In search of the Missing Middle


A statistic often bandied around these days to the extent that it has become some kind of refrain is that about $3 billion lies untapped in the informal sector of the economy.

Banks have therefore variously been reminded to craft appropriate strategies in order to channel this pool of liquidity into the formal banking sector.

This status quo is mainly attributed to banks’ tendency to concentrate on narrow niches while leaving out a large swath of unbanked segments at the bottom of the financial pyramid where profitability is not assured.

This segment of the population without bank accounts and with unmet needs for financial services is also referred to the “Missing Middle” and can include owners of micro-businesses, traders, artisans and low-end employees of State or private sector organisations.

Their needs are often more complex than can be satisfied by traditional banking or microfinance models.

Lately, we have seen a raft of initiatives to customise financial products to the needs of low-income earners through mobile banking and card-based payment platforms such as the NetOne and FBC Bank Limited’s One Wallet, Kingdom Bank’s Cellcard, Tetrad’s e-mali and a host of other up-coming products.

In order for these products to be successful, enough education will be required to bring consumers up to speed with new technologies and to convince them that using formal financial services has many advantages.

Banks have an obligation to remind the banking public that being unbanked has cost implications that can manifest themselves in actual expense, security concerns and general inconvenience. I was recently reminded of this by an article titled “The cost of being unbanked” by one Felix Salmon.

Statistics at the end of 2010 showed that active banking accounts had dropped to below the one million mark from around five million in 2005.

An increase in the number of accounts is therefore of immense interest to banks because it is an opportunity to increase revenue.

Banks can make money from offering basic bank accounts in three ways; first in the old-fashioned way of getting a stable low-cost funding base from deposits, secondly through the opportunity to cross-sell other products such as loans or credit cards and thirdly through fee and commission income.

In seeking to increase usage of banking services, banks will need to be aware of some of the reasons why people voluntarily exclude themselves from the banking system.

Accordingly, this week we focus on some of these reasons and where applicable, on how banks are beginning to address some of the concerns.

The resultant debate may help to diffuse some formidable barriers to financial inclusion.

Some potential consumers of banking services simply do not attempt to open bank accounts because they do not have enough money to meet minimum balance requirements set by banks or are intimidated by their lack of financial literacy which makes them view banks as simply not welcoming enough.

Most recent alternative products being introduced by banks are beginning to address these concerns given their tokenistic minimum balances or even no minimum balances at all while account opening processes have been considerably simplified.

Bank charges are one of the key reasons cited by a considerable number of people for not opening a bank account. Once burnt, twice run! T

his concern should be addressed gradually as the number of players in the banking sector increases and competition intensifies.

We have already begun to see some banks placing emphasis on savings products which do not attract service charges.

The NMBSAVE Savings Account and Metropolitan Bank’s MET-Save Account are two such examples.

While developments in the market have ushered in a number of low-cost banking alternatives which may make not having an account a choice, for some people, not opening an account is not a matter of choice because of their troubled banking histories.

Once one has been blacklisted for defaulting on their obligations, it may take years to rehabilitate a damaged credit history.

Before you can open an account, your prospective bank will generally instigate the “know your customer process”, which includes background checks with the relevant financial clearing bureaus to establish whether you have a clean credit history.

If you happen to be “traced”, opening an account can prove to be difficult. Thereafter, you are essentially at the mercy of the bank which will decide on the materiality or otherwise of the outcome of the search.

Another important consideration that can weigh in favour of people’s decisions to exclude themselves from formal banking circles is the quality of service they can expect to get from the banks.

With the kind of queues that are prevalent at a number of local banks, time, conscious people would think twice before they can commit to opening an account and depositing their money into the bank where accessing it can be an uphill struggle.

For those in the informal sector for instance, time is money and they can’t afford to spend half a day in a bank queue while production is at a standstill.

More often than not this feeds the preference to keep money under the pillow where it can be accessed without a hassle and at no cost.

In Zimbabwe, memories of the losses incurred during the 2003/2004 banking crisis and when the economy was dollarised in early 2009 are an important determinant of whether or not certain sections of society will feel inclined to open an account.

A lot of people now feel that physically handling their own money offers them a sense of control given the banking sector’s recent history which has caused many a customer bouts of financial anxiety.

According to Salmon “Below a certain level, the poor have much the same relationship with money as the hungry do with food. It becomes something you’re always conscious of, something you’re always worried about.

At that level, it really does feel a lot better to have a dollar in your pocket than to have a dollar on deposit at a financial institution which is prone to charging seemingly arbitrary fees for any or no reason.” Banks have their work cut out as far as improving confidence in the sector is concerned.

Salmon further says that most people don’t join the financial mainstream because banks do not try hard enough to lure them, having found that there is no economic incentive for them to do so.

This is because most of the poor and unbanked tend to be “high-touch” customers who come into the banking hall a lot, don’t like using automatic bill-payment facilities or ATMs and generally consume a lot of teller time without the bank having very much to show for it.

Other reasons the unbanked remain so include geographical inaccessibility and lack of banking infrastructure.

The special needs of the unbanked market include flexibility in savings and repayment schedules given the lack of steady income, simple and speedy processing in order to save time, small product sizes in terms of loans and low-balance savings accounts commensurate with earnings as well as proximity and ease of access to financial services.

Any bank intending to successfully tap into the $3 billion has to first be aware of these requirements then be able to meet them.

Have you considered voluntarily excluding yourself from the banking system? What would be your reasons? Please weigh in with your insights on

Omen N Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity.