‘Confusion Exclusion’–or Rational Choice? Why Some of the Unbanked Stay That Way

Some 2 billion people around the world are financially excluded–and presumed to be in need of financial education because they do not use formal financial services like bank accounts, insurance, and credit. That’s about 70% of the adult population in developing countries and 20% in developed ones.

Getting all individuals access to modern financial products and services is an important part of the financial literacy mission. It can dramatically improve access to credit at lower costs. But what if individuals without access don’t really want these products? That is the intriguing question posed in a recent paper in the Journal of Social Policy by three researchers at the Center for Social Impact at the University of New South Wales in Australia.

Why would anyone choose to be financially excluded? The researchers—Fanny Salignac, Kristy Muir, and Jade Wong—rattle through a range of possibilities. Some of the financially excluded might prefer living an all-cash lifestyle to better keep track of spending. Some might stay away from credit cards and bank accounts because they are worried about being rejected. Others might worry about these products leading to too much debt or costly fees from bounced checks, interest charges or other standard bank features.

The latest version of the Federal Deposit Insurance Corporation’s (FDIC) survey of Americans without bank accounts demonstrates many of these points. Nine million U.S. households, including 15.6 million adults and 7.6 million children, didn’t have a bank account in 2015.

When surveyed, these unbanked households gave “Do not have enough money to keep in account” as the top reason for not having one. A full 57% said that was the case. Other top reasons included “avoiding bank gives more privacy” and “don’t trust banks” and “account fees too high” and “account fees unpredictable.” At least one in four cited each of these reasons.

Physical access didn’t seem to be much of an impediment. Only 9% of survey-takers cited “inconvenient locations” and slightly fewer picked “inconvenient hours” as reasons for remaining unbanked.

What should those fighting for financial inclusion take away from such findings?

As in any other field: know thy customer. The University of New South Wales researchers leave plenty of room for the possibility that some financially excluded people don’t fully understand the sorts of products and services that are available to them, or how they might actually benefit from using them. The researchers call this “confusion exclusion.” This is where financial education can be an important fix and where financial literacy efforts should be focused.

But in many cases there is a good chance that unbanked individuals are not ignorant about their options–but making a rational choice given their financial constraints and opportunities. For example, just because a person doesn’t have a savings account or credit card doesn’t mean she doesn’t have a way to raise money in an emergency. Networks of informal borrowing can be fast, efficient, and, importantly for lower-income households, flexible.

The researchers point out that people who choose non-mainstream forms of finance may be selecting these options because they better suit their needs. For instance, poorer households tend to have extreme income volatility, which can make it tough to manage regular formal financial services. “While the availability of financial products and services is important,” the researchers write, “the way in which these services are provided as well as the way in which they are tailored to an individual’s needs is significant.”

Posted in Latest Research, Success Stories on January, 2017