|Illustration: Andrew Archer|
|US banking regulation:|
On the River Solimões in the Amazon region, inhabitants of the 11 towns spread along its 1,600 kilometres deposit and withdraw their money on the Voyager V as it sails up and down. Voyager V is Bradesco’s floating bank branch. In the fishing village of Mazunte in Mexico, Banamex customers can send money from or deposit it into their accounts at the local convenience store, Oxxo. And in Balogun market in Lagos, Nigeria, female business owners can open savings accounts with Diamond Bank’s agents using mobile-phone technology.
This is the new map of banking – expanding geographically into rural areas to serve the hard-to-reach and deepening into urban metropolises to serve the unbanked and the underbanked – and it’s only going to spread wider with financial inclusion as the number one priority for the World Bank.
In 2013 World Bank group president Jim Yong Kim issued a call to action to halve the number of the world’s unbanked from a staggering 2 billion people to 1 billion by 2020. It has spurred local governments to reassess banking requirements and regulations, and has drawn the attention of philanthropists such as Bill and Melinda Gates. But as Michael Schlein, president and CEO at Accion, the global microfinance and impact investment non-profit group, says: “The issue of bringing 2 billion people out of poverty – if one is at all serious – cannot be answered by government and charity alone. We must harness the capital markets.”
Banks are stepping in to answer the call. While responsibility has not been laid at their door, there is an understanding that they need to play a role in the solution. It is the banking system, after all, that appears to have failed a third of the world. As Piyush Gupta, chief executive of Singaporean bank DBS, which has just launched a digital bank in India says: “Banks are realizing that essentially today they need a licence to operate – not just from regulators, but from society. They have to do good.”
The argument of the banks regarding their limited role so far – and it is valid – has been simply that serving the unbanked can be unprofitable or too risky. Instead some have made commitments to tackle financial inclusion through microfinance and the philanthropic efforts of their corporate foundations. But this argument is now being turned on its head.
Thanks to advances in financial technology and changes in regulation that allow agent-banking, the challenges of profitability in serving the unbanked have diminished. That changes everything for banks. As Schlein says: “Distances are no longer insurmountable. Transaction sizes are no longer too small. Data can now be used and collected to create credit profiles more easily. All of a sudden banks are saying: ‘We now may be able to service this part of the market in a commercially viable way’.”
According to a new report released in September from McKinsey Global Institute, an estimated $4.2 trillion in deposits in developing countries could flow into the financial system as digital finance enables many more people to gain access to accounts and shift their savings from informal mechanisms.
Consultancy group Accenture and Care International estimate the unbanked and underbanked in emerging markets offer a $380 billion annual revenue opportunity for those who have the right business models in place.
New providers are already scenting profit to be made from those customers the banks never touched because they lacked the technology to derive margin from handling low-value payments at marginal cost.
Kosta Peric, deputy director of financial services for the poor at the Bill & Melinda Gates Foundation, points out these 2 billion unbanked people can be economically quite active – in fact, often having three or four sources of revenue and transacting multiple times a day.
In developed markets the commercial opportunity may be smaller in scale – Findex estimates around 60 million people in high-income OECD countries to be unbanked – but their inclusion offers the same opportunities to local economies. When individuals have access to checking and savings accounts, their propensity to weather income volatility increases. In addition to helping lift people out of poverty, better financial health can also reduce the strain on local governments and agencies.
As the financial crisis entailed local governments bailing out their domestic banks, there is a heightened pressure (albeit not formally spoken) for banks to now play their role in the growth of local economies. One need only look at the corporate social responsibility or business objectives of large banks like JPMorgan or Citi to see that financial inclusion is a priority. But Susan Lund, partner at McKinsey Global Institute, says it is time for financial inclusion to move from the CSR department and into business lines: “Whether the trillions of dollars in new deposits goes to banks or non-traditional players is up for grabs.”
Banks are not the only ones capable of creating a bridge to greater global financial inclusion; mobile network operators and technology firms have already made huge inroads into serving the unbanked.
M-Pesa is the poster child of how financial technology can bring the unbanked into a formal financial services industry. Communications company Safaricom launched the Kenyan mobile money transfer platform in 2007, and its model is simple: because more people in the country have mobile phones than bank accounts, M-Pesa has simply turned the phone into a virtual wallet.
