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
During my many years of experience in the fintech space, I have observed banks take a defensive position, launching one or more preemptive strikes, because they fear missing out or being left behind by their competitors or by new disruptors. They often enter the fintech game by building “me too” technologies without a corresponding business model or compelling enough market case. All too often they give up if the results are not immediate, something that start-ups like Ezuza cannot afford to do. Our solution is our lifeblood. When things are not going as expected, start-ups like Ezuza must pivot, not revert to the old and familiar.
The Market Is Big Enough for Everyone
Some of the banks that participated in the study, including Bancolombia and Banco Davivienda (Colombia) and Fidelity Bank (Ghana), see the quest for financial inclusion as a viable market opportunity. As such, they appear to be throwing their full weight behind their financial inclusion initiatives. They see the market potential of banking the next 2 billion consumers in the world. They recognize the findings of the report, that “The scale of this market reflects growing incomes at the base of the pyramid. The bottom 40 percent of the population in low- and middle-income economies constitutes a total spending market of $3 trillion, with major shares of the population in all regions of the world gaining enough disposable income to become interested in using formal financial services for the first time.”
Yet, having waded into this vortex of financial inclusion and realizing the enormity and complexity of the task at hand, these banks estimate that the amount of the potential surplus to be had by stakeholders is large enough to be shared. Thus, they can justify forming the alliances and revenue share concessions necessary to reach their strategic objective: extension of financial services to unbanked and underbanked populations with the right products at affordable prices.
This collaborative approach is entirely consistent with the “do lunch or be lunch” theory of predictability and change, which is as applicable to banking as it is to any business sector undergoing change and innovation. These banks seek to establish mutually beneficial partnerships and dialogue with fintech companies like Ezuza. It is a mutual dependency.
For example, Ezuza has partnered with others, including an intergovernmental organization (the Inter-American Development Bank), retailers (independent mom-and-pop stores across Mexico who are the gateway to business and consumer financial inclusion), a Fast Moving Consumer Goods company (see my earlier blog on the role of FMCG companies in financial inclusion), and mobile network operators.
These multiple and often complex alliances are essential. While technology has made universal financial inclusion a more realistic and achievable objective, many other elements must come together for us to put the technology to its full use. As Abrar Mir, a banker from Pakistan quoted in the report, put it, “After 75 years of operations, Habib Bank Ltd. has 11 million customers, and my team is expected to bring in another 20 million customers by 2020.” Such is the potential for technology-enabled growth within the banking sector and for financial inclusion. I am sure that Mir would agree that Habib Bank cannot accomplish this on its own.
The report concludes with a series of concrete and comprehensive recommendations for banks and government regulators interested in financial inclusion. Among them:
- Increased exchange of best practices
- Regulatory flexibility (i.e., automation of Know Your Customer processes and customer on-boarding)
- Partnerships with fintech companies
- Increased use of data analytics to understand the unbanked and underbanked consumer
- Engagement with microenterprises
- Digital inclusion promoting access to the internet and affordable data plans
In addition to following those recommendations, banks that want to do lunch rather than be lunch should consider the following suggestions that arise from my viewpoint as Ezuza’s CEO:
- Provide banking services to fintechs that are simple to consume, accessible, and automated, while maintaining the security of the traditional banking channel.
- Enable mobile money operators to transition to cashless operations. Banks must modify their traditional banking products to enable efficient cash deposits by the numerous agents who receive cash from mobile banking users. Consumer cash collection primes the mobile money pump; in many mobile money ecosystems, traditional banks provide core wholesale services, and the agents use these services as business customers of the bank.
- Rethink the economics of a transaction. The volume of mobile money transactions in emerging markets is potentially high, but the value of each transaction is low. With modern data center technology driving costs down, traditional banking operations should be low-cost and affordable to the mobile money sector.
- Work with the fintechs and use the mobile money data analytics to better assess risk. Using this information, banks can develop “intelligent credit” instruments for mobile money agents who provide cash collection services to consumers in areas with limited branch accessibility .
Disruptors have identified the rich growth opportunities in emerging markets and have decided to pursue them. Banks, too, have acknowledged this untapped market, but many have yet to develop plans and products to serve this market successfully. As I have seen and the recent report reveals, the market is big enough to support disruptors and banks. Both will be rewarded more so if they do lunch and find ways to work together. So let’s do lunch.