Staked to the Ground in a Savings Junkyard
Saturday, October 15, 2011 at 12:03PM
Kim Wilson

A Junkyard of Savings OptionsOn the whole, banking for the poor disappoints. With better access to banks, low-income people might enjoy the confidentiality and security of formal financial services right next to the informal services of their mattress, local lottery or nosey neighbor. As it stands, the poor are financially staked to the ground.  They can’t free themselves from the mattress, the lottery, or the neighbor. They have nowhere to go.

Some are lucky enough to belong to well-run savings groups. But these groups rarely meet short-term needs for withdrawal or long-term needs of retirement*. Members are stuck as savings tweens if groups are their only option.

One reason many are trapped in a savings junkyard is the mountain of paperwork currently required for even mundane banking activities. You’ve seen it. We’ve all seen it. Much of this hassle results from mandates imposed on banks by regulators attempting to meet international benchmarks. These standards and the various regulations they spawn are to a large degree meant to deter money laundering and terrorism. But, such rules beg an obvious question: are they fostering financial exclusion? I argue – yes, and some of my colleagues involved with the Alliance for Financial Inclusion would agree.

One expression of faulty regulation is KYC – Know Your Customer. It sounds pleasant enough, no? Who should not know a customer, and thus serve her well? But KYC makes no pretense at encouraging banks to understand customers or their needs, as a route to better service. Its aim is to force banks to know just enough about customers to trace tricksters and terrorists. Yet in seeking to meet this goal, diligence officials within banks insist upon identification requirements that cannot be met by the most vulnerable segments of a given market.

A fear of the nefarious has thrown regulators off track. Yes, the bad guys are out there, but their financial activity is only neferarious in the moments when they attempt to do something bad with their money.  Not in the moments when they save.

The act of saving is harmless. To do harm, sinister savers must purchase something, pay someone, or make a transfer to something illicit. So let that harm be stopped, not the act of saving itself. There are already regulatory caps on amounts withdrawn or transferred. Those rules can stay in place. What should be removed is the identity hurdle associated with bank accounts.

Regulators already make exceptions. Playing the lottery – a financial strategy that targets the poor – is curiously exempt from the tough standards of identity. Expensive prepaid cards also require less ID, as do the pricey services of money transfer. Are lawmakers negatively biased toward banks? If so, they should not be. Banks and credit unions are one of the few places that savers can earn an insured return on deposits.

Lawmakers should focus on getting as much savings as they can into a connected system for two reasons. First, money lured into a digital account allows analysts to more easily trace sinister activity. Once in the system bad guys can be detected and snared.  Analysts cannot do such detective work if menacing targets use cash. Cash is difficult to trace.

Second, in coaxing money into the digital system regulators can start to help the good guys, those small savers looking for ways to get their money out of the mattress and into safer, cheaper, and more profitable services.

That means regulators must lift KYC rules for savers. KYC need only come into play when a saver does something serious with her savings. Not a moment before. At the point when a saver makes transfers of more than a few hundred dollars or makes a purchase of similar amounts, we feel sure she will be more motivated to master KYC paperwork. Up until the point, the saver is only that, a saver. A pin-code and a thumbprint should do for ID.

In short, banks need not know their savers. Let savers go unknown and un-hassled. Let them out of the savings junkyard and into the ranks of the financially included. 

* For an exception, see this paper, Pray for Money

Article originally appeared on Savings Revolution (
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