Monday, April 21, 2008

Banking is a Social Compact

by Denis R. Rhoden, Jr., Research Associate at Kirwan Institute

In fifteen years, when we look back and observe how people and financial institutions engage each other today, this moment will matter. My claim is tongue in cheek, however, because we can argue that every moment fits that description. For many Americans, today’s economic conditions will serve as an anchor for their life events going forward. Enough has been written about the sluggish economy and solutions of all flavors, so I will focus on the practice of financial inclusion as today’s convention to reaffirm the social compact between bank, people and place.
First, financial inclusion is a practice and an orientation to society. The social compact is embedded in every financial act, from savings deposits to structured finance. Consider the power consumers confer to these institutions: A study of why people change banks in 1968 found 75% of people who switched did so because they moved. Recently, consumer research found customers were more likely to divorce than change their bank. So as we sit at the foot of history, an observation by Ferdinand Braudel came to mind:

“The key problem is to find out why that sector of society of the past, which I would not hesitate to call capitalist, should have lived as if in a bell jar, cut off from the rest; why was it not able to expand and conquer the whole of society?”

Two countries leading the way in practicing financial inclusion are India and the UK. ‘Universal Banking’ began as a partnership between UK Banks and the Government in 2003 to increase access to Britons who found themselves on the outside of the mainstream system. Before the program began the government estimated that 3 million people (5% of the population) were without an account and thus outside the bell jar.
Domestically the momentum to rid the financial system of irresponsible practices should bear witness to lessons learned about the sheer size and geographic scale of those needing interventions going forward in the US. If the UK underbanked experience is comparable, the US has 15 million people who may fit this condition, yet institutional responses is opaque and some argue non-existent.
People will remember these times, because of how it made them feel as much as for what happened. Bill Maher has a provocative but simple way of capturing today’s sentiment “If you default on your mortgage you are a loser, but if you default on a million mortgages you get a government bailout.”
Web Sites to Review:
Financial Inclusion Taskforce
British Banking Association
HM Treasury
BBC, “Universal banking launched”
Boston Consulting Group, “Next Billion Consumers”

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