Are Banks Rising to the Challenge?
In our first post in this series, we used CGAP's definition of financial inclusion:
“... seek to ensure that all households and businesses, regardless of income level, have access to and can effectively use the appropriate financial services they need to improve their lives.“
Not long ago, we sat in a meeting room in the head-office of one of the big South African banks. We were invited to discuss how the EXCEED platform could win micro-entrepreneurs to use their services. Like other formal financial institutions, the banking services of the bank we visited are largely reaching civil servants, businesses and people employed in the private mainstream economy. Regulated and unregulated microfinance institutions, cooperative banks, mobile money services, fintechs and community savings-clubs successfully stepped into this gap and provide essential yet fundamentally different financial services to the un(der)banked. Banks have caught on to this. At last, upwardly mobile micro-entrepreneurs have gotten on the radar of our host. Before we look at typical challenges traditional banks face, lets have a glimpse at the motivations of banks to attract this different target group.
Are banks serious about financial inclusion?
An international financial inclusion study undertaken by Accenture and Care in 2015 researched the motivation of 30 banks for their entry into this market
20% of the banks cited philanthropic/ corporate responsibility related reasons, 17% were regulatory driven, 40% were in this market to gain short-term profits and only 23% pursued financial inclusion efforts. The same study concludes: “While none of the banks has fully mastered the underbanked market, there are promising examples of how some are excelling in particular capabilities. These examples illustrate that banks can achieve changes across their business and operating models to extend their products and services inclusively, profitably and responsibly.”
The banks' dilemmas
In order to tap into this market, banks need to address inherent constraints such as:
Culture & mindset: marketing literature, staff-appearance, body-language and jargon; staff reluctance to assist customers from certain socio-economic, cultural backgrounds, religions or castes; resistance to change, hierarchical structures and unions;
Business models: over-reliance on physical bank branches for service delivery; pricing; customer service
Shareholder expectations of decent profit margins
Products: partly or wholly unsuitable features, terms & conditions and accessibility;
Staff resources at branches: lack of language skills, knowledge, and aptitudes to appropriately serve needs of different target groups
Administrative burdens: ID documentation requirements, completion and signing of forms and other administrative processes hinder account openings, incur higher costs and leave frustrated customers in lengthy queues.
Regulatory requirements increase costs and present challenges: such as ensuring compliance with proof of loan affordability when customers have irregular incomes, no expense records and proof of income sources.
Low risk-taking aptitude: ineffective loan evaluation criteria or scoring methods as most of the unbanked have no financial statements or credit records
Operational costs: operational costs associated with physical branches, security costs of cash transports and staff-costs;
Distrust: many unbanked do not trust banks. Sources of distrust can be lack of or miscommunication, unrealistic assumptions of financial literacy levels, inappropriate terms & conditions and using jargon or languages customers are not fluent in.
Technology: internal systems & processes to integrate with new or third-party systems for providing alternative delivery channels and services
Digital inclusion and consumer readiness are closely linked to the success of digital and mobile technology.
Make it happen
Back to our meeting: we realised that our target market substantially differs from our host's current customer base. As learnt from their two failed attempts at attracting sufficient subscriptions from micro-entrepreneurs, digital platforms are not a quick fix. EXCEED, for example, is partnering with organisations who can provide the training, support and mentoring to motivate regular and accurate record-keeping and to use reports for growing their businesses.
Given all the capabilities and resources banks have at their disposal, it should rather be a matter of commitment and concerted effort to devise products, services and delivery channels that attract micro-entrepreneurs. This may also require looking at new ways to fulfil legal and regulatory requirements as well as make services more affordable and accessible.
Accenture, Care: Within Reach, How banks in emerging economies can grow profitably by being more inclusive
Care, Plan & Barclays: Banking on Change; download available here