A Clash of Kings and Strategies: Why Financial Exclusion Lingers
Most large scale interventions fail to tackle the exclusion of society's most vulnerable. Here's why
Imagine waking up to hear your NGN500 and NGN1000 notes are no longer valid currencies.
Crazy right?
You don’t have to imagine because, in 2016, it happened in India.
In a bid to fight corruption and reduce the amount of cash in circulation, the Indian Prime Minister announced that the two highest currencies - Rs500 and Rs1000 - would no longer be legal tender and be taken out of circulation.
The move wiped out 86% of the currency in circulation.
It led to a mass exodus out of the cash economy as millions of Indians rushed to deposit their Rs500 and Rs1000 notes with financial institutions and open bank accounts. Over 230 million new accounts were opened.
It looked like a win, as India appeared to have cracked the playbook on financial inclusion.
Or had they?
In 2017, the Global Findex reported a shocking amount of dormant accounts in India. According to the report, about 195 million bank accounts were dormant (that’s 48% of all bank accounts in India).
Apparently, people had opened accounts and then abandoned them.
The infamous demonetisation exercise was a government-level experiment in financial inclusion. But it failed to achieve its objective because it used the wrong strategy.
Push vs Pull: A Tale of Two Strategies
When I talk about financial inclusion, people usually ask me, can the government make bank accounts compulsory? Or do something similar to what the Indian Prime Minister did.
In today’s newsletter, I want to answer that question.
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There are two ways to get people to use your product or service. You can use push strategies and pull strategies and both have their strengths and cons.
Push strategies: A push strategy is when a service provider ‘pushes’ a product at a customer. It involves taking the product directly to where the customer is via whatever means, ensuring the customer is aware of your products and services.
For example, when a bank sends their sales team into higher institutions to sign up undergrads as new customers, that’s a push strategy.
It can be quite effective (I’d know because that’s how I opened my first bank account).
A country’s central bank can also ‘push’ financial institutions towards customers. In the last newsletter, I shared the story about the Central Bank of Nigeria (CBN) mandating microfinance banks to open 64 new accounts per branch, every month.
Those rarely work.
Pull strategies: A pull strategy ‘pulls’ a customer towards a provider by creating demand for their products and services. A good example is the Sahel Consulting story published in last month’s newsletter.
Here’s an excerpt:
ALDDN’s value proposition is to help local dairy farmers increase the volume and quality of milk they produce. This makes them attractive suppliers to milk processors, who can then meet their raw milk needs locally instead of importing. But the processors refuse to pay suppliers in cash, preferring digital transfers into mobile money wallets/bank accounts.
Thus, the second half of ALDDN’s value proposition is to help integrate the local dairy farmers into the banking system to make them eligible for digital payment.
Read: Up North: How Sahel Consulting is Including Low-Income Women one Community at a Time
By creating demand for a product, the laws of economics are set in motion and the eternal dance between demand and supply commences.
And as we saw from the ALDDN story, it can be quite effective.
Government vs Socioeconomic realities
Let’s go back to the India story.
The Indian government’s demonetisation exercise tried to ‘pull’ citizens towards digital payments (ie generate demand for bank accounts) by banning the country’s highest currency notes. And it worked for middle-class citizens and above.
What the government failed to account for was the second-order effect on low-income citizens who are at the mercy of greater forces than government mandates.
So what did poor citizens do?
They opened bank accounts and deposited their Rs1000 and Rs500 notes. They then withdrew their money in lower denominations and went back to using cash.
Poor people are excluded, not because they don’t want bank accounts but because of:
Poverty: they earn too little or not at all.
Income volatility: many unbanked people are informal workers who earn wages and get paid daily based on the work they can find. Having a bank account means they have to keep paying maintenance fees, transfer fees, etc even when they have not earned any wages that month.
Proximity: Many live in rural areas where banks are few or non-existent.
Illiteracy: many poor people can’t read or write in the official language.
Proof of Identification: You can’t open a bank account if you don’t have proof of identification or address.
This is why when compelled to open bank accounts, poor people abandoned them almost immediately.
Ultimately, the pull strategy failed because it generated artificial demand without investing in systems that supported the intended behavior change.
Because at its core, financial inclusion is about behaviour change. Not just opening bank accounts.
Measuring bank accounts, a vanity metric
There’s a problem with the way financial inclusion is measured.
Since the early 2000s, when governments sought ways to increase their citizen’s access to financial services, financial inclusion became defined as the number of people with bank accounts. This is why push strategies are so popular - because they often lead to a surge in bank accounts.
But measuring number of bank accounts is a vanity metric.
Because, as the India story showed us, many of those bank accounts end up dormant.
It’s like trying to lose weight by working out but not changing your diet. Yes, you will shed some pounds but the weight loss will be transient. To achieve your weight goals, you need both strategies.
Real financial inclusion is when people not only open bank accounts but use them frequently, till it becomes integrated into their daily routine.
This is why I said financial inclusion is about behaviour change.
And this is why we need to move beyond ‘pushing’ financial products and services at citizens to building enabling systems at the bottom of the pyramid that create demand for financial services.
Want an example of an enabling system?
Employment is a good place to start. Research shows that when people have stable income, they tend to open and keep using bank accounts.
Same can be said for literacy and proving identity.
Epilogue
Financial inclusion requires push and pull strategies.
There have been so many push strategies in Nigeria’s financial service industry: the CBN’s Cashless Initiative (2012), the licensing of Microfinance banks (2005/2011), mobile money (2008), agent banking (2013), Payment Service Banks (2018), etc.
What has been lacking is genuine demand.
This is why inclusion has stagnated.
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Honestly, I strongly affirm with both push and pull strategy, but the push strategy has higher efficiency in Nigeria, since it allows consumer to reach product and Services at thier leisure.
This is a brilliant expose as always. I agree with you that both push and pull strategies are needed to achieve financial inclusion.
I will disagree with your position on demand. We have pent up demand among citizens given their massive use of informal financial services. From my experience on the field, there is no meeting of the minds between financial service providers (FSPs) and would -be customers. FSPs need to pay more attention to understanding customer personas and their financial needs in product design and service delivery.