One-fifth of the world’s population are unbanked. Historically, it hasn’t been economically viable to provide financial services for these individuals, as they didn’t meet the minimum profitable threshold for most financial institutions. A number of reasons have combined to produce this situation, not just in developing economies but also in developed ones such as the US and UK. The introduction of new technologies has the potential to lower the cost of overcoming the hurdles that stop people entering the banking world – be they geographic or regulatory inaccessibility, product mismatch, or a lack of trust – transforming the formerly unbanked into valued members of the formal economy and supporting economic growth for all.
Emerging markets are already embracing innovative technology and developing policy to increase financial inclusion. This is no surprise when you consider the estimated US$200 billion opportunity they represent (pdf). But the individuals classed as unbanked don’t all share the same situation. Some lack access to banking institutions, while others simply have needs that existing products don’t address. Even given a conducive environment, banks operating in these markets need to tailor their existing offerings to successfully achieve profitable financial inclusion.
One problem is onboarding people who have never had access to banks or credit. How do you get them to trust banks with their money, and vice versa? Banks are now able to offer emerging markets innovative solutions, such as PNB MetLife Insurance’s JKB Family Protection Savings Bank Account that bundles low-cost insurance protection with the benefits of a savings account. The bank expects this product to generate new business prospects of up to US$2 billion and foster trust among customers – many of whom will use credit products in the future.
Channel innovation is also key. Digital channels can provide greater convenience for customers as well as lowering the cost for banks, and have been instrumental in helping providers overcome challenges related to infrastructure and geography. In Kenya, Musoni, a digital microfinance institution, uses a mobile platform to disburse loans within 72 hours and collect payments. In Bangladesh, the payment company bKash allows people to exchange hard currency for e-money through a network of community-based agents. This can then be used to transfer money to others, receive money, and buy mobile airtime.
Effective financial inclusion will likely require a “bricks-and-clicks” distribution model, including physical branch presences to build trust and confidence, perhaps supplemented by agents (such as post offices and supermarkets). This may take a nontraditional form, such as the Colombian telecom company Tigo Une’s conversion of 13,000 pay phones into “payphone banks.” The transformation allows under-served customers to deposit coin-denominated daily earnings into their own microsavings accounts, at effectively no cost to Tigo Une. In Indonesia, Bank Rakyat’s floating bank branches allow inhabitants of the country’s remote islands to access financial services. The bank has even gone so far as to launch its own satellite, BRIsat, to provide reliable connectivity and reduce operating costs.
Technology is also allowing financial institutions to overcome the lack of credit histories in many of these emerging markets. Many financially excluded individuals don’t have the financial track record that banks traditionally rely on to support lending decisions, nor do they necessarily have formal proof of identification. Pioneers in this space are developing new underwriting and credit scoring analytics for individuals and businesses to assess lending risk. In Mexico, the lending platform Konfio measures creditworthiness of potential business clients through a proprietary algorithm. By looking at cash flow and willingness to repay through analyzing the online application, social data, e-commerce platforms, and other data sources, they are able to create a credit rating for business that would be previously be turned away. In China, the agriculture fintech company Nongfenqi does the same through conversations with customers’ business partners, customers, and fellow villagers. These new ways to calculate risk save financial institutions money while allowing them to expand their customer base significantly.