I call fact on that! I am in the process of preparing a keynote address entitled Credit Access And Risk Management: A Gap To Close, for an International Banking Conference sponsored by Asobancaria, Colombia's Banking and Financial Entities Association. The conference will take place in late November in Cartagena, Colombia.
During the course of my research on the high cost of being poor in Latin and South America, I learned that it is estimated that perhaps a billion dollars is maintained under mattresses and in cookie jars where it earns no interest and provides no indication of the thriftiness of the lower income tiers of society. Worse, as many as 85 percent of the population is out of the formal financial banking system, and as a result their in-person cash payment and deposit transactions require long trips, risk of robbery, and long waiting lines, in addition to carrying a high degree of cost (as much as five to ten percent of the actual payment amount for check-cashing, and as much as nineteen percent for US dollar international wire transfers to non-bank customers who receive income supplements from relatives and friends). Bank loans can carry as much as a 17 percent annual interest rate (35-40 percent for credit cards) and the common non-bank alternative sources for loans can charge as much as from 150 to 400 percent interest annually.
Several questions come to mind.
1. What can be done to improve the situation? Short Answer -- Plenty!
2. Can technology play a role? Short Answer -- Yes!
3. How can the formal financial system be changed to work better for those families falling into the lowest income groups? Answer – By adopting simple, reasonable, effective, consistent, and transparent loan qualification criteria, by pricing transactions accordingly, by lowering minimum opening deposit account balance barriers, and by educating consumers on the benefits of participating in the formal banking system!
4. How do we close the gap between credit access and credit risk management? Answer – By challenging the Business as Usual mindset and the Status Quo, and by accepting the fact that if we take no action to change the situation we can expect to see more of the same, or worse in the future. Not a very good outcome for the disadvantaged people or the financial institutions that would otherwise be able to fund their banking activities more economically with all of the “cookie jar” money.
These are not just issues for our friends who live south of our border. These questions are also relevant
right here in the United States!
I have some suggestions on some useful approaches to increasing credit availability to all segments of consumers based upon properly defined creditworthiness. In Chapter 1 of our latest book, our lead-in quote is from educational pioneer John Dewey, who said “A problem well-defined is half-solved.” In order to define creditworthiness properly, we need first to identify a
comprehensive credit assessment framework, which we have termed
CCAF (pronounced See-Caf).
I do not want to steal the thunder from my keynote next month, so I will spare you the details for now. In December I will post excerpts from my address, which will most definitely shed more light on these issues. Stay tuned!
Clark Abrahams is Chief Financial Architect at SAS where he leads business and product development. He has over 30 years of experience in the financial services industry. Along with co-author Mingyuan Zhang, Clark has written two books that re-think credit risk management and granting access to credit: 
