The opportunity for the financial services industry and other stakeholders to address the challenges of the world's poor is greater today than ever before. That is thanks, in part, to better tools for measuring the precise magnitude and characteristics of global poverty. And that, in turn, is largely thanks to the work of Angus Deaton, the Princeton University professor who will receive the Nobel Memorial Prize in Economic Sciences on Thursday.
Deaton taught us that uncovering the truth about poverty requires looking beyond how much money a person has or how many impoverished people live in a country or area. We must look at how these people actually live their lives. Deaton's "household surveys" took the measurement of poverty beyond income and into the nuances of consumption, expenditures and the conditions of life.
As is true with many foundational thinkers, Deaton's early observations were actually quite radical when he first made them, decades ago. From him we learned that poor people have difficulty borrowing money, have volatile incomes, more regularly tap into savings to buffer against sudden financial shocks and amass insurance through social networks and large households, rather than through formal networks. Lately, Deaton has ventured into measuring happiness and contentment — work that is both extremely difficult and hugely important to understanding what poverty means to the people grappling with it.
So how can financial services use the better understanding of poverty enabled by Deaton's work to respond to the market needs of the world's poor? We now understand that being poor, in short, is expensive. And with limited assets come more and greater strains, including hard material costs. If you have a bank account, you can write and accept checks for free. But if you're a poor worker trying to share cash wages with your family back home, you have to pay a steep transaction fee with every transfer. Globally, the average fee is around 8%, but in some places it's much higher — nearly 17% when sending money from South Africa, for example.
In addition to hard costs, poor people face considerable non-monetary expenses. Poverty costs you time: Paying a bill with cash can mean traveling all day to get to the appropriate office. Poverty costs you opportunity: Many poor people lack a formal ID, which often precludes them from signing up for a bank account, loan and many other services. And poverty takes a serious, ongoing mental toll: Constantly calculating how to make it to the next day is immensely stressful and wearisome.
Not only is poverty more precisely studied and understood today, but the resources we have to eradicate it are more advanced. Digital financial services in particular demonstrate exciting pathways to the improved well-being and empowerment of poor people. People with limited assets need tools that help them maximize their assets rather than save. By that token, simple digital accounts that enable people to store and spend money easily and securely — in many cases, from their mobile phones — can have tremendous benefits. For example, families can better acquire food, education, healthcare and other necessities; farmers and entrepreneurs can invest more in their businesses; and people can build up cushions against accidents, illnesses and other financial emergencies that would otherwise push them back into poverty.
Digital financial services have taken off in many developing markets. In Africa, the industry is expected to top $1.3 billion in the next four years. But to make them truly pervasive, we must follow Deaton's lead and apply a detailed understanding of the habits and needs of households and individual people. For banks, this means having sign-up requirements tiered according to risk. Simple accounts can have simple requirements, so that poor people without ID can still become customers. For progressively more advanced accounts and services, requirements can be stricter.
Banks can also focus on lowering transaction fees. Decades of research have shown that the poor make plenty of financial transactions. They just happen to fall mostly outside the formal economy. For banks to capture that activity, they need to allow for the high volume of low-value transactions that poor people engage in. Digital accounts do this very well, cutting transaction costs by as much as 90% by removing much of the manpower and overhead associated with traditional accounts. This savings can be passed on to the customer, whose aggregate usage adds up to real profit for the provider. And customers who begin with simple money-in, money-out accounts can slowly but surely build equity and trust, making them eligible for loans and other financial products that are more valuable both to them and the provider.
It all begins with products that are fitted to what people need now. Deaton made it clear that if we can fully grasp how poor people use their limited assets, then we can provide structures and services that fit and actually improve how they live. We encourage banks and everyone else building tomorrow's economy to use what he's taught us to make that economy one that includes and benefits everyone.
Rodger Voorhies is director of the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation.