By Powell Nielsen
This past summer I was part of a delegation with the School for International Training located in Cartagena, Colombia. There, I was tasked with finding low-tech solutions for the urban and nearby rural communities to acquire clean drinking water. However, over the trip, I noticed one particular problem apparent in many of the struggling communities– lack of access to financial institutions, in particular, banking services. Many in Colombia survive on a paycheck-to-paycheck lifestyle along with occasional help in the form of welfare assistance from the Colombian government. Unbanked low-income families cannot effectively save money, apply for loans, or build any sort of formal wealth. This, I believe, has placed these communities in a financial hole from which they cannot climb out. Not only is this an education problem, but it is also a banking reform issue. This article will outline this in Latin America along with providing evidence that both FinTech companies and state-led financial education programs can revolutionize banking in Latin America along with bringing financial services to both the rural and urban poor.
Every morning as I made my way through the city of Cartagena from the Manga district to El Centro I passed a particularly disorderly crowd in front of an Agro Colombia bank just as I crossed the Puerto Roman. People swarmed the entrance, an informal line snaked its way down the street full of people of all different ages and similar economic backgrounds. Occasionally, the group would be more lively than usual, yelling at the bank employees from outside and throwing objects at the large glass windows. This situation was a regular occurrence, and I had to get to the bottom of it. I approached my group leader and Professor Mar Marquez and asked them about the unruly mob that convened every morning. They explained that the Colombian government had begun to offer welfare payments to the lowest-earning citizens across the country, but had serious understaffing problems when confronted with those who were eligible. Agro Colombia Bank is a state-run bank that has many locations and employees across Colombia. Why was it faced with so many who were eligible for welfare packages, yet could not fill the countless orders that were required? After further investigation in my own time, I came to understand that many of the urban and rural poor did not have bank accounts, access to financial services, or the education required to understand how to access these resources. Their only option was to wait outside every morning in front of the same bank and pray that a bank employee could serve them. In fact, many Latin American countries experience similar socioeconomic problems from limited access to banking services. The unbanked in Colombia turned out to be a common problem throughout Latin America affecting far more than the ability for unbanked individuals to receive stimulus checks and possibly rise out of poverty.
As of 2021 roughly 70% of the population in Latin America remains unbanked and is unable to access financial services. This is due to a number of factors including strict anti-money laundering laws, high interest rates on credit cards and minimum account balances, insufficient resources and mistrust of banking institutions just to name a few. Many banks across Latin America only serve the top 20% of earners to avoid working with lower-income communities. Not only is it unprofitable for banks to include lower-income individuals, but they are stigmatized by the industry as being untrustworthy and a poor investment. Furthermore, nearly 58.6% of Latin America works in the informal economy, where issues regarding tax returns make it incredibly difficult for the rural and urban poor to set up banks in the first place. Finally, according to the Geographic Journal, “takeover by foreign owners of Latin American banks is frequently followed by charges in lending and operating practices, such as a decline in the numbers of deposit accounts, and an increased focus on operations in wealthier areas”. Additionally, while current legislation in both Mexico and Colombia cap interest rates at 17%, credit card charges reach up to 40% per annum. For individuals living below a living wage, these charges are impossible to pay back.
The main issues regarding this crisis most closely relate not only to lack of access but also to lack of education. Today, there are many other ways of procuring bank accounts in the form of online microfinance and banking apps which have massive advantages to the poor unbanked of Latin America. Nearly every employed person in Latin America either owns a smartphone or has access to one, hence with the right education and trust-building these citizens could easily become banked in a matter of hours, rather than the usual 30-day wait period required by traditional banks. More than two-thirds of Latin America is connected to the mobile internet, in countries like Panama, Argentina, Uruguay, and Chile this number is up to 80% coverage. FinTech companies have had great success in many developing countries and have started to yield similar results in Latin America. Mobile banking companies have begun to spring up across Latin America including Movii in Colombia, Nubank in Brazil, Ualá in Argentina and Kueski in Mexico. All of these companies come in an easily accessible format in an application on one’s smartphone. For rural communities, the likelihood of a major bank establishing a location is quite slim due to high overhead costs. For FinTech companies, “geographical barriers are hardly a concern.” Additionally, Fintech banks send credit cards in 8 days while it takes nearly a month for traditional banks to complete the same service. During the wait, one can download a digital credit card and utilize almost all forms of electronic payments. In the case of the recent COVID-19 pandemic, FinTech banking came as a massive relief to those who could not leave their homes during lockdown. By utilizing easily accessible electronic payment systems through FinTech, individuals could order groceries, food, and whatever else they needed directly to their door. Furthermore, many urban and rural marginalized communities do own homes, while they may exist in improvised housing, they have mailing addresses.
FinTech companies have no hidden fees or predatory charges as traditional banking methods do in Latin America. Current predatory practices include outrageously high interest rates to cover supposed risks and bring in large profits. Most countries have few banks creating little competition and incentive to serve lower-income individuals. Also, smaller loans are considered to be risky investments due to stigmatization of the lower income community, creating difficulty for low-income customers to apply for loans in the first place. However, the main issue isn’t the lack of Fintech companies in Latin America, it is the education of their existence, trust-building between Fintech and marginalized communities, along the promotion of their services through government programs.
Generally the unbanked have lower incomes and lower levels of education attainment. For this reason, many of the unbanked work informal or multiple jobs, and rarely have the time to set up traditional bank accounts or participate in financial education programs sponsored by their governments. FinTech and government programs need to utilize the online space as well as the physical space to promote and build trust with marginalized communities. Due to the shady history and exclusive nature of traditional banks in Latin America, lower-income areas have little faith in banks or their practices. Not only should Latin American governments reach out to FinTech companies in a competitive way, but government sponsorship of online banking FinTech must happen in an antimonopolistic structure.While it will be a long road to creating trust, by utilizing online advertisement, explaining the beneficial differences of FinTech to traditional banks, and educating across schools and employment programs, generations of unbanked citizens can begin to take part in their economies formally, and hopefully begin to build real wealth.
The unbanked issue doesn’t only affect the unbanked themselves, the informal economies existing in Latin America affect the whole macroeconomy on the national level as well. By formalizing the informal, governments can generate higher tax revenue while gaining a larger picture of what economic problems need to be addressed via investment and regulatory changes. Additionally,the Geographic Journal asserts, “data shows that there is a strong positive correlation between the growth of financial intermediaries and development, measured by factors such as growth in GDP per capita, income, investment and aggregate productivity”. By banking the unbanked quickly and effectively, the governments in Latin America can understand the complex mesh of networks in which the dual micro-business household entity exists and operates, informing deficits in financial service provisions. The Central Bank of Mexico reports that cash transactions cost up to 5 times more and cheque payments up to 15 times more than electronic payments. Furthermore, financial exclusion ultimately jeopardizes economic growth due to it reducing aggregate savings and thus aggregate investments. By fighting financial illiteracy and getting the unbanked to participate in some sort of banking services, governments have the capacity to invest back into previously informal economies.
From a microeconomic standpoint, FinTech can create benefits for those in low socioeconomic environments. Small loans offered by FinTech companies with low interest rates can allow low-income communities to start businesses, purchase homes, and find ways out of a perpetual cycle of poverty. Furthermore, setting up savings accounts can allow lower-income families to earn interest and gain valuable education from banking professionals on how to save effectively and set money aside for large purchases like a home, or even save for retirement. FinTech banking is only the beginning of the benefits that the low-income of Latin America can enjoy. Once they are able to save through accounts and access honest lending practices, they can begin to invest back into their economy and passively create income. For many individuals living on roughly than 5 USD a day, having the option to borrow and save sustainably at the micro level can create a pathway to both financial education and building wealth. The formalization of the vast amounts of informal workers across Latin America can also lead to a better understanding of workers’ rights, including minimum wage and pension packages. By simply reporting earnings to a banking institution, Latin American governments can better legislate for workers’ rights and allocate welfare packages more effectively. This in turn would lead to better solutions serving the low-income informal worker in a new formal economic setting.
Nearly every individual has access to or owns a smartphone. If a person can watch a YouTube video, they can install a FinTech bank account on their phone. The issue lies in the lack of communication between FinTech companies, unbanked communities, and government institutions. While Latin American governments may desire to promote their own traditional banks over foreign FinTech companies, many domestically owned FinTech companies have arisen across Latin America. By fighting financial illiteracy and improving access to financial services, the rural and urban poor can begin to take part in their own economies on their own terms, building wealth for themselves, and their country, while informing their governments on how to best stimulate and regulate their economies within a broader formalization process.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Photo by Random Institute via Unsplash