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The Financial Inclusion Trilemma
Levitin, Adam J.
Levitin, Adam J.
Abstract
The challenge of financial inclusion is among the most intractable
policy problems in banking. Despite living in the world’s wealthiest
economy, many Americans are shut out of the financial system. Five percent
of American households lack a bank account, and an additional thirteen
percent rely on expensive and sometimes predatory fringe financial services,
such as check cashers or payday lenders.
Financial inclusion presents a policy trilemma. It is possible to
simultaneously achieve only two of three goals: widespread availability of
services to low-income consumers, fair terms of service, and profitability of
service. Thus it is possible to provide fair and profitable services, but only to
a small, cherry-picked population of low-income consumers. Conversely, it
is possible to provide profitable service to a large population, but only on
exploitative terms. Or it is possible to provide fair services to a large
population, but not at a profit.
The financial inclusion trilemma is not a market failure. Instead, it is
the result of the market working. The market result, however, does not
accord with policy preferences. Rather than addressing that tension,
American financial inclusion policy still leads with market-based solutions,
soft government nudges, and the hope that technology will transform the
economics of small-balance deposit accounts and small-dollar loans.
It is time to recognize the policy failure in financial inclusion and
consider to a menu of stronger regulatory interventions: hard service
mandates, taxpayer subsidies, and public provision of financial services. In
particular, this Article argues for following the approach taken in Canada,
the European Union, and the United Kingdom. This approach—the
adoption of a mandate for the provision of free or low-cost basic banking
services to all qualified applicants—is the simplest solution to the problem
of the unbanked. Addressing small-dollar credit, however, remains an
intractable problem, largely beyond the scope of financial regulation
because the challenge many low-income consumers face is solvency, not
liquidity.