Half the world lives without the benefits of financial services. Most of us don’t understand what it means to be a “financial nomad” – living without full access to traditional banking – but the costs are great.
To put it in perspective, globally there are 4.5 billion adults who are eligible for access to financial services, yet only 2.1 billion have taken advantage of this and established relationships with banking institutions. Most of these people have basic savings accounts that don’t offer debit cards, checkbooks, etc. – what I like to call non-transactional banking – which means limited access to low-cost money transfers and bill payment options.
Hard and soft costs are high – in the US where 70 Million Americans are financial nomads, their families spend as much on high priced financials services – overdraft fees, check cashing, bill pay, high priced credit -as they spend on food. This doesn’t count the soft costs including travel time, gas, stress. This burden is on families that are already struggling to make ends meet.
Why don’t these people have bank accounts when most of them have jobs? They many times don’t have enough money to maintain a minimum balance or pay for the basic servicing of an account. In addition because their living on a tight budget they are much more likely to bounce checks or need to use overdraft. All this means higher fees including getting into a spiral of excessive fees that makes the bank account too painful and expensive.
For example, Bank of America offers an eBanking option which includes a very basic, relatively easy to access account. However, it requires a $12 monthly service fee unless a client enrolls in paperless and self-service banking via a Bank of America ATM or online portal. This is simply a checking account, and to add a savings account costs another $10 in fees each month. Thus, it can cost over $250 a year just for the privilege of accessing their money. Add to this, overdraft fees and bounced check charges and the amount can be significantly higher. This is access prohibitive to the financial nomad who simply can’t afford the expense.
Then, of course there are geographical challenges. Not everyone lives in a large city where the nearest bank is just down the block. Many financial nomads live in rural areas that are 50 miles or more from the nearest bank. More true in developing countries like India, but even in the US banks are closing branches in economically distressed areas. Add in distrust of banks, lack of documentation and the cost of getting to the bank, and well, many simply forgo doing so.
For many financial nomads, these fees and barriers lead them to rely on less beneficial financial services. Indeed, there are many services that are far more harmful to their financial health; payday lenders and overpriced check-cashing services being the most nefarious. For many, these services offer quick cash and a simple solution to their financial straits at the moment. With slick advertisements and confusing terms, payday lenders prey on the financial nomad with vigor. While the immediate need for liquid cash is met, the long-term cost is steep and ends up costing borrowers their financial peace of mind.
The cost to individuals, families, communities and economies is too high. But there is hope. Around the world innovators from new companies are developing new solutions many specifically targeted at the underserved. You can read more about this in my upcoming book Financial Inclusion at the Bottom of the Pyramid (like on Facebook for updates on the release date). Or preview some of the innovators stories by following the links below.
Link for Carol’s Facebook page
Link to Financial Inclusion at the Bottom of the Pyramid
Link to Mobile Beyond Podcasts of financial pioneers.