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The Financial Inclusion Trilemma

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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.

Replication data for this paper is available on JREG’s Dataverse account.

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