WSBI’s Natalie Staniewicz and Ian Radcliffe share insights in News & Views magazine insight piece
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BRUSSELS, 19 December 2017 – Around 2 billion people worldwide do not use formal financial services and more than half of adults in the poorest households are unbanked. With one in two in the financial desert, the financial inclusion challenge is real and pressing. Access to useful, needsfocused and affordable financial services delivered in a responsible and sustainable way is a key enabler for day-to-day living, planning for a rainy day and opening up long-term prospects.
The stark figures have put financial inclusion on the radar among policymakers around the world. It has surfaced as a top international policy issue to help address social-economic development, slash poverty and grow economies, especially in the aftermath of the financial crisis.
The policy discussion has grown, with financial inclusion being adapted as a key development pillar at the Seoul G20 agenda in 2010 as well as a topic of a World Bank initiative launched in 2013 “to provide universal financial access to all working-age adults by 2020.” WSBI is a strategic partner to the World Bank Group in their 2020 goal of Universal Financial Access. As a global savings and retail banking organisation – representing approximately 6000 banks in 80 countries – financial inclusion is at the core of WSBI’s mission and membership has pledged the aim to reach 1.7 billion customers and an additional 400 million new transaction accounts by the end of 2020.
Financial Inclusion encompasses many challenges and opportunities nowadays. In this article, we examine two themes. First, there is a pressing need for industry to find an even stronger business case to tackle the financial inclusion challenge. Second, innovation and digitisation can drive down costs and reinforce customer proximity to give better access to basic financial services. Digitisation is an essential support in reaching out to people worldwide who currently have little or no access to financial services.
With a vast number of potential customers remaining excluded from financial services and unbanked and underbanked clients representing a $380Bn market opportunity (Accenture) – what does this mean for banks on the ground? Banks know that to have a viable business case, one number matters:1 million. At least 1 million or more active customers in a market.
That can be a challenge for banks in developing or emerging countries, especially with branches concentrated in rural areas. Opening an account is one thing, but making sure the accounts are used is quite another. At least 50 per cent of all accounts worldwide are dormant. In countries like Indonesia the number could be as much as 70 per cent.
The dormant and underbanked figures are troubling. It is not just banks facing this problem. Mobile money, now available in 93 countries, is the fast-growing delivery channel in so many countries. But on the global mobile front, we see a troubling trend: two-thirds of all mobile money accounts are dormant. The question thus remains how to activate these dormant customers.
Despite this data, mobile payments can help migrate the 2 billion unbanked into an account. But an account needs to be used. There are 1.3 billion adults – roughly equal to the population of China – with an account in developing countries still paying their utilities bills in cash. This is low-hanging fruit that should be picked by banks and their customers.
WSBI’s mantra for financial inclusion is: usability, affordability, accessibility, sustainability. Affordability is a major challenge. In the poorest countries, the maximum that the unbanked poor have available to pay financial charges is probably $1 per month which is one day’s household expenditure per person per month.
How can a financial institution sustainably deliver 3-5 transactions per month within this affordability envelope? This is where extending the word “financial inclusion” to “digital financial inclusion” comes in place.
Digital financial technology – so called “FinTech” – can help further bring down costs of financial services, make the provision of financial services more efficient, fast and widespread and can provide means to understand the customer better thus strengthening access to finance for the unbanked and hard-to-reach.
Banks should not only focus on extending branch and agent networks to rural areas but there is a great need to better harness digital strategies and use technology to connect with the unbanked.
Mobile financial services can allow convenient access even to remote areas, digitising payments can extend use of transaction accounts, digital IDs can allow an easier access to opening accounts. And if banks cannot still come up with a business case, it would be wise to partner with others to help make it happen.
Technology is not a means on its own. It should be used to provide affordable, easy to use, secure and easy to understand services. Technology should be applied to follow the customer journey – meaning being customer centric and providing customers with services they need at each part of their financial journey. Innovation thus entails a partnership between human contact and technological means. It is not only about following IT or the industry, but about taking into consideration the best solution to provide the most convenient and secure service for clients by bridging the physical-digital gap.
