Banks Still Have a Role to Play in Financial Inclusion: As the Industry Evolves, They Must Decide Whether They Want to Do Lunch or Be Lunch

> Posted by Monique Maddy, President & CEO, Ezuza

The following post was originally published on The Huffington Post.

The Institute of International Finance (IIF) and the Center for Financial Inclusion (CFI) issued a timely report earlier this month: “The Business of Financial Inclusion: Insights from Banks in Emerging Markets.” This report is notable because its release comes at a time of expected – some would even argue inevitable – disruption within the financial services industry, specifically in the banking sector.

The report incorporates the key messages gleaned through in-depth interviews with 24 global, national, and regional institutions in 19 countries. The takeaways from these institutions are representative of the current state of banking in these markets and reveal how banks perceive both the opportunity and the challenge of achieving financial inclusion.

Currently, most, if not all, of the talk in the banking industry is about would-be disruptors—that is, the predators, not the prey. The report gives the prey’s perspective and outlines how they plan to confront the potential threat to their business in emerging markets.

I am the CEO of Ezuza, a mobile money company. Ezuza is a predator, one of those would-be disruptors that are all the rage these days. More and more companies, both large and small, are entering the financial services fray, looking to shake things up and grab a share of what has mostly been the exclusive domain of well-established and deep-pocketed financial institutions serving an equally well-established and predictable market.

But the market is changing. In the case of banking, the change required to service the majority of consumers and businesses in emerging markets is radical. These potential new customers have never been banked before. Compared to established consumers, they have different needs and radically different expectations in terms of banking products and corresponding price points that they can afford. Their financial needs cannot be addressed with conventional banking formulas. Are traditional banks prepared to pivot?

A Time for Growth

Many observers are signaling the death knell of the old guard. They predict that banking is poised to be the latest casualty of the digital age. Venture capitalists, private equity firms, and even some of the leading banks themselves, in an apparent effort to hedge their bets and minimize the potential damage to their existing models, are betting on the predators. These funders are supporting the very start-ups that are innovating in the financial services space and changing the industry dynamics, so much so that the banks could be marginalized, if not totally disintermediated, from the market.

Not so fast, argue the report’s authors—and I agree, at least insofar as emerging markets are concerned. Banks in these markets are not going away any time soon; instead, the most nimble and forward thinking among them will reinvent themselves. The authors state that of the 721 million new accounts opened between 2011 and 2014, 90 percent of them were opened at financial institutions. Admittedly, it is not clear whether the growth in new accounts is due to regulatory imperatives (in many countries a mobile wallet must be linked to a traditional bank account) or the result of the banks’ concerted efforts to tap into new markets. However, the fact remains that traditional banks, at least for the foreseeable future, will continue to be essential to achieving full financial inclusion.

As the report acknowledges, “At the heart of it all, banks must do real things for real people and work to fuel inclusive economies from the center, thereby enriching lives and transforming societies.” Although banks are an essential component of the solution, they are not optimally structured to take advantage of the efficiency that technology requires and allows. This limitation prevents banks from extending their reach to underserved communities. Out of necessity, the banks have to work with a variety of partners, including companies like Ezuza, to access this global unbanked and underbanked market. They have to adapt.

Preparing for the Future

The report’s findings called to mind lessons conveyed in Howard Stevenson’s book, Do Lunch or Be Lunch: The Power of Predictability in Creating Your Future. In the book, Stevenson describes how businesses must accurately predict the future to take the right steps to get there, to help shape the outcome, and to survive. It is all about the survival of the fittest and who is best prepared for the future.

With disruptive players lurking at every turn, traditional businesses need to take measures for self-preservation and to ensure some degree of predictability for their existing customers and potential new ones. To survive, these businesses need to predict the future and their role within that future. They need to do lunch or they will be lunch, swallowed by leaner, hungrier, and much faster new players.

Additionally, in a rapidly evolving industry, the traditional players need to be strategic, understanding where they are strong and where they are weak, so they can partner with others in ways that play to their strengths and compensate for their shortcomings. By forming new types of partnerships, all involved can not only survive but prosper, creating new markets and new opportunities.

So how does the “do lunch or be lunch” survival theory apply to traditional banks and the quest for financial inclusion? It depends. Not all banks are created equal; therefore, they approach financial inclusion from several different angles:

  • A corporate social responsibility
  • A viable market opportunity worth pursuing
  • Not a viable market, making it safe to ignore for now; leave it to the predators
  • A form of political pressure to increase access to finance among the unbanked and underbanked populations
  • A defensive strategy

To read the second half of this post, click here.

Image credit: Accion

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