The recent report, The Business of Financial Inclusion: Insights from Banks in Emerging Markets represents a new endeavor for the Institute of International Finance (IIF). It is based on the insights of 24 executives in charge of financial inclusion, a topic of growing interest.
The Center for Financial Inclusion, our partner in this report, correctly uses the best of the many definitions of financial inclusion, including those of the World Bank and similar multilateral institutions. They define financial inclusion as “the percentage of the population and businesses that use financial services.”
Based on this definition, the World Bank stresses that access to a checking account is the first step to accessing the financial world, but behind this lies something much more important: the correct use of these products and services. This will not occur, however, if these products do not possess the expected quality in terms of price, convenience, simplicity and security. These characteristics also act as barriers in the sector.
Financial innovation is not taking place in wealthy countries, but in emerging countries
In the two years I have dedicated to this issue, starting with my position at the IIF in Washington, D.C., I have seen why companies like BBVA have so much to say on the matter. It is no coincidence that I myself am a BBVA secondee. BBVA has a division dedicated exclusively to financial inclusion based in Mexico, a prestigious research team focused on financial inclusion, a financial education program and policy coordinated by Responsible Banking and a BBVA Microfinance Foundation whose impact and size can only be compared to the largest microfinance organization in the world, Brac, in Bangladesh
Here are my conclusions included in the report, which is based on 24 in-depth interviews with leading banks working on financial inclusion in emerging countries like Mexico, Peru, Colombia, Brazil, South Africa, Ghana, Kenya, India, China, Bangladesh, etc.:
First reading: financial innovation is not taking place in wealthy countries, but in emerging countries. Kenya, Mexico, Colombia or India have digital money while Spain and the U.S., where 98% and 94% of the population, respectively, have a checking account, do not. I have seen my Rickshaw (tricycle, tourist attraction in Bangladesh) driver in Dhaka pay for two sodas with a basic cell phone from 20 years ago. The technological miracle is called bkash, the largest supplier of mobile money in the world (Brac Bank’s platform supported by a large investment from the powerful Gates Foundation as part of their appropriate goal to digitize in order to make access to financial services universal). By the way, I can’t do this in Washington D.C. with my smartphone. What a contradiction!
Second reading: financial inclusion is no longer first credit, then savings and then everything else. Now, everything starts with payments and transactional accounts. Savings, insurance and pensions follow.
Third reading: financial inclusion is more about limited access to banking services than no access to banking services. Nearly all banks start with low income customers in emerging countries earning less than $500 a year. It’s all about informality and less about poverty.
Fourth reading: financial inclusion is also poverty and the base of the pyramid. This is evolving, especially through microfinance, as is the case of the international leader in financial inclusion, BBVA Microfinance Foundation, together with BRAC – the largest NGO in the world, based in Bangladesh with 150,000 employees and even its own bank. Even the World Bank, through its private branch, the IFC, estimates that this current market of 300 million people will increase five fold over the next five years. And even more so with the technological revolution created by the “tablet office” making it possible to gain ground over official credit lines.
Creating a digital ecosystem that makes it possible to bring the age of opportunity to everyone is fundamental
Fifth reading: financial inclusion currently starts with bank correspondents, the small stores where you can perform basic transactions like depositing and withdrawing money, open accounts, etc. This model that is so extensive in Mexico, Peru, Colombia and India represents a true revolution to improve the population’s access to financial services. Proximity, security and price are the keys to using regulated financial services. A regulation that should seek to include and protect everyone.
Sixth reading: digitization is critical to gain volume and scale. For example, in emerging countries, digitization of public assistance called conditional transfers (pensions, food assistance, education assistance, etc.) is essential. According to the World Bank, more than 1.3 billion people still pay their water, electricity or phone bills in cash.
Seventh reading: customer identification is critical. Regulators call it “Know Your Customer”, KYC. 20% of the world’s population is not included in any census and this separates them from financial inclusion. There are still two billion people around the world that are not part of the financial system and this directly affects its stability, financial integrity and consumer protection.
But there are already success stories that allow us to conclude that the solution is underway. For example, I have seen for myself how poor, illiterate people in India opened a checking account by putting their fingers on a digital scanner that cost less than $5. The scanner is Aadhaar, a massive, cheap and safe digital fingerprint identification system that can create 12 digit checking accounts. It is hard to believe that the agent was a distributor of grain and kerosene for cooking and that just one room held his bed, kitchen and the agency he managed – an establishment representing a bank and trusted by his community. Similarly, the largest bank in the world in terms of offices, the State Bank of India, has 50,000 operators around the country using this system. These practices and government policies that promote the use of these accounts have an enormous impact. Banks need to find the cheapest and most viable way possible of increasing access to banking services without losing money. This remains a challenge but all those interviewed expected to reach the break-even point very soon.
Finally, there is no single solution for financial inclusion as it depends on the social, economic, regulatory and technological environment.
It is clear that cash is expensive (approximately 2% of GDP) and anonymous. Therefore, the future is digital. Initiatives like Bkash or BIM in Peru allow me to be optimistic but I am convinced that banks should take advantage of this trend to also engage in cross-selling.
This entails addressing questions regarding the use of consumer data so that financial or telephone suppliers can have a customer record that allows them to improve their products, ensuring they are useful, of good quality, cheap, appropriate and adapted to very particular financial needs. We are talking about a nearly $400 billion potential market. We are talking about a transactional market, a market with small margins and huge volume. We are talking about a market of unstoppable digitization in countries with nearly 100% cell phone penetration yet less than 40% of the adult population has a checking account. We are ultimately talking about including everyone and benefiting everyone in this financial inclusion business.
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