SIBOS Day Two — Figuring out how to profitably serve the Underbanked

The ability for a bank to serve the ‘unbanked’ might just be a contradiction as there may be a very obvious reason why banks haven’t served them to date – possibly, they can’t profitably serve this segment. So the better question is, what is required to serve this segment?

A question all startups face as they establish themselves is “What is your business model?”What the questioner is trying to understand is what are the forces that will allow you to sustainably grow your business.

For banks, a very succinct answer might look a little like this…

Banks broadly make money by earning the interest differential between what they pay on the deposits they receive and what they earn on the loans they make to customers. They additionally make money by earning fees from services provided including transaction execution, advisory and management. These can be applied across customer segments and across channels.

At SIBOS 2015 Singapore, and especially when we think about the developing and emerging economies of Asia Pacific, Financial Inclusion (which we call the Underbanked market on Daily Fintech) is a very hot topic. We often hear about the circa 2.5 Billion people who are ‘unbanked’ and do not have access to quality financial services.

But of course when we think about this more, the unbanked can easily extend to young people (aged less than 18, the common age before credit can be offered to minors), those who cannot work for reasons such as disability or those with a tarnished history incompatible with the narrow parameters firmly held by a very old credit scoring industry.

Whether poor or disadvantaged, if you cannot pay the interest income on credit or the fees, there has not really been an interest by banks to offer services.

And compounding this unfortunate exclusion has been the rising wave of regulation aimed initially at fraud and now extending to anything remotely linked to terrorism, even by association of country. New regulations on KYC (Know-Your-Customer), AML (Anti-money Laundering) and more recently establishment of new bodies such as FATF (Financial Action Task Force), an independent inter-governmental body that develops and promotes policies to protect the global financial system against terrorist financing

On the SIBOS Day 2 Innotribe panel on Financial Inclusion, we heard from some leading thinkers in the space. There was a mix of optimism and enthusiasm that the industry could innovate its way profitably into this segment. However, there were also concerns, due to the compounding strains on banks, whether this was a realistic expectation.

I want to present some options that could promote inclusion by developing a new business model that could sustainably serve, initially, some of the huge unbanked populations (note that almost all examples will involve a mobile device to reach the customer):

1) Smart credit profiling – The banks are losing ground very quickly to new innovative online credit services, FinTechs, who are able to rapidly use widely available digital profile information to intelligently determine credit worthiness. Facebook was a suggested digital identity platform and with biometic idenitfiers. New startups in this space were well represented at SIBOS with Kreditech, Iwoca, Cignifi and Modeall presenting their new capabilities, and opening up financial services to various customer segments. But as was wisely pointed out, they have yet to see a down cycle so the jury is still out. Notwithstanding, better credit profiling will open financial services to a larger population.

2) Micropayments and alternative low-cost payment systems – Broad industy innovations can lower the cost of financial services to increase access to those on the lower, but maybe not bottom, segments. New peer-to-peer models mean that capital can be transferred to pay those who deposit and charge those who borrow much more efficiently without the intermediary earning the “interest differeniatial”. Also enhancements to payment systems include new distributed ledger systems that bypass the archaic payment systems operated today by incumbant payment service providers.

3) New business models – A saying that has often been quoted in startup world goes, ‘if you’re not paying for the product, you are the product’. That may not be such an unethical outcome if socially responsible companies are able to deliver new inclusive services such that customers can access and suppliers are able to create a profit. Some examples include Nextbillion who provide Mobile Movies to show movies and educational content while collecting data to document positive impacts. Another is Wobe who provide an App for women in rural Indonesia to earn commissions from reselling mobile phone credits. While these are isolated examples, they are indeed setting a precendent for creating self-sustainable business models to serve what we describe as being ‘unbanked’.

So question is not how can banks serve the unbanked, rather, what is the optimal business model to serve this segment to improve the welfare of this excluded segment. This could involve Banks, FinTechs, TelCos, or maybe even someone else.

By Ravi Patel