Subscribers can deposit cash at any of M-Pesa’s 85,000 agents who serve as ‘human ATMs’, and who are located in many locations where banks could not afford to have a branch, running their agency as a side-business typically out of their store. Customers can then use their phones to pay bills or transfer the money to another customer, all without having to have a bank account.
Today in a country of 44 million some 70% of adults in Kenya use M-Pesa, making 9 million transactions daily. The success of M-Pesa has also ensured Safaricom is the most profitable company in east and central Africa. This year M-Pesa’s revenues grew 27%.
Unbanked not unbankable
Unsurprisingly it’s a model that other mobile network operators are mimicking, not just throughout Africa, but also in countries such as Pakistan. It has also spurred a revolution in agent banking.
“Asian countries wanting to increase financial inclusion have embraced agent-banking and it has completely redefined the rules of distribution,” says Gupta. He points to Bank of China’s mobile-phone offering that has 500,000 agents operating across China helping the bank reach 100 million farmers.
If the aim of the World Bank is to solve world poverty – partly through ensuring people have access to financial services that can help them transact, save and take out loans to grow their business – then mobile technology has shown that a bank account is not necessarily needed. Indeed there are many reasons why the traditional bank account is not the preference of many unbanked.
“Sometimes it is forgotten that many of the unbanked are far from unbankable,” points out Inez Murray, CEO at the Global Banking Alliance for Women. “They just choose not to have a bank account for both demand- and supply-side reasons.”
In some developing countries, she points out, there is a lack of trust where customers have seen banks seize their savings. Elsewhere, such as in India, a survey by McKinsey showed that customers were deterred from going to banks because the minimum balance was too high, and that they did not know which products were suitable for them. In many other regions the unbanked, particularly unbanked women, also complain that they do not feel comfortable entering a bank, that the ID requirements are too onerous to start a bank account, or that bank branches are simply too far away.
|“Sometimes it is forgotten that many of the unbanked are far from unbankable. They just choose not to have a bank account for both demand- and supply-side reasons”|
Inez Murray, CEO at the Global Banking Alliance for Women
Despite the excitement and headlines around mobile network operators and fintech entrepreneurs providing solutions for the unbanked, the data points to quite the opposite. According to the World Bank’s Global Findex database, over 90% of the 721 million new accounts opened between 2011 and 2014 were opened at financial institutions – the vast majority banks, but also credit unions, cooperatives, microfinance institutions and postal banks. Banks are still a preferred choice for the majority of unbanked. The banks just may be required to alter their models.
In Africa the mobile-money solution has not only encouraged the use of bank accounts, it has also given banks the opportunity to create their own similar offerings – often through a partnership.
Safaricom chief executive Bob Collymore says: “Banks are figuring out that M-Pesa is a good companion for them” as it offers “a mechanism for what those banks want to do.” There are 10 African banks that partner with M-Pesa to allow customers to transfer funds from their M-Pesa accounts into their bank accounts. Some of them have also teamed up with M-Pesa to offer loans through its mobile service, such as Kenyan commercial bank KCB.
Equity Bank said in July that it would now allow M-Pesa customers to use its ATMs to withdraw cash using an authorization code and a phone number as a personal identification number. It affords M-Pesa’s users greater liquidity and brings Equity Bank greater revenues, as well as the opportunity to add M-Pesa clients to the bank.
But Equity Bank has not stopped there and is proof that Africa’s banks are taking charge when it comes to financial inclusion. Last year the Kenyan bank teamed up with Indian telecommunications company Airtel to launch Equitel in Africa – a payment and mobile virtual network operator that gives customers access to its banking services such as loans, cross-border transfers, insurance and investments through their phones. That could ultimately replace M-Pesa for its own customers.
Equity Group CEO James Mwangi says the hope is that 90% of Kenyans will have access to banking services. For Equity Group there is also a commercial upside. In 2016’s half-year results Mwangi said he would not be surprised if in the next three years the bank’s cost-to-income ratio drops below 40% due to Equitel’s success.
It is entirely likely. Mobile banking means fewer branches per customer, fewer paper statements and fewer loan officers. And mobile technology is moving at such a pace that the price point of banking is dropping even faster than banks expect.
