David Hirshleifer

David Hirshleifer Ph.D.

What Lies Beneath

It’s mod, it groovy, it’s FAB! – Financial Access @ Birth

It’s mod, it groovy, it’s FAB! – Financial Access @ Birth

Posted May 23, 2010

A big problem for the poor is lack of financial access. It's hard to borrow without collateral. And strangely, it's also hard for the poor to lend. As co-founder Bhagwan Chowdhry and fellow founders write on the FAB website, "...nearly half of the world's population does not have access to any formal financial services. Their savings are kept in small jars or trunks, or through a patchwork of informal methods." If the wealthy get to store their money safely, and receive interest, why not the world's poorest? As the FABs put it, "Lack of [financial] access ... forces Nandinis of our world into a cycle of constant indebtedness, preventing them from building up household resources for security or investment, and perpetuating their poverty."

A group of financial economists, entrepreneurs, and ethicists are proposing an innovative way to help the poor gain access--- guarantee it from birth. How? Give a bank account to every child born into the world alive, be it liberal, labour, or conservative. Financial Access @ Birth.

"The opening of these ‘FAB' bank accounts would be integrated with the official birth registration process and perhaps with electronic banking. Governments, with the help of institutional/individual donors will make a deposit of US$100 in each FAB account."

The $100 encourages parents to participate. This can help the poor learn about banking and gain access to its benefits. In a 2001 paper, behavioral economists Brigitte Madrian and Dennis Shea found that even in the U.S. educated individuals suffer from intense inertia in making financial decisions, probably in part because they do not feel expert about such decisions. For example, people put off allocating fund for retirement, and once they choose a retirement allocation (how much to contribute, what to invest it in) they seldom change their allocation. Madrian and Shea found that at firms with automatic enrollment in retirement contributions (but where people were entirely free change or discontinue such contributions), people ended up contributing far more for retirement than in firms where the default was not to contribute. Since these are big decisions, and for many people uncomfortable ones, the decision of whether to shift from the default is often delayed indefinitely.

A challenge for persuading the poor to try potentially life-improving technologies such as "smart cards, electronic accounts, vaccination," according to Chowdhry, "is that they don't trust banks or the government. FAB does two things, it gives them a big incentive to show-up with the infant because of the $100 deposit." And second, "...once they show-up, say at a clinic, free vaccination also seems like a good idea," since otherwise "they would usually not bring their infants to clinic at all."

As with many things in life, learning to use financial tools like bank accounts is a matter of getting over the initial hump. And according to Chowdhry, the way to do that is to have people try the service just once--- way more effective than words and persuasion. FAB may just give a lot of people who are in desperate need, and who would really like to save, the chance to do so.

Here's the FAB website.

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