The Business of Financial Inclusion: Insights from Emerging Market Banks

Banks have unique stories about they are expanding to the unbanked and the underbanked

When it comes to financial inclusion, as is true in many sectors these days, sexy start-ups and disruptive innovators often occupy the spotlight. But away from the glare, traditional banks are getting on with the work and making an enormous difference. In The Business of Financial Inclusion: Insights from Banks in Emerging Markets, produced in a partnership between the Institute of International Finance (IIF) and CFI, we explore how banks are innovating to include new customers.

Given the headlines, it may be a surprise to hear that even today the overwhelming majority of new accounts are opened at formal financial institutions, not mobile money outlets. Thanks to the Global Findex, we know that over 720 million adults accessed formal financial services for the first time between 2011 and 2014, 90 percent of these new accounts were opened at formal financial institutions. Of the 720 million total new accounts, only 54 million used mobile money as their primary account.

How are banks expanding customer outreach?

Through in-depth interviews, leaders from 24 national, regional, and global banks told us about the opportunities and challenges they face while reaching the unbanked and underbanked. Each bank has its own particular story. In the aggregate, their stories give insight into how banks are evolving to meet people where they are and serve population segments that have been traditionally excluded.

Some banks have inclusion in their DNA. Turkey’s Isbank was created during the birth of the nation in 1924 to support Turkish business owners and the young national economy, and Standard Bank in South Africa led the charge to end financial apartheid following the end of official apartheid in 1994. For these banks, financial inclusion is simply a new name for a longstanding commitment – bolstered by new technologies that make outreach easier. On the other hand, some banks must challenge their dominant organizational norms and change course to reach the currently un-reached.

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When they decide to pursue financial inclusion, banks also choose from a number of paths. We identified four broad strategies: corporate social responsibility (CSR); investments in microfinance institutions; niche market activities within a broader commercial strategy; and market-motivated efforts with aggressive growth plans. Within this range of strategies is also a range of viability, with CSR efforts aiming at social impact and commercial efforts aiming at profit. Some banks pursue several of these strategies at once. Most of the banks that we talked to intend to make money from financial inclusion activities, and many have either reached or will soon reach a clear break-even point during which the gains from new customers surpass the upfront costs of acquiring and serving them.

Whatever their motivations and expectations, all the banks we spoke to are using technology-enabled channels to bring in new customers. Banks are evolving alongside, often with and sometimes beyond, financial technology start-ups and telecos. Communications technology enables a wider ecosystem of customer service touchpoints and data analysis helps providers fine-tune these touchpoints.

We find, not unexpectedly, that digital payments are the leading edge of new customer outreach. Many banks are leveraging government-to-person (G2P) and business-to-person (B2P) payments to acquire customers at the base of the pyramid. Once a G2P or P2P payer has put money into an account, the bank seeks to engage the customer fully with services such as bill payment, e-commerce, and even transportation payments. From payments, banks then aim to gradually cross-sell other financial products: savings, credit and insurance.

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Agent banking has become a critical aspect of low-income customer acquisition and service. Almost every bank interviewed has established a vast agent network. Many banking agents can carry out a full suite of transactions, enabled by biometric national ID systems for simplified identity verification and backed by increasingly robust data analytics programs. Agent banking has its challenges, however, as interviewees were quick to point out. Many banks struggle to make their agent operations work well, with issues such as agent churn, agent liquidity management, quality of information agents provide, and ensuring that customers trust agents.

In nearly all cases we identified, banks find it necessary or advantageous to partner with other organizations that bring specialized capabilities into the business. Partnerships may be at the front or back end of operations, and can support a variety of functions, allowing for enhanced product offerings, financial risk management, greater customer engagement, and more. We saw partnerships with microfinance institutions, fintech start-ups, solar energy companies, and agent network managers, to name only a few. These partnerships put banks at the center of their own financial ecosystems.

For as much opportunity as banks have, their expansion to reach the unbanked is not without challenges. The banks we spoke with highlighted a number of challenges, often unique to their organizational and country context. Customer-related barriers included lack of new consumer trust in banks and unfamiliarity with digital and agent banking, together with low financial capability and digital literacy. These issues lead to low uptake and usage. Banks are struggling to manage and take advantage of quickly-growing amounts of customer data. Broader infrastructure deficits, especially in connectivity, limited the reach of digital banking and increased the cost. Finally, many banks highlighted regulatory issues, especially regarding pricing, capacity, and Know Your Customer requirements.

Despite these challenges, all 24 interviewed banks presented bold goals and evidenced the enthusiasm to reach them. The expansion of financial technology is not leaving them behind, but is driving their efforts. The report offers a profile of the inclusion strategies each bank employs. A scan of these pages takes us to the front lines, where banks are creating a genuinely inclusive financial sector.

Have you read?

Accelerating Agent Banking in Kenya: Part One

Microfinance vs. Financial Inclusion: What’s the Difference?

“It All Comes Down to Knowledge” – Akiba’s Mobile Banking Experience

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