> Posted by Philip Brown, CFI Advisory Council Member and Managing Director Risk, Citi Inclusive Finance
As new opportunities for inclusive financial services continue to grow, they are accompanied by an array of risks, many of which are not fully evident today. Since 2008, the Banana Skins surveys have charted both known risks and those that have previously been overlooked or underrated. The recently released report “It’s all about strategy” is no exception — it surveys a spectrum of participants and gathers their perceptions of the risk in the provision of inclusive financial services.
What does this year’s survey tell us?
Continuous progressive change in service provider business models is not new. But the accelerated pace and diversity of change, coupled with extent of the redesign and transformation process across all aspects of the business model, are shifting inclusive financial service provision. There are changes across the creation and delivery of services, business economics and processes, delivery infrastructure, such as payment systems, mobile networks and agent networks, and strategies for customer acquisition and the targeted customer base. The inclusive finance sector is no longer defined around segment-specific institutions but around the end clients, services provided and the now diverse and growing universe of service providers.
Digital transformation is a pervasive theme in this year’s Banana Skins report, which is a call to recognise the risk of not thinking strategically about all aspects of financial service provision. Across the globe, mobile applications are adding millions of clients versus thousands for established models. Both non-credit products and new forms of credit such as instant nano-credit for pre-paid mobile phone users continue to grow. Rather than viewing disrupters as a threat, one cited respondent positively describes new competitors as facilitators of market development, improving the quality of services and creating pressure to reduce interest rates.
Strategy is defined in the report as “the risk that service providers will fail to develop business models which make them relevant and competitive in a changing market place”. As a result of digital transformation, there is a shift in mindset from incremental to exponential in every aspect of the business. With exponential strategy we must accept inherent uncertainty that we may not be able to follow the initial step-by-step plan and expect success. In order to respond to increased speed and to more and unexpected changes, we must work to improve the quality and adaptability of drivers.
The report portrays a sector experiencing a shift from commercially driven transformation to technology driven financial inclusion business. In this context, the top ten risks are seen as internal or manageable by the service provider. This diverges from the trend in previous surveys, which have portrayed a shift in risk concern from an emphasis on enterprise or entity management risk to the broader external context, such as political, credit, and macro-economic risks.
“It’s all about strategy” is a wake-up call for greater strategic thinking on the part of service providers. Strong governance is key: without a sound, clear-sighted strategy, institutions could face marginalisation. This speaks to a shift in mindset from the incremental to the exponential – a mindset focused on growth and inclusion in a more client-centric and ever-changing risk landscape. It implicitly recognises the ability to reach new clients, align and re-engineer processes to their needs, and embrace new digital distribution opportunities.
This message is not just for service providers – it is equally applicable to investors, regulators, and other stakeholders. It highlights the increased responsibility of boards to provide strategic direction. In doing so, the survey’s most important contribution is to continue to raise the awareness and understanding of risk, and to provoke action.
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