15 December 2017
Graham Seel

Banks and Fintech

Graham Seel - BankTech Consulting

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Financial Inclusion

The financial services industry has much to contribute to the UN and World Bank goal of full financial inclusion by 2020. This group will focus on industry contributions, ideas, barriers and enablers.

Can Banks Really Meet the Financial Needs of the Poor?

20 May 2015  |  5714 views  |  7

We often talk about whether banking the poor can be profitable, as though that’s the only thing stopping banks from providing the financial services the poor need. But in reality, the bigger challenge is that standard consumer financial services simply won’t do. Even when poor households have access to formal or semi-formal financial services, they use them as just one more tool for managing the inadequate and unpredictable income stream, and unplanned financial shocks, that are an everyday part of their lives.

What would banks need to be able to do in order to have the potential to meet the complex financial management needs of poor households? In a short blog post, of course, we can’t cover everything. But here are some ideas. What is interesting is that emerging non-bank financial technology providers are already working on most of these, though some of them are focused (understandably) on developed economies. Notice that the items on this partial list overlap and interact significantly – this is typical of the financial management approach of poor households.

  1. Digital money with cash options. The advent of digital banking undoubtedly offers some promise for accessible financial services for the poor (as is amply demonstrated by M-Pesa and M-Shwari among an increasing array of digital services). The hard part, though, is still the cash element. Most poor people live, and will continue for many years or decades, to live in cash economies. Cash-in and cash-out facilities need to be highly accessible and reliable. Banks will need to partner with agent management organizations (which could be specialized, or could be multi-purpose like an MNO’s agent network).
  2. Peer lending services. Most lending and borrowing occurs between family members, friends and trusted associates. That isn’t going to change quickly. But for poor households, though convenient and not needing heavy paperwork, this can be unreliable, unsafe, and sometimes socially challenging. Mobile-driven and digital peer lending services, with known participants and perhaps even unknown (e.g. with some bank underwriting), could significantly improve existing purely informal mechanisms.
  3. Flexible credit products. In an emergency (such as illness or accident), a poor household will typically need to borrow, but likely won’t have a single source with sufficient lending capacity or the right terms. The ability to seek several small amounts of credit without necessarily needing to go physically to each friend, relative, or semi-formal source would ease the stress associated with the emergency.
  4. Targeted financial management tools. This may be the place needing the most research, but may also have the most value. For example, a poor household may today be spending money on an informal deposit-taker for short term savings. Easily solved, you might say, by a reliable cash-in facility for a digital account. But the real value of the deposit-taker may be that (s)he comes every day for a very small deposit. Some services (e.g. M-Shwari) can already send a daily text reminder to make a savings deposit. Will this be enough? That remains to be seen. Other examples would include automated distribution of electronically received regular payments (government payments, wages, etc) between loans, savings, current account, family (remittances or loan repayments), bill payments, etc.; and additionally tools to give visibility into the household’s current and anticipated cash positions.
  5. Needs-based product options. One of the more complex aspects of household financial management is selection of the “right” saving or lending tool for a particular purpose. A mobile tool that will check on available sources (e.g. peer lending funds, terms and interest rates, or available deposit instruments, or even demand from reliable peer borrowers, for short, medium or longer term savings) and make recommendations based on the consumer’s needs for liquidity, return, etc.

Many other categories of product need could be cited (and are encouraged in comments to this blog post). The most important job for large organizations seeking to advance financial inclusion (such as CGAP and the Bill & Melinda Gates Foundation) is to facilitate the bringing together of the right partnerships – research, technology, financial institutions, NGOs, poverty advocacy groups – to bring clarity to what the poor need to help them manage financially, and what is feasible given financial institution economics and technology capabilities, and then to facilitate development and deployment of such products wherever they are needed (and all by 2020 according to the G20 FI2020 initiative!)

The content of this blog and associated comments reflects my personal views and is not reflective of The Norman Group, World Renew, the CRCNA, or any of their partners.

 

TagsMobile & onlineRetail banking

Comments: (12)

Graham Seel
Graham Seel - BankTech Consulting - Concord | 21 May, 2015, 16:21

I don't know that it is fair to say the banks have "no interest" in trying to serve the poor. They do, though, have a primary focus on managing return on capital according to market and shareholder expectations. The potential contribution of the technology industry is creation of tools and products that actually serve the poor in a way that at least meet the minimum returns the banks' masters require. We're still quite a way from that though.

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Jim Wells
Jim Wells - Wellspring Consulting International - Fort Lauderdale | 22 May, 2015, 23:08

Short answer is that banks certainly CAN meet the needs of low-income consumers, but decades of purposefully excluding them shows that they WON'T.  Besides, the products and services offered by traditional banks fail to meet the unique needs and wants of non-traditional consumers. Once governments and central banks understand that trusted local, community/village businesses and organizations need to be integrated into the delivery of financial products and services, enfranchisement of low-income consumers can take place. 

