Ash Center: Bridging the Gap: How Can Banks Reach the Unbanked?

March 7, 2013
 Ash Center: Bridging the Gap: How Can Banks Reach the Unbanked?
Jay Rosengard, co-organizer of the Bridging the Gap conference held March 1 at Harvard Kennedy School

By Kate Hoagland

In the developing world, more than half of all adults do not have a bank account. Of those that have an account, less than 10 percent make at least three withdrawals a month*. For the unbanked, it can be a challenge to increase savings, improve credit, and accumulate assets when managing money outside of the traditional financial sector. For financial institutions, it is a struggle to understand this untapped market of consumers and aid them in money management.

At the March 1 conference “Bridging the Gap: How Can Banks Reach the Unbanked?” more than 50 scholars, government officials, and banking leaders from around the world convened at Harvard Kennedy School (HKS) to discuss new opportunities and challenges in bridging the gap between the unbanked and the banking sector. The event offered participants an opportunity to assess over 30 years of research on financial services for low-income households and evaluate the latest alternatives to reach the unbanked and underbanked.

Bank Accounts v. Pockets
Elizabeth Rhyne, managing director of Accion’s Center for Financial Inclusion, set the framework for the conference’s discussion by comparing the different money management habits of the banked and the unbanked. While 90 percent of adults in the developed world actively use their bank accounts as the central hub for all money management activities, adults in the developing world follow a completely different “pocket theory” model.

Under the pocket theory, low-income adults typically manage their financial lives by compartmentalizing funds—often in cash—in a series of different “pockets”. If they have a bank account at all, it only serves as one player in a complex web of different types of transactions among a host of diverse players.

Bank Account as On Ramp to Financial Inclusion?
The predominant assumption that the unbanked must adopt the bank account model is controversial. Rhyne challenged, “Is a bank account really an on ramp to financial inclusion?” Timothy Odgen of the Financial Access Initiative added, “People aren’t waiting around for money management, they are already doing it with the tools they have. Instead, we should be asking what’s wrong with our products if they can’t compete with the ‘terrible’ alternatives offered by the informal sector.”

Yet, as more and more people move from the lower class into a swelling middle class over the next decade, Rhyne suggested that the pocket theory of money management may prove inadequate as the unbanked population’s economic activity increases. And the timeframe by which banks need to develop a long-term relationship with this audience is narrowing. As Drs. Ayse Zoodsma-Sungur of Nederlandsche Bank (Dutch central bank) quipped, “people change phones, wives, husbands, and cars more than they change their banks.”

Cash and Carry
The conference also explored new opportunities to reach the unbanked. Often, low income people send money in small increments via higher cost money transfer services. But because added-on minimum fees per transaction can make this cost prohibitive, people have been forced to physically transfer funds themselves, which can be risky and sometimes more expensive when including transaction and opportunity costs. These remittances have traditionally been viewed as international transfers between a worker and his native land, but recent research suggests more frequent fund submissions at larger amounts are transferred domestically between urban and rural locations.

With mobile phone usage on the rise, there is now a safer, lower cost alternative to such cash and carry money transfer practices. According to the International Telecommunication Union, worldwide more people have mobile phones than bank accounts, and transferring funds via a mobile device is by far one of the lowest-cost transactions today. To conduct a mobile money transfer, mobile users:

    • Deposit their cash at a registered retail site like a local pharmacy or gas station, and their balance is reflected on their mobile phone.
    • To pay a bill or send money to friends and family, users log on to their account on their phone, and request funds be sent to that party.
    • The recipient receives a text message notification of new funds, and then travels to their nearest registered retail site to withdraw the funds, using the text as a receipt.

Mobile money’s ease of use and low cost are contributing to its widespread adoption—in Africa mobile money use is on the rise in Kenya, Uganda, and Tanzania.

The Newest Frontier
Jay Rosengard, co-organizer of the conference and director of the HKS Financial Sector Program, explained that mobile money transfers pose both a challenge and an opportunity to the formal banking sector, because in some cases banks are eliminated from the equation. “The question is how do you tie this to other services—such as credit for income growth and savings for asset accumulation—that have a potential for greater impact in the longer term,” said Rosengard. Moreover, the digital transfer of money can be a scary frontier for “pocket” consumers unfamiliar with the lack of a paper receipt and the use of a PIN.

Mobile money is just one type of payment system that has gained popularity in recent years as a lower cost alternative to conducting transactions. According to Rodger Voorhies of the Gates Foundation, payments may be the key channel to encourage the unbanked to use financial services while gaining increased security for their financial transactions at a lower cost. “In many ways, payments are the newest frontier,” said Voorhies, adding that they are “the connective tissue that holds financial systems together” and “mirror transactions poor people already do now.”

This event was organized by the Ash Center for Democratic Governance and Innovation and the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School along with the SWIFT Institute, the nonprofit arm of SWIFT designed to improve access to financial services. To review the conference’s presentations, please visit

* Global Findex, 2012