De-Risking: Why Should You Care?

Somalis, who rely heavily on money transfers from abroad, have been severely affected by the closing of remittance companies’ accounts.

This post is the first in a series examining the global phenomenon of de-risking and its impact on financial inclusion. Through the Credit Suisse Global Citizens Program, CFI partnered with Rissa Ofilada, who works as a lawyer in compliance in the Philippines, to undertake a study on de-risking. In the series, we’ll discuss the causes of the phenomenon, what it means for customers at the base of the pyramid, how it affects global momentum toward financial inclusion, and what solutions are on the horizon.

The term de-risking may sound arcane and technical, but in fact some observers believe that de-risking is the biggest threat to the progress that has already been made on financial inclusion. We at CFI are worried about it—and you should be too.

De-risking refers to the trend of commercial banks, payments companies, and regulators closing down “suspicious” accounts. These accounts could be suspicious for any number of reasons. The owner may not have had adequate proof of identity—a common problem for lower-income people in countries without well-developed identification systems. Or the owners may not be able to precisely trace the source of the funds they deposit—a frequent issue for those operating in the informal sector. Or the provider had a problem with another lower-income customer who was flagged as suspicious, and as a result decided to close all accounts owned by people with similar patterns or profiles.

We are also starting to see regulators pulling back from regulations that allow for basic accounts and lower know-your-customer (KYC) standards for payments. About a decade ago, the government of South Africa began to offer banks the opportunity to forego the proof of address requirements for transactions of less than approximately $315 per day—a victory for financial inclusion. Today, however, the South African Parliament is considering dropping this exemption under the Financial Intelligence Centre Amendment Bill. And other countries are following suit, pushing their financial institutions to be far more conservative.

Who is responsible for de-risking? Well, it appears no one—and everyone—is to blame. The Financial Action Task Force (FATF), the global body charged with policing terrorism finance and other security threats, proposed a set of regulations in 2012 that they hoped would leave space for financial inclusion while still accounting for the kinds of risks FATF is focused on. This guidance did not prevent the New York State Banking Commissioner from responding to the fear of terrorist attacks by levying fines on global banks that transacted with particular markets and particular people. While the fines were not directed against transactions with the kinds of clients targeted by financial inclusion efforts, many banks began to shy away from these lower-income clients, too. Governments, faced with the prospect of limited interaction of their nationals with the global financial system, adopted conservatism in their policies so as to avoid running up against sanctions from U.S. authorities. This trend filters down to employees at financial institutions, particularly since some violations carry jail time or huge fines. Bankers have started to choose to transact with the least “risky” customers, excluding people who cannot prove their identities or sources of funds. And as a result the very people our industry has been fighting to include are shut out of the formal financial system.

In the regulatory push to create a more accountable and responsible financial system, our industry may have also succeeded in promoting the mass exclusion of lower-income and hard-to-reach customers, small non-profits and NGOs, and migrants and refugees.

If you would like to know more, then you’re in luck. In this blog series—stay tuned—we’ll be looking at de-risking from various angles and seeking solutions. Looking forward to exploring the issue along with you.

Image credit: Giro 555 SHO

Have you read?

Basel Committee Guidance on Financial Inclusion: Views from a Supervisor

Somalia: Facing Drought with Fewer Remittance Lifelines

Emerging Themes in Responsible Digital Finance


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