Big banks expanding to world's poorest
LONDON -- When the Afghan government used mobile phones instead of cash
to pay some of its policemen, the officers thought they'd just had a 30%
pay rise. In truth, they had just been paid the full amount, with
nothing skimmed off by middlemen, for the first time.
A vendor displays his wares in a market in Mozambique. With the use of
technology, banks have been reaching out to the poor to give them access
to financial services. -- Reuters
This anecdote from the US Agency for International Development shows how
technological innovations such as mobile banking and biometrics have
helped integrate more people in emerging markets into the formal
financial system, opening up opportunities for banks willing to take a
chance.
While the market for more affluent and business clients becomes
saturated, providing the world's poorest with access to financial
products is an unmatched growth opportunity.
Half the world's adults, over 2.5 billion people, do not have a formal
bank account, according to the World Bank. In low-income economies, it
can be less than a quarter.
Many developing countries also offer banks the allure of a growing
working-age population and an emerging middle class.
"Twenty years ago, we spoke about the poor with a sense of futility, and
I think now when you talk about the base of the pyramid, more often than
not you're talking about markets and opportunities," said Michael
Schlein, chief executive of Accion, a non-profit organisation that
invests in microfinance institutions.
Between 2010 and 2020, the world's poorest 40% will nearly double their
spending power to $5.8 trillion from $3 trillion, according to Accion's
Center for Financial Inclusion.
The idea of providing the world's poorest with small loans was pioneered
30 years ago by Nobel Peace Prize winner Mohammad Yunus and Grameen Bank
in Bangladesh. Microfinance grew into a global industry with a loan
portfolio of $78 billion in 2011, according to data provider MIX Market.
Big banks, which suffered more than a little reputational damage of
their own during the crisis, realized they needed to go beyond
branch-based models to profitably reach such customers in a market
traditionally reliant on cash.
"The competition and the saturation in those (developed) markets are
getting higher and higher, so they have to look for the next wave, the
next area of possible profitable ventures," said Gerhard Coetzee, a
specialist at the Consultative Group to Assist the Poor, a think-tank at
the World Bank.
Citigroup launched a mobile payments scheme called Mobile Collect for
small stores in the Dominican Republic earlier this year, while
MasterCard teamed up with the Nigerian government in May to roll out 13
million national identity cards that double as electronic payment cards.
COMPETE OR COLLABORATE
Tapping the potential in the market of the unbanked requires alternative
business models.
Fragmentation makes it harder to achieve economies of scale, and banks
also have to overcome the hurdles of poor communications infrastructure
and the often non-existent credit history of many potential customers.
"Many banks think of the digitization opportunity around the world.
There is, however, a constraint, which is the whole issue of
infrastructure," Aigboje Aig-Imoukhuede, chief executive of Nigeria's
Access Bank, told a recent conference.
Another issue is competition. Banks' biggest rivals are not their peers
but rather mobile network operators and large retailers. Mr. Coetzee
says they face a difficult balancing act of rolling out competing
products and collaborating to serve a bigger chunk of the market.
Banks also need mobile network operators to allow their payment systems
to work across rivals' systems -- a commonplace in developed banking
markets -- if they are to achieve scale.
M-Pesa, Safaricom's successful mobile payment system in Kenya, benefited
from the telco's hefty market share to roll out its service, so it had
an in-built advantage. But that doesn't apply everywhere, Mr. Schlein said.
Bob Annibale, Global Director of Community Development and Microfinance
at Citigroup, also highlighted the importance of integrating different
payment systems.
"It is about that financial architecture... The bank payment system also
connects to the mobile payments system. If that becomes the norm, it's a
lot easier for us."
But getting competitors to collaborate is not easy.
"If you're waiting for the industry to come together and collaborate,
it's like asking the turkeys to vote for Christmas," a participant said
at the conference.
Clearing such obstacles could unlock huge rewards.
Barclays, which teamed up with NGOs Care International and Plan UK to
form the Banking on Change partnership, connecting village savings
groups with the formal financial system, estimated that $145 billion --
about a quarter of the Nigerian economy -- could be injected into the
global economy each year if all 2.5 billion of the unbanked were
included in the scheme. -- Reuters
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