DBS launched its mobile bank offering digibank in India earlier this year. It required smartphones and therefore did not have a natural audience with the lower-income and unbanked population, yet “all of a sudden the cost of a smartphone dropped to Rs2000 (about $4) and the whole game changed,” Gupta says.
“As the marginal cost of taking on a new customer is close to zero because we have no bricks and mortar or call centres, and as credit checks can be handled by a robot thanks to India’s move to universal identification, we can take on those customers that at one time we could not have afforded to.”
But for mobile-phone banking customers to exist there needs to be mobile-phone reception. That basic requirement is encouraging new partnerships between banks and mobile network operators in Latin America.
In Peru, Mibanco is the most successful microfinance bank in the country. Its CEO, Percy Urteaga, says, as it reaches saturation in the urban areas of Peru, the long-term strategy of the bank will require accessing rural parts of the country. But given that cellular reception in those regions is poor, even mobile banking will not be a help unless the mobile network operators invest in infrastructure. “We’re already in talks with the Peruvian mobile network operators, but we will most likely have to work together if we want to bring microcredit and micro-savings to these hard-to-reach areas,” he says.
Driven by the need and desire to reach the unbanked, technology partnerships are now becoming the norm for banks. For microfinance banks, those partnerships are often with fintechs that have developed means of collecting data to build a credit profile of small entrepreneurs.
In rural Kenya microfinance bank Musoni Kenya provides loans to farmers with no formal credit history via their mobile phones thanks to fintech firm FarmDrive. FarmDrive’s initiative turns farmers’ sales data into a credit profile. First Access is another credit-profile provider that works in parts of Africa with microfinance banks. It uses mobile-phone transactions to determine creditworthiness. Such tie-ups aren’t always without their challenges, as microfinancier Finca discovered in Tanzania.
Indeed trouble-shooting is to be expected when the innovations are evolving fast. In China, for example, the entire credit-scoring industry is being overhauled by 2020 in a bid to help banks better provide loans to the unbanked. Last year the central bank cleared 10 companies, including affiliates of social-networking giant Tencent, Ping An Group and Alibaba, to establish consumer credit-rating operations.
Alibaba’s offering, Sesame Credit, collects information on 300 million individual users and 37 million small businesses that buy and sell on Alibaba platforms, for example. But critics are concerned that the nature of using social networks could result in credit profiles being informed by morals and relationships.
Aside from fintech, retailers are another new partner for banks in developing countries as they seek to tackle the unbanked. When Bradesco wanted to reach communities along the River Solimões it simply partnered up with a floating supermarket. On board, services to the public are carried out by a Bradesco manager who helps customers open accounts, check bank statements, make withdrawals, deposits and transfers, pay bills, apply for loans, recharge cell phones and obtain a credit card. They can also use an ATM from the Bradesco network, which is connected via satellite.
It’s a lucrative partnership. Since adding the bank to the boat in 2009, more than 45,000 checking and saving accounts have been opened, while local economies along the river have developed.
In Mexico, Banamex formed a joint venture with telecoms company América Móvil to create Transfer, a mobile payments operator, and formed distribution partnerships with convenience store networks Oxxo and 7Eleven aimed at the unbanked. Through the Transfer Banamex product, customers can open a Banamex bank account remotely at these locations or through their mobile phones, and access their accounts now in over 20,000 points throughout Mexico.
Since 2012 Transfer Banamex has added more than 2.5 million active customers.
“Those are outlets that potential clients are familiar with, so it gives them an entry point to getting their first bank account,” says Bob Annibale, global director of Citi Community Development.
Accenture and Care’s report says partnerships will be key for banks that hope to make financial inclusion viable, and points to NGOs as potential partners that can provide access to savings groups and that can support development of suitable responsible products and services.
In developed economies, partnerships are proving just as important in reaching those who have been excluded from traditional financial services. According to the FDIC’s latest data, 9.6 million households in the US were unbanked in 2013 (around 17 million adults), and 24.3 million households were underbanked – meaning that they had a bank account but also used alternative financial services like payday lenders outside the banking system. The most common groups of unbanked include low-income individuals and families, those who are less-educated, households headed by women, young adults and immigrants.