We have heard a lot about mobile banking and mobile money in the past, but there are a few new developments which will have a deep impact on access to finance.
Take Artificial Intelligence (AI) and big data analytics. A very important development in financial services is using both – specifically via machine learning – to optimize the collection and use of customer data. Understanding the customer is critical, particularly demographics and topographical distribution. Gathering and analysing data is essential; including big data analytics from unorthodox data sources, such as social media or mobile phone data.
WSBI has been successful in correlating customer mobile phone usage patterns with savings behaviour, which is useful in supporting customer segmentation and marketing approaches, as well as product design.
By combining AI with Big Data, institutions can aim to achieve much. They look to lend money more profitably to otherwise underserved segments of the population and acquire new so-far-not-reached or underserved customers. They also look to provide solutions based on current needs as well as past interactions and improve and “rightsize” the customer experience by understanding customer needs and segments. Weaving AI and Big Data also shows promise for banks to drive efficiencies with automation and thus slash costs. Banks can invest even more smartly in the retail branch network and make better decisions based on customer habits and needs. Banks also seek to improve Risk, Fraud and AML/KYC analytics.
Partnerships work too. Contrary to the popular narrative, many financial institutions view FinTech start-ups as partners in innovation, not threats to their core business. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institutions with help from FinTech partnerships. Such cooperation can help gain access to new market segments, create new offerings, extend data collection or deepen customer engagement and product usage.
The glue that brings partnerships to fruition are APIs - Application Programming Interface. The API ecosystem – which allows third parties to connect to an enterprise’s systems – brings benefits to developers and customers. The API world can make it easy to facilitate interoperability and jump legacy systems at low cost. APIs allow new applications to be built on top of pre-existing products, thereby capitalising on the product’s existing customer base.
APIs can support open banking, including the offering of products and services developed by outside organisations. A strong API is the key to becoming a customer’s ‘banking concierge’ offering the best available services in the market place. Open platforms and open APIs hold the potential to facilitate development of and access to a broad range of products and services, and thus enhance financial inclusion.
In Europe, fostered by the Payment Services Directive 2, or PSD2, APIs are becoming common interfaces and banking-as-a-service platforms. The trend towards open architecture is growing in markets outside of Europe too.
The digital banking potential is unquestioned. So, what can policy do to help support digital financial inclusion? Governments must create an enabling framework. As things may move very fast in the next 5-10 years, legislation needs to keep up, and it must be technology neutral.
Ensuring customer protection and privacy while avoiding undue burdens must be kept in mind. The role of policymakers should not be to issue constraining legislation – which would limit innovation to a narrow spectrum of opportunities – but to ensure that innovative solutions always fully comply with the existing regulatory framework, so that technological disruption in the financial sector does not produce negative effects for both consumers, investors and the market itself.
Legislators need to make sure that everyone has a valid identification document, and a low-cost, accessible means for customers to be authenticated. Policy should support the industry to onboard people digitally. This will involve the FATF and other institutions in the KYC, AML and e-ID sphere.
A level playing field is of importance: FinTech means “Financial Technology”, thus an activity not a specific entity. FinTech is thus being fostered and done by banks just as much as startups, IT companies or third-party providers. The business models of financial service providers need to be respected whilst at the same time ensuring that competition law is enforced.
Finally, increasing citizens’ financial and digital literacy and capability is of utmost importance.
The digital financial inclusion journey starts with a quote from the late Steve Jobs, who once said: “Creativity is just connecting things”. Thus, new technologies and new ways of doing business can extend ways to connect entities, services and data points and thus reach broader segments of the population with financial services. Banks and their partners, policymakers and customers have to make sure to embrace the potential of digitisation and innovation.
The next edition of News & Views will be available later this month.
>> See WSBI's commitment to UFA 2020
>> WSBI-ESBG position on anti-money laundering