Micro is Big in Australia

Contributor:

Simon Millett
Director of Banking
Financial Services Group
CSC

The Connected Consumer report’s identification of microfinance as a major trend impacting the future of financial services coincides with research suggesting that close to 3 million Australians (approximately 30 percent of the total adult population) don't have access to day-to-day financial products. This includes things most of us take for granted — a basic banking account, car insurance or even a credit card.

It’s counterintuitive that one of the world’s richest and most advanced economies — Australia — has such a high proportion of its adults effectively candidates for the very services implied in the “micro” category. This surprising statistic further solidifies the growing prominence of this aspect of the industry.

The landmark study by the University of New South Wales (UNSW) Centre for Social Impact shows that the ability to secure as much as A$3,000 in funds for an emergency through the mainstream financial system is increasingly out of reach for a growing number of Australians. If it’s at this level in Australia, it’s at least that level in the U.S., in Europe and in some of Asia's most advanced economies.

Similar to what we of the so called “first world” expect to be “problems of the third world,” the report found more people are relying on family or friends, and access to simple banking products is also behind the fast-paced growth in fringe credit offerings. These fringe products include payday lenders (who often charge substantially higher interest rates than banks) and community-funded lending schemes.

Significantly, the study found parts of New South Wales — the nation’s richest state — had the highest number of people without a basic bank account. In some regional cities, more than 7 percent of adults are without a bank account. The number in parts of Sydney and Canberra is running at 5 percent. Remarkably, an overall 3 percent of Australians do not have a bank account because of their economic position. This grows to close to 30 percent of adults when you add in other basic financial services assumed fully available in an advanced, first-world economy.

The key reason for financial exclusion is that the average annual cost of basic financial services (banking, credit card and either car or home insurance) is too high — roughly A$1,800. The level of documentation needed to establish an account can often be a hurdle, as well. The banks are partly to blame given that many don't lend less than A$5,000 as a personal loan, preferring to steer customers toward credit cards. The UNSW report found even access to a moderate amount of credit crucial to accessing key household goods, such as a washing machine, went beyond a monthly budget.

The major Australian banks responded with apparent astonishment to the report’s findings. Cameron Clyne, CEO of NAB, one of Australia’s Big 4 banks, said the industry needed to lift its game by providing affordable products to more people. “The absence of access to mainstream financial services does preclude people from advancing socially and economically,” he said. “Often it's the unexpected expenses — if the car breaks down or someone needs to get to a job interview. There's an obligation for the banking system to improve financial inclusion.”

Even more interesting, the UNSW report comes just days after Federal Treasurer Wayne Swan brokered an agreement with the banking industry to provide free ATM transactions for indigenous people in remote communities. Indeed, the study found the number of Aborigines and Torres Strait Islanders (severely excluded from access to day-to-day financial services) was more than double the non-indigenous communities’ national average. Approximately 43 percent operate outside the mainstream banking system.

Nothing here for Australia to be proud of overall, but we should reflect on the “M for Micro” in our own first-world countries. It’s clear that all is not what it seems. Organized microfinance probably has a bigger role than we would like to believe. We take for granted that because we have mainstream services and they’re widespread, that we don't need better systems to cater to the less advantaged.

In many ways we can learn from third-world communities, just as they can from us. What do you think? Post your thoughts below and let’s keep the conversation going.

Blog on!