One of the biggest challenges for these groups is that the high cost of using alternatives prevents them from saving money and climbing out of poverty. According to the FDIC, a household with a net income of $20,000 may pay as much as $1,200 annually for alternative service fees – substantially more than the expense of a monthly checking account fee.
Financial inclusion therefore is deemed as vital if poverty levels are going to improve in the US – they haven’t since 2010 and are worse than in 2007. The latest data from the US Census Bureau puts the poverty rate at 14.8% in 2014 (46.7 million people).
Given the infrastructure and regulation within the US, mobile money is not going to be the (only) solution. Prepaid cards and market lenders have sought successfully to fill some of the gap between the banks and the alternative financial services, but increasingly US banks are taking responsibility.
Some of the nation’s largest banks are now offering basic accounts that have low account fees. Citibank, for example, launched Access Account in 2014, Bank of America has Safe Balance, and JPMorgan Chase offers Chase Liquid – all cost between $4.95 and $10 a month and require no minimum balance and allow customers to deposit cheques, pay bills and make withdrawals.
It is through collaborating with partners that banks have been better able to build these products. What’s become clear is that making opening an account easy and providing workshops on financial literacy is not an effective strategy anymore, says Colleen Briggs, head of financial capability initiatives within global philanthropy at JPMorgan Chase. “Financial information has to be relevant and paired with a product that is immediately useful and that can foster continued engagement. This is bringing financial services together with behavioural scientists and design firms to ensure that products are designed to meet the needs of consumers and ultimately promote better financial behaviours.”
It has also brought US banks together with local communities in the same ways that banks in emerging markets are working with local NGOs. “Local non-profits can help tell us where the gaps are,” says Briggs. “They are there in those communities working with consumers operating outside of the formal financial system. We learned, for example, how product enhancements, such as online bill payments, trusted agent networks or SMS reminders, can increase the use of financial services.”
Citi has also made big strides in working with local communities to help reach the unbanked and underbanked. It has gone further than many banks by creating a business line, Citi Inclusive Finance, which works across its businesses in over 40 countries, including the US, to develop commercial support and solutions that advance inclusion. For example, Annibale’s business has a programme offering Citi’s ATM network to several minority banks and credit unions, enabling more than 300,000 of their customers to access thousands of cash machines. It also works with local community organizations and municipal leaders on expanding financial inclusion by financing start-up initiative Ventanilla de Asesoria Financiera, which provides financial counselling, alongside the Mexican Consulate in New York and the New York City Department of Consumer Affairs Office of Financial Empowerment.
“One third of New Yorkers are foreign-born, and they often arrive without a banking history,” says Annibale. “This community can best be supported in a trusted and convenient location, like the consulate, by a specialized community organization. So there we work with institutions that target those communities because they can inform us of the most effective way we can be of service to advance financial inclusion.”
In Singapore, much of the country’s unbanked population (just 4%) is similarly foreign and without a credit history. Gupta says that DBS has targeted the migrant worker community in particular. It has partnered with the Ministry of Manpower and the companies that employ migrant workers to collect know-your-customer (KYC) data, enabling DBS to on-board them more easily as clients – many of whom are unbanked.
In Europe the partnerships differ vastly from country to country and financial inclusion is a tale of two regions. About 5% (17 million) of people in the eurozone are unbanked, according to Findex, while Denmark, Norway, Sweden and Finland have zero unbanked. In central and eastern Europe, however, it is a story more akin to that of Africa and Latin America. Almost 40% of Romania’s population is unbanked, for example, which has created an opportunity for M-Pesa. It launched in Romania in 2014, and in Albania last year.
Turkey is another country that would benefit from M-Pesa’s agent network model. Some 43% of Turkey’s population is unbanked, and some 55% of its women. There have been some bank partnerships that, while not targeting the unbanked, nonetheless offer an alternative point of entry to becoming included. ING Bank and PTT Bank teamed up with Vodafone to offer a prepaid card, while Akbank and Garanti Bank teamed up with Turkcell to offer something similar.
