were at different institutions, and how far away they were. In my case, my wife and I looked for a bank that had a focus on investing in the community, and that paid attention to social and environmental issues. And then we chose, freely. And, since we chose freely, we aren’t “linked”. We are simply buying a service because we want to, and we can change any time we want to. We aren't linked.

“Since we chose freely, we aren’t “linked”. We are simply buying a service because we want to.”

But now consider the case of Savings Groups. Many have been linked, and that usually means that under a program - usually a partnership between an international NGO and a donor - it was decided that it would be A Good Thing to get these groups to open bank accounts. So the donor gave money to the NGO, which in turn promised to entice a certain number of groups to open bank accounts. To make that happen, the International NGO assembled a team of local NGOs and banks, and trained their existing staff or hired new staff, and gave them targets to reach in terms of signing up people with banks. The staff did what it was paid to do: it went out and convinced groups to open accounts with the bank.

Some of the staff were diligent and carefully explained the costs, risks and advantages of having a bank account to the groups, and then the groups discussed this among themselves, and decided yes or no, they would or would not open an account.

But of course other staff were less conscientious: they told the groups half the story of having an account, overselling the advantages and under-informing about the costs and risks. Or they dealt only with the committee of the group and didn’t take the time to explain what was happening to all the members. Or, they put psychological pressure on the group, recalling their history of bringing them Good Things From Donors, and suggesting that there would be a fruitful future relationship provided that the group cooperated with them. In short, they did whatever was necessary to get groups and members to open accounts.

However, they probably did not tell the groups to shop around, or to consider whether risk was really reduced if they had to travel long distances to keep their money safe. They didn’t warn the groups about the risks and likely outcomes of solidarity loans, including losing members, especially the poorest. They didn’t argue that the group could probably meet the needs of most members with the group’s own resources. They didn’t stress that interest payments and fees would be draining from the group to the bank.

When this happens, some groups open accounts. Maybe some of them are fully informed and after weighing the costs, risks and advantages, they decide democratically to open an account. But for many of them, one way or another the INGO decides for them, pressures them, coerces them - in short, they are linked. And the result of linkage is that many accounts are dormant, and the mistrust of banks isn’t diminished.

When that happens, that is, when the groups do not decide freely and after consideration, we have wasted an opportunity to let groups mature by thinking for themselves and making their own decisions (which most groups are quite able to do). The trouble with letting people decide for themselves is that they don't always make the decisions that we want them to, so we "educate" groups that they need bank accounts. 

Linkage moves the center of responsibility – nowadays called “agency” – from the group or the group members to the INGO and its partners. Many groups have simply decided to open bank accounts themselves without anyone’s help. These groups aren’t linked – they just have accounts. Like you and me. 

Banks that are bothered by dormancy - that is, bank accounts that were opened but no one uses - may find the solution in agency - in making sure that the people who opened the account did that of their own free will, understanding what they were doing. Informed consumers who open accounts because they need them will probably use them. 

• • •

So how did INGOs get into the picture? The INGOs live off the largesse of donors, and they know that many donors have adopted the financial inclusion agenda, the idea that getting poor people to have bank accounts leads not to just poor people with bank accounts, but to poor people getting out of poverty. So, the INGOs say the have access to lots of unbanked people, and they get very smart people to spend weeks and months developing business models to show the banks that they can make money from groups. 

But here's a different idea: why don't we just let financial service providers design products that groups might want, and then let them try to sell the products to the groups? If the groups choose to buy the products, then everyone is happy, and if not, then the banks need to go back to the drawing board and make the products even better. The best banks are doing that already, and they realize they can reach many many more groups without passing through NGO gatekeepers.

Isn't that the way a market is supposed to work?