Financial Inclusion

Financial Inclusion

Can banking the poor be profitable?

Over the past decade increased emphasis has been placed on the importance of “financial inclusion” in poverty alleviation and overall economic development. The World Bank estimates that there are 2.5 billion adults around the world without access to a formal bank account (see World Bank Infographic on Financial Inclusion), most of them poor people in developing countries, especially in rural areas.  Their lack of access to formal banking services – whether to save, borrow, or simply transact – makes them more vulnerable to income fluctuations. Worse, it exposes them to losses from fraud and theft, or exploitation by unscrupulous money-lenders.  Many Emerging Market governments would therefore like to see the commercial banks doing more to serve the poorer unbanked segments of the population.

But does this make commercial sense for a bank, or should banking the poor be seen only as part of its “corporate social responsibility” activities, rather than a sustainable business proposition in its own right?  The answer is that banking the unbanked CAN be good business, but only if a bank makes the effort to understand and overcome some of the unique challenges of providing banking services to the poor.

There is no doubt that in many countries the potential size of the market represents a huge opportunity. Other attractions for banks are:

» Lower volatility of the deposit base (many small deposits rather than a few large ones)

» Lower price-sensitivity, e.g. for micro-loans

» The opportunity to benefit from Government policies – e.g. for distributing social payments and pensions\

» The creation of a positive CSR image, from being seen to serve the less privileged.

But how can a bank address this market successfully and profitably?

The starting point, as in any business, is to understand the customer. The unbanked are not a homogenous group, and like all customers they fall into a number of sub-segments depending for example on where they live, their occupation, age, gender, role in the household, and income level. Some of these sub-segments will be easier to reach than others, and may be more likely to provide the kind of business that the bank is seeking. So doing the necessary research to identify the “hot spots” in this market will dramatically increase the chances of success.

Other issues that a bank will need to give careful thought to include: 

1. Delivery/distribution model: This is often the biggest challenge, especially if trying to reach poor rural communities. The high cost of traditional branches makes them uneconomic for small numbers of low-value transactions. Yet one of the most important factors in banking the poor is making the service easily accessible to them. Fortunately, modern technology offers many potential solutions – e.g. the use of agents equipped with POS terminals, or partnering with mobile network operators.

2. Regulation: Rigid AML/CFT rules, and sometimes difficulties in obtaining unambiguous customer identification, can create an unwelcome administrative cost burden. But regulators are gradually becoming aware of the importance of flexibility in how regulatory rules are applied to very low-balance accounts.

3. Operational: Poor infrastructure in rural areas, the risks of cash transportation, and the capacity of IT systems to cope with increased customer numbers and transaction volumes all need to be taken into account.

4. Products and pricing: There will be a need to develop loan and deposit products specially tailored to the needs of the poor, at prices they can afford.

5. Credit policies and processes: If the bank intends to provide micro-credits to poor customers, then it will need to adapt its credit processes to cope with the needs of a very different market – i.e. small short-term loans provided with no tangible collateral.

6. Cultural: Finally banks need to ensure that their staff have a positive attitude, so that poorer customers do not feel alienated or intimidated. 

None of these problems is insurmountable, and there are many examples of banks who have shown that financial inclusion can be good for business as well as good for national development.

Is your bank working to attract the unbanked, and penetrate the poorer segments of the mass market? What challenges have you faced or overcome? Or do you feel that the problems outweigh the potential benefits? We would welcome your comments and views on this important topic.