The commercial opportunities for CEE banks are vast, as Alior Bank in Poland demonstrates. It started in 2008, targeting the unbanked in rural areas of Poland, where as many as a third were unbanked. Alior promised them free and easy payments of utility bills. Fast forward eight years and now the bank not only has a partnership with Deutsche Telekom’s Polish unit T-Mobile to offer mobile banking in Poland, but also with Deutsche Telekom’s Telekom Romania to offer the same service there. It now has some Zl30 billion ($7.66 billion) in assets and is on track to become the fifth-largest bank in Poland.
|“We are profitable overall, but there are certainly segments of clients that are loss-making for us. We consider that this is the cost that we have to assume in order to take them through the funnel of financial inclusion” - Percy Urteaga, Mibanco|
Cross-sector collaboration is going to play a critical role for banks that want to make long-term progress in financial inclusion, says Louise James of Accenture Development Partnerships, and such partnerships are more likely to produce the results that the World Bank is looking for. Says James: “These partnerships, while helping banks realize commercial benefits, also ensure that new customers are integrated in a way that underpins wider social development and long-term involvement in local commerce.”
That’s really the key. It’s little help to the long-term goals of decreasing world poverty and improving local economies if financial inclusion solutions do not enable their customers to save money or grow their businesses and earn additional income.
Savings products in particular are seen as beneficial. Research funded by JPMorgan Chase at the Urban Institute shows that even a small amount of savings can cushion an income disruption that can stop families from missing housing payments and that can also lower social security pay-outs, providing a win-win for governments and individuals.
Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities in Washington, and former economic adviser in the Obama presidency, suggests a growth in income of just $3,000 a year to low-income families with children could result in millions of jobs being created down the line. That is really where banks can show their muscle when it comes to financial inclusion. The breadth of products they can offer and the insights from the relationships they have can lead them to work on a long-term strategy.
This year’s survey by Accion’s Center for Financial Inclusion and the Citi Foundation into the risks of financial inclusion for banks found that strategy (or lack thereof) was ranked the greatest. The Centre for the Study of Financial Innovation’s Banana Skins Report showed risk management and change management to be the second- and third-largest risks, above technology.
Mibanco’s Urteaga agrees that strategy is the most important factor for any financial institution looking to reach out to the unbanked. “Without that you cannot even begin to look at developing fintech or forming partnerships, because you would very easily start working with the wrong companies.”
Mibanco adds 10,000 unbanked entrepreneurs every month, in part due a very traditional strategy of incentivizing its loan officers to add clients each month. It also recently added a micro-savings product.
But while Mibanco is profitable, he admits that the business model is highly people-intensive and branch-reliant, and is not reaching the further 2 million SMEs that are in need of banking. “We have been working hard to redefine our strategy, and approach it from a short-term view and long-term view.”
In the short term, Urteaga says the focus is on improving the current model. “So, do we need to push the electronic wallet? Do we need to segment clients? Do we need to think about forming a network of alliances? Should we look at creating digital-only products like e-savings or micro-insurance? And how can we digitize processes with biometrics or using social-media data?” As a result, Mibanco has met fintech entrepreneurs to discuss credit-scoring alternatives and mobile-phone loan applications.
Over the long-term, however, strategy becomes more about challenging the current business model. “Can we make microfinance without credit officers?” asks Urteaga. “Or without branches? We are working with innovation consultancy firms to build out future scenarios, as well as being in talks with regional telecoms companies. There’s a lot of talk and excitement about fintech, but a strategy has to come first.”
Indeed one reason why CSFI Banana Skins’ respondents said strategy was the biggest risk was concern that some financial institutions were jumping into fintech without having analysed whether or not the technology was suitable for their proposed audience.
Another concern they have about strategy is that a focus on commercial gain would mean that banks might actually undermine financial inclusion by leaving out the most vulnerable populations as they come under pressure to make money.
In Accenture and Care’s study, 40% of the banks in emerging markets it surveyed said their financial inclusion efforts were driven by short-term profits, focusing on commercial opportunities in specific financial inclusion segments. Only 23% of banks surveyed had financial inclusion as part of a coherent corporate strategy leading to long-term, sustainable investment plans to develop inclusive business models.