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Graham Seel
Graham Seel - BankTech Consulting - Concord | 22 May, 2015, 23:12

Jim historically you have been right that banks have shown no interest in meeting the needs of the poor. I think there are many reasons. Understanding of what financial inclusion will take has evolved steadily over the past couple of decades, and only recently have there been solid attempts to design appropriate products. But more significantly, we simply haven't had the technology necessary to make unit costs for small transactions viable from a commercial bank's shareholders' perspective So while there have been some microfinance investments, and other experiments by banks such as Citi and Barclays, there hasn't been a shareholder-friendly business case. That starts to be possible with emerging technologies.

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A Finextra member
A Finextra member | 23 May, 2015, 09:37

Mobile fintech is moving rapidly towards the huge population of unbanked. I dont think banks are agile enough to pursue new avenues like this one. Smaller companies will continue to prove the value of the unbanked financial market. 

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A Finextra member
A Finextra member | 23 May, 2015, 19:40

There are some good examples of inclusive services through branchless banking in Bangladesh, Pakistan, India and many other countries.

Interestingly in Pakistan, Mobile operators have acquired microfinance banks as a way to achieve this. A key factor in all these countries has been whether mobile operators and banks have been able to really work together effectively.

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Graham Seel
Graham Seel - BankTech Consulting - Concord | 23 May, 2015, 22:21

Charmaine, interesting point. We'll see some strange bedfellows before we're fully done with financial inclusion! I wonder how well telecommunications and banking regulators are getting on together too in some places?

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Jim Wells
Jim Wells - Wellspring Consulting International - Fort Lauderdale | 24 May, 2015, 00:38

Love what the Reserve Bank of India is doing.  It realized that banks clearly were not going to be the answer to financial inclusion, so it has offered to license new, non-traditional, special purpose & payment banks, as well as encouage various agents and banking correspondents. Common sense finally occurring in a national central bank. 

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Chris Meggs
Chris Meggs - Chasm management limited - Ipswich | 26 May, 2015, 10:25 Interesting and provocative post, Graham. I believe that your first point is the most challenging. Where do we define the crossover between actual cash and notional cash? One can envisage a system whereby salary, for instance, is paid into an account and drawn out at an ATM. Here the actual and notional cash are the same. But when an underbanked person attempts to overdraw, clearly the bank has to advance cash against a notional security (future salary). Do we mean that the real problem is constructing a credit system for the unbanked? Is this where it gets really difficult to include the unbanked?
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Graham Seel
Graham Seel - BankTech Consulting - Concord | 26 May, 2015, 17:41

Chris - thanks for a great comment. Do we not have flavors of the risk you describe here in existing consumer loans that are either secured against future income streams, or not secured at all? Having said that, the risk model is going to be different and needs some attention. Underwriting is typically a rather expensive exercise, leading to high loan fees that would not be appropriate for a very small short-term loan. Pricing of the kind of risk you describe is also challenging if we're to avoid prohibitive up-front fees for short-term loans. This is no doubt why true APRs for microloans are so much higher than the advertised nominal interest rates would suggest.

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Jim Wells
Jim Wells - Wellspring Consulting International - Fort Lauderdale | 26 May, 2015, 19:02

Critically important to remember that the population we are discussing deals primarily in cash. These consumers know precisely how much they have to spend and, more importantly, when they cannot spend. They borrow money only when needed as a conscious and considered decision. It is grossly unfair to saddle thess consumers with a financial instrument with the potential to drive them into debt by accident, no matter how well-intentioned the effort may appear to those who are more affluent.   

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Graham Seel
Graham Seel - BankTech Consulting - Concord | 26 May, 2015, 19:06

Yes, Jim, I agree. Hence lines of credit like an overdraft line need to be offered with extreme caution, and underwriting of individual loans needs to take into account ability to repay so far as information is available to support it. I suspect there is still a lot of work to do to come up with credit risk management models that protect the customer and the financial institution, while still allowing flexible loan products with acceptable pricing. Even defining what is acceptable pricing is context-driven and can't be easily generalized.

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Jim Wells
Jim Wells - Wellspring Consulting International - Fort Lauderdale | 26 May, 2015, 19:17

Graham - Banks have turned overdraft credit into a pernicious and predatory offering in industrialized countries. It would be cruel to allow banks to inflict this practice on the vulnerable population we are discussing. I believe the M-Shwari product, which encourages (requires) savings before one is eligible for credit, is a far more effective and humane way to introduce credit to this population. It neither encourages people to spend more than they have, nor allows them to go into debt by accident.  

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job title Principal Consultant
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Consultant to Fintech firms selling to, or partnering with, banks. Services include fractional Customer Success Executive, custom sponsored webinars, papers, etc.

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