Are Commercial Banks Ready to Serve the Base of the Pyramid?

> Posted by Susy Cheston, Senior Advisor, CFI

Of the 700 million new accounts that the Global Findex reports were opened from 2011 to 2014:

  • Banks and other financial institutions accounted for 550 million;
  • Mobile network operators accounted for 100-240 million, depending on your source and methodology;
  • Microfinance institutions accounted for 50 million.

These numbers are rough and involve some overlap—but they point to the continued importance of commercial banks in financial inclusion. Put another way, of the 3.2 billion accounts reported in the 2014 Findex, 3.1 billion were accounts with a financial institution.

That’s why I was so interested in hearing what the commercial bankers had to say at an Institute of International Finance (IIF) roundtable held in Lima on October 9 alongside the International Monetary Fund (IMF) / World Bank meetings. The strategies they discussed for reaching the BoP were not new to those immersed in the financial inclusion world, but it was heartening to hear their commitment to putting those strategies into operation. Here are a few of the points from the discussion:

Use data to understand customers. Now more than ever, there is a wealth of available data to help us better understand customers at the base of the pyramid. These new customer insights are opening up new practices – from on-boarding, to cross-selling, to risk management. Data analytics can also enable cost reductions on credit and insurance. For example, ecommerce platforms for small manufacturers can facilitate credit offers and then arrange for automatic repayment from the ecommerce activity itself. This innovative use of data allows financing at half the cost.

Partner with last mile providers. Several banks credited their progress in reaching the BoP to partnerships with microfinance institutions, agent networks, mobile network operators, and retailers. In the case of Indonesia, they did the math. About 40 percent of the population has access to financial services, served by roughly 30,000 bank branches in the country. Yet with roughly 300,000 shops and a mobile penetration rate of 70 percent, there is a clear win if banks can figure out the partnership models with agents and mobile operators—including the questions of who owns the customer and how to structure revenue sharing.

Work with G2P and national ID programs to connect to large numbers of new customers. Large commercial financial institutions are partnering with governments to help deploy payments like conditional cash transfers. Such a partnership both serves the government and also supports the bank’s customer acquisition. Of course, this can be a huge undertaking, sometimes involving the entire population of a country. Banks operating in this space that are concerned about their capacity have started small, with plans to expand. Universal ID programs are helping make it easier to meet costly Know Your Customer requirements, most notably the Aadhaar program in India.

A stable and open regulation system is, of course, always helpful, as well as dialogue between the public and private sectors, including both financial and telco regulators. The roundtable particularly focused on the challenges of inconsistent and unclear supervision which is exacerbated by the introduction of new technology. When a supervisor with a great deal of discretion faces a new technology, anything can happen, and the resulting uncertainty can make banks shy away.

Understand the product introduction “ladder” (we call this on-ramps). Customers often begin with a single product and then progress to use a wider array of services. Roundtable participants seemed to agree that the most effective product introduction ladder is typically: cash in/cash out; bill pay; savings; and credit. (We’ll hope that insurance is included in the next discussion!)

Provide customer support. Without adequate focus on the customer, the services offered will likely fail. Providers must build customer understanding and gear product offerings accordingly. Clients must be treated with adequate care, including in the handling of newly emerging risks like data privacy. And integrating financial capability-building into product delivery, especially for new financial customers, is key.

IIF’s roundtable wasn’t the only inclusive finance activity at the IMF / World Bank meetings in Lima. On October 8, in a session entitled “Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?”, an expert panel discussed the current state of financial inclusion, the impact of national commitments, and how the U.N. Sustainable Development Goals (SDGs) will shape the future of national targets and methods used to advance progress. There was a consensus among panelists that financial inclusion plays a fundamental role in all levels of economic development. (A great recap of the session from the Alliance for Financial Inclusion is available, here.) Christine Lagarde, head of the IMF, also put financial inclusion in the macro spotlight in her speech, delivered the following day. And in the Civil Society Policy Forum accompanying the IMF meeting, the Microcredit Summit Campaign focused on ways financial inclusion can contribute to ending extreme poverty.

Image credit: Accion

Have you read?

FinTech for FI2020: A Conversation on Aligning Technology and Partnerships for Financial Inclusion

Global Findex Offers Next Steps for How to Give People Bank Accounts

Rating Progress toward Financial Inclusion on a Scale of 1 to 10

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