Urteaga says that any financial inclusion strategy has to make room for customers that are not commercially viable as well. “We are profitable overall, but there are certainly segments of clients that are loss-making for us. We consider that this is the cost that we have to assume in order to take them through the funnel of financial inclusion. But of course, if we are able to define a more efficient business model it would be better for both them and us.”
|“The issue of bringing 2 billion people out of poverty – if one is at all serious – cannot be answered by government and charity alone. We must harness the capital markets” - Michael Schlein, Accion|
It’s hard not to get caught up in the short-term lure of profit-making from new clients when $380 billion annually is on the table, but banks stand to make far more than short-term gains by getting their financial inclusion strategies right. Firstly it lowers the cost of all customers as the cheap cost of the unbanked spreads over a larger client base.
Secondly, as banks expand the number of their customers, they automatically become more attractive to potential partners within the ecosystem. “Volume helps when negotiating,” says Gupta. “Thirdly, with more customers comes more data, so the opportunity to create products or services arises.”
Briggs at JPMorgan Chase says: “With anonymized digital payment data, we have insights into the financial lives of consumers in a way we never have before. It can entirely change the way we think about serving consumers operating outside of the formal financial system.”
Serving the unbanked can also bring value to corporate clients. Says Gupta: “Most of the migrant workers are employed by large corporates in Singapore, who are our clients. For those it is often a huge challenge to work out how they will pay those workers and how they will look after them. That we have a low-cost safe and secure process now for those workers is a blessing to them.”
Finally, if financial inclusion means less poverty and stronger local economies, then that means better business for banks.
Above all, it is the local banks that are in the best position to shine… if they are happy to reimagine their models.
“While the global banks have the scale and ability to create the technology, their motivation is not as strong and the KYC challenges of their own regulators are an obstacle,” says Gupta. Domestic banks on the other hand, he says, are being encouraged by their local governments and have a greater focus on the region and the types of partnerships that will be necessary in adapting their model.
Will banks be able to compete against the likes of M-Pesa or Alibaba’s mobile payments platform and therefore keep products commercially viable? In developed economies that threat is far smaller. Gupta is hopeful that, even in emerging markets regions where banks have been long established, they will. “Some of the telecoms companies in India are now trying to partner with banks because they realize it will be easier than creating their own payments bank. If the banks are smart, they will also aim to create better clearing and settlement products than the non-banks.”
Banks also have a funding advantage by having access to low-cost deposits, and, other than in Africa where the banking system is underdeveloped, they also have the benefits of scale and distribution. And the strength of banks lies in the fact that people trust them. “If you live somewhere rural, you may prefer to know your money is with a bank rather than a social media or technology company,” says Gupta.
While banks and non-banks may be rushing into financial inclusion reform however, there is a long way to go. Many more partnerships will have to be developed before the World Bank’s goal is reached.
Accion’s Schlein says that the hundreds of millions of new bank accounts that have been created in recent years are often not being used. “We’ve tended to look at financial inclusion from a top-down viewpoint, that by converting payments away from cash and sending them digitally into a bank account, somehow the previously unbanked will start using that account and other products more frequently.”
Instead what has happened, says Schlein, is that the recipients simply cash out and go back to living in a cash world until the next payment. “If we really want to ensure that the unbanked are coming fully into a system that can support their growth, then we need collectively to work on how to engage activity more and to build the financial tools that work for them.”
In India for example, bank account penetration increased from 35% to 53% between 2011 and 2014, but data showed 43% of all bank accounts to be dormant. That led to the State Bank of India changing tactics. Says Schlein: “The bank led a major effort to encourage the utilization of the newly opened accounts. In 18 months, we have seen zero account balances fall from 90% to 40%.”
Gupta also says that there needs to be collective rethinking about customer data if there is to be a better service for those who lack traditional credit or identification information. “The current way we operate is inefficient,” he says. “We wind up duplicating data checks – with utilities running their checks, banks running theirs, auto lenders theirs and so on. If we could create an intelligent data depository and/or use third-party algorithms to better identify potential clients then this would change our efforts towards global financial inclusion substantially.”
The collective effort required has not gone unnoticed by the World Bank’s Kim. He is calling for “country-led targets and reforms; the use of technology, innovation and data to transform business models; and public- and private-sector initiatives to rapidly expand access to financial services” to meet his group’s goal.
Whether or not his target is hit in 2020, the impact of the agenda has clearly already been felt, and it is changing the face of banking for ever.