Security Deposits: Rethinking How Financial Inclusion Can Work

By VisionbyAGC | September 2023

For decades, access to finance has depended heavily on a familiar set of requirements: a strong credit history, sufficient income, formal employment, collateral and an established relationship with a financial institution.

For people who already participate comfortably in the formal financial system, these requirements may appear straightforward.

For everyone else, they can become barriers.

This is one of the central challenges of financial inclusion: how do you extend access to finance to people who may have the capacity to repay, but do not yet have the conventional financial profile that lenders expect?

One emerging approach is the use of security deposits as part of a structured financing model.

Rather than relying exclusively on historical credit information, a security deposit can introduce another layer of assurance into the financing relationship. Properly structured, it can help align the interests of the customer and the financing provider while creating an alternative pathway to participation.

But there is another, equally important dimension to the approach.

A security requirement can also encourage applicants to think more carefully about how much they actually need to borrow.

Moving Beyond the Traditional Credit Profile

Traditional credit assessment is designed to manage risk. Credit histories, income records, collateral and other financial information help lenders determine whether an applicant is likely to meet their obligations.

The difficulty is that these systems can be less informative when an individual has limited or newly established credit history.

This is particularly relevant in emerging markets, where financial inclusion remains an important policy and economic objective.

Alternative approaches to credit assessment are also gaining attention internationally, including the use of additional financial and transactional information to better understand borrowers who may be underserved by conventional scoring systems.

The underlying idea is simple:

Financial access should not necessarily depend on having already had extensive access to finance.

But expanding access also raises another question: how do we make sure that greater access does not encourage people to take on more debt than they can realistically manage?

That is where the structure of financing becomes important.

Where Security Deposits Enter the Picture

A security deposit changes the structure of the risk relationship.

Instead of asking a financing provider to rely entirely on an applicant’s existing credit profile, a defined amount of money may be placed as security under agreed terms.

The deposit can provide an additional layer of protection while allowing the applicant to participate in a financial arrangement that might otherwise be difficult to access.

But its function does not necessarily end with protecting the provider.

A well-designed deposit requirement can also introduce a degree of financial discipline for the applicant.

If the amount of security required increases with the amount of financing requested, asking for more becomes a more deliberate decision.

The applicant has to consider not only whether the additional money is available, but whether it is actually necessary.

That distinction matters.

There can be a significant difference between what someone can borrow and what someone should borrow.

Protecting Both Sides of the Transaction

The conventional conversation around lending often focuses on protecting the lender from the borrower.

But responsible financial design can consider the reverse as well: how can borrowers be protected from taking on obligations simply because those obligations are available to them?

It is easy to request more when the immediate cost of doing so appears limited.

Someone may qualify for a larger amount and decide to take it because they can—not necessarily because they need it or because the resulting repayments fit comfortably within their circumstances.

A security requirement can create a useful pause.

The larger the financing request, the greater the applicant’s own commitment may become.

That can encourage questions such as:

Do I actually need this additional amount?

Can I realistically manage the repayments?

Is the additional financing worth the additional commitment?

In this sense, the deposit can serve two purposes at once.

It can help manage the provider’s exposure, while encouraging the applicant to manage their own exposure.

Why This Can Matter for Financial Inclusion

A security-deposit model can potentially address several limitations associated with conventional financing.

1. It can create another route to demonstrating financial commitment

A traditional credit file tells a lender about someone’s previous borrowing behaviour.

A structured security deposit can provide a different form of commitment within the specific transaction.

That does not make one approach universally better than the other. They simply provide different information and different forms of risk protection.

2. It can reduce reliance on traditional collateral

Many people do not own property or other assets that can easily be pledged as conventional collateral.

A structured deposit can provide a more accessible form of security than some traditional collateral requirements, depending on the product and its terms.

The broader lesson is that the form of security matters.

If the only acceptable form of security is inaccessible to a large portion of the population, financial inclusion becomes difficult.

3. It can help bridge the gap between exclusion and participation

Financial inclusion is not simply about opening bank accounts.

It is also about enabling people to access useful financial products and services on appropriate terms.

A security-based approach can become one component of that wider ecosystem by creating another mechanism through which risk and access can be balanced.

4. It can discourage unnecessary borrowing

Inclusion should not be confused with unrestricted access to debt.

If the applicant’s required commitment increases alongside the amount requested, the structure can encourage people to distinguish between what they want and what they realistically need.

This can be particularly valuable in environments where access to financing may create a temptation to request the maximum available amount.

The objective is not to prevent people from accessing the financing they genuinely need.

It is to introduce a moment of consideration before they take on a larger obligation.

The Innovation Is in the Structure

The most interesting part of the security-deposit approach is not the deposit itself.

Deposits are not new.

The innovation lies in how the deposit is incorporated into the financing relationship.

A well-designed model should clearly establish:

• How much security is required;
• Whether the requirement changes according to the amount requested;
• Why it is required;
• Where and how it is held;
• The conditions governing its use;
• What happens if the customer meets their obligations;
• What happens in the event of default;
• Whether and when the deposit is refundable; and
• What fees and other costs apply.

These details are not administrative footnotes. They are fundamental to whether a security-based financing model is genuinely accessible and responsible.

Inclusion Requires Transparency

Financial inclusion should not mean simply making finance available.

It should also mean making the terms understandable.

Customers should know what they are committing, what they may receive, what they may lose, and what conditions apply before entering into an arrangement.

This is particularly important when security deposits are involved.

A model that creates access but leaves customers unclear about the treatment of their money does not solve the underlying problem of financial trust.

The objective should therefore be access combined with clarity, appropriate risk management and responsible financial practices.

A Different Way of Thinking About Access

The traditional question in lending has often been:

“Does this person have the financial history required to qualify?”

A more inclusive approach can introduce another question:

“Are there responsible ways to structure the transaction so that the person’s commitment and the provider’s risk can both be appropriately managed?”

And perhaps another:

“How can we make access easier without making over-borrowing easier?”

That shift in thinking is significant.

It moves the conversation away from simply deciding who fits an existing financial system and toward considering how financial products themselves can evolve.

Security deposits are not a universal solution to financial exclusion. They cannot replace sound underwriting, consumer protection, affordability assessments or responsible lending practices.

But as part of a carefully structured model, they can represent an interesting tool for expanding participation while encouraging more deliberate borrowing.

And that may be the real innovation.

Financial inclusion does not always require removing risk. Sometimes, it requires finding better ways to share and manage it—while helping people make financial commitments they can realistically sustain.

VisionbyAGC

At VisionbyAGC, we believe access to financial opportunities should be supported by clearer processes, responsible structures and practical pathways for people navigating today’s financial landscape.

As financial services continue to evolve, approaches that rethink how risk, security and access work together may become increasingly important to building a more inclusive financial ecosystem.