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Banking regulation got you down? The rise of fintech and cryptointermediation in Africa

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Abstract

Lack of access to financial services is a problem for many; worldwide, one in four adults does not have a checking or savings account. Financial institutions with active, low-balance accounts often face considerable challenges compared to larger financial institutions (Black, 1979). Adding a fixed regulatory cost of servicing accounts can affect relative costs and thus generate an Alchian-Allen effect (the third law of demand) that leads financial institutions to quit servicing these low-balance accounts. Regulators may prefer this outcome as it is easier to regulate and extract rents from large financial institutions. Data indicates more underbanking in countries with lower income and more regulation. This article looks at the barriers traditional financial intermediaries often face in less developed nations and then looks at how fintech and cryptocurrencies enable bank alternatives to lower barriers to entry and expand financial inclusion.

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Notes

  1. The use of financial services is unsurprisingly correlated with income, and 19.8% of households earning less than $15,000 per year do not have a checking or savings account, compared to 4.5 accounts per households overall (Federal Deposit Insurance Corporation, 2022, p.75).

  2. For example, the National Community Reinvestment Coalition’s Richardson and Edlebi (2022) look at the percentages of loans going to different groups and conclude that lower percentages of loans from certain banks to specific demographic groups indicate systemic redlining. Richardson and Edlebi (2022) conclude that banks are putting investors ahead of underserved communities: “Resources which could have been used to fulfill the commitments it made to the marginalized went to investors instead.“ Those who believe that financial institutions that wrongfully prioritize shareholder well-being over the marginalized typically support various inclusion mandates for increasing access.

  3. For a history of the redlining maps stemming from the New Deal agency Home Owners’ Loan Corporation see, Aaronson et al. (2021).

  4. The remaining financial institutions, such as credit unions that sought to serve minorities, historically faced restrictions on certain types of lending, such as offering 30-year mortgages or making commercial loans (Black & Dugger, 1981; Black, 1981). Moreover, any potential new banks would have to receive a charter from a state banking commission or the U.S. Comptroller of the Currency and demonstrate a “Public Need for New Banks,“ which is more difficult in areas where minority customers are more likely to have lower balance accounts (Black & Lundsten, 1977).

  5. Politicians and regulators might individually benefit from the revolving door issue where they later receive payments from banks they regulated. For example, Barney Frank individually collected $2 million from Silicon Valley Bank for being on its board, with Frank stating, “I need to make money” (Franklin & Gandel, 2023). For an overview of the potential beneficiaries in the economic theories of regulation, see Thomas and Thomas (2022), Peltzman (2022), and Yandle (2022).

  6. Black and Schweitzer (1985, p.13) also discuss these same challenges related to loans and conclude that differences in lending across different demographic groups “is not prima facia evidence of discrimination.“ They write, “Such results call into question the rationale for the continued existence of the array of consumer protection laws and implementing regulations designed to prohibit lending discrimination. Indeed, the cost of compliance could act to discourage mortgage lending” (Black and Schweitzer, 1985, p.13).

  7. Adam Smith ([1776] 1982, p.853) also wrote about how a fixed charge license fee on businesses small and large alike “must necessarily give some advantage to the great, and occasion some oppression to the small dealers.“ Smith ([1776] 1982, p.853) adds, “If the tax had been considerable, it would have oppressed the small, and forced almost the whole retail trade into the hands of the great dealers.” Thomas (2019), Manish and O’Reilly (2019) and Chambers and O’Reilly (2022) discuss how financial regulations are likely to be regressive and disproportionally harm smaller firms and lower income individuals.

  8. For a discussion about the usefulness of rational choice analysis of qualitative evidence see Bates et al. (1998), Skarbek (2020), and Leeson (2020).

  9. I refer to a cryptointermediary as any firm or middleman within the cryptocurrency industry that helps parties hold or transact in cryptocurrencies. Few cryptointermediaries would be classified as being close to a full scale bank, but many provide services traditionally offered by banks.

  10. Barclays has done business in Africa for over a century and is the largest shareholder in the continent’s third-largest bank, Absa Group (formerly Barclays Africa), which owns banks in Botswana, Ghana, Kenya, Mauritius, Mozambique, Seychelles, South Africa, Tanzania, Uganda, and Zambia.

  11. Cline et al. (2022) analysis indicate a correlation between lower regulation and more trust and better market outcomes among countries. Heinemann and Schüler (2004, p.114) present evidence that countries with more financial regulations tend to less banking services and argue that incumbent firms work to shape regulations to create barriers to entry.

  12. Of course, some people choose to be unbanked and their decision might not change if regulations were decreased. In its survey of unbanked Americans, the Federal Deposit Insurance Corporation (2022, p.3) finds that 8.4% and 13.2% the unbanked list “don’t trust the banks” or “avoiding a bank account gives more privacy” as their primary reason for not using a bank.

  13. These numbers are not directly comparable because stablecoin settlement includes both final transfer of funds among individuals akin to someone paying someone using a charge or credit card but also settlement of back and forth trades among exchanges. Both are economically important functions but the latter statistic has near limitless potential for expansion as trading volume using stablecoin increases.

  14. In contrast to modern state capacity advocates who assume an expansion of markets can only come after government creates the right legal and regulatory support for markets, Rajan (2004, p.56) argues that an “assume a perfect world” approach is a poor guide to policy.

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Acknowledgement

I thank Harold Black, Brian Cutsiger, Ramon DeGenarro, Kevin Grier, Robin Grier, Claudia Williamson Kramer, William Luther, Florence Muhoza, Jamie Bologna Pavlik, Benjamin Powell, Daniel J. Smith, Peter Yakobe, and seminar participants at the University of Tennessee at Chattanooga, the Association of Private Enterprise Education, and Texas Tech University for helpful comments and suggestions.

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  1. Shelby Cullom Davis Professor of American Business and Economic Enterprise, Trinity College, Hartford, Connecticut, 06106, USA

    Edward Peter Stringham

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Stringham, E.P. Banking regulation got you down? The rise of fintech and cryptointermediation in Africa. Public Choice 197, 455–470 (2023). https://doi.org/10.1007/s11127-023-01090-9

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