Banking the unbanked: focusing on commercial banks misses an opportunity
Commercial banks won't offer financial incentives to the unbanked to open bank accounts. But another sector could, and should.
A new paper from Paul Gertler, Sean Higgins, Aisling Scott and Enrique Seira, published by NBER (paywall), attempts to show that encouraging the unbanked to open bank accounts is not merely socially beneficial but also good for banks. This is a reasonable aim, since they are proposing that to attract new customers, commercial banks should run deposit lotteries similar to the UK’s Premium Bonds scheme. There’s no incentive whatsoever for commercial banks do to this unless doing so would increase their profits and hence their value.
The authors argue that banks would necessarily want to provide incentives for the unbanked to open accounts, because:
deposits are a more stable form of funding than short-term debt
attracting more deposits increases banks’ value.
They support these assertions by citing two academic papers: Ivashina & Scharfstein’s 2010 paper “Bank lending during the financial crisis of 2008”, and “The Cross-Section of Bank Value”, by Mark Egan, Stefan Lewellen and Adi Sunderam, published in 2022.
Sadly, neither paper supports their assertions. And as I shall show, both assertions are questionable. Worse, the authors have not examined closely enough the nature of the UK’s Premium Bonds scheme, and therefore assume it is a sensible model for a commercial scheme. These errors result in the entire paper going in the wrong direction, and a tragically missed opportunity to make the case for a fundamentally different way of banking the unbanked.
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