04 Aug 2016
Financial inclusion is increasingly on the agenda of banking institutions around the world as technological advances increasingly reduce the cost of serving emerging-market customers — opening up a potentially significant growth opportunity for banks.
In the past, banks operating in emerging markets have not viewed unserved and under-served individuals or micro, small and medium enterprises (MSMEs) as profitable customer segments.
“Financial inclusion is increasingly on the agenda of banking institutions around the world.”
From an operational standpoint it just made more sense for banks to leave these segments to government agencies, nongovernment organisations (NGOs) or informal service providers, given banking services to these underbanked and unbanked groups tended to be low-end, unprofitable and costly to provide.
Now as income levels expand in emerging markets and fuel the financial demands of lower-income consumers, interest is on the rise.
New business models are being enabled by digital technologies, making it a practical reality for profit-oriented banks to provide more efficient and effective access to financial services. This gives banks a genuine reason to revisit — or, if one doesn’t already exist, craft — their financial inclusion strategy.
For banks across Asia-Pacific (APAC), EY estimates this to be a growth opportunity worth $A110 billion ($US88 billion) of boosted revenue in emerging markets by 2020.
Current retail bank account penetration across APAC stands at an average of 65 per cent. EY estimates this could increase to 74 per cent by 2020 through the introduction of greater financial inclusion measures.
Banks operating in China — by sheer virtue of the size of the market for both personal and MSME banking — have the greatest revenue opportunity from financial inclusion, estimated to be worth a collective $A79 billion ($US63.4 billion) by 2020.
Regionally, banks operating in Thailand, Vietnam, the Philippines and Indonesia can also benefit from providing more inclusive finance products and services — all with values that could add anywhere up to 20 per cent in additional revenues.
EY’s financial inclusion heat map
Banks’ financial inclusion growth opportunities will be the greatest in markets which embrace technology-led innovation and have a clear and supportive policy framework for financial stability.
On the technology developments’ side, mobile adoption, e-payments, national digital identity (ID) systems, open access to digital data and currency digitisation are all crucial considerations for banks wanting to tap into these markets. For instance:
• As mobile devices become more affordable and network coverage expands, digital connectivity of financially excluded individuals and MSMEs improves.
These channels provide greater convenience for customers at a lower cost-to-serve for banks, and have been instrumental in helping providers overcome challenges related to infrastructure and geography.
Moreover, digital technology can streamline the lending process, enable direct origination of loans and significantly reduce decision times, while also enabling greater transaction volume.
• Government-issued biometric ID programs are being explored by an increasing number of countries.
India’s Aadhaar system, for example, provides real-time verification of identities using a fingerprint scan, iris scan or digital face print. Among others, Aadhaar enables the direct transfer of government subsidies and unemployment benefits.
Banks could leverage such biometric ID programs to verify customers at ATMs or service counters, and widen access to financial services.
• Concepts, such as digital passport — a distributed mechanism for trusted and secure customer information exchange between multiple providers — would enable easier identification and vetting, help build credit histories, and make it easier for customers to switch providers by facilitating simpler know your customer (KYC) and onboarding processes.
Digital passport concept
A range of policy and systemic drivers in these markets will also be required to provide the necessary safeguards and incentives which enable banks and their financial ecosystem partners to innovate together and provide greater opportunities for the underbanked and unbanked. Some examples of initiatives we have seen so far include:
• Stringent consumer protection laws with strong transparency and disclosure, financial integrity, and effective recourse mechanisms for grievances to build trust in banks and encourage greater financial inclusion.
• Financial literacy education programs (initiated by banks or government bodies) to help individuals and MSMEs understand the value of having access to the financial system, and teach valuable money-management skills.
• Recognising onerous regulations can be a barrier to financial inclusion and, hence, governments should take steps to ease selected rules.
• Promoting collaboration, not competition. This is done through supporting a more diverse ecosystem (of not just banks but also NGOs, e-commerce firms, FinTechs, retailers and telecommunication companies) to provide diverse sources of capital for MSMEs plus make financial investments more accessible for lower-income communities.
Financial inclusion is not merely a corporate responsibility goal; it is a strategic growth opportunity for banks operating in the emerging markets in APAC.
Not only can it have a positive impact on financial institutions’ bottom lines but it’s also good for local economies and individuals. This is because inclusiveness tends to smooth income trends, grow local businesses, protect against natural and artificial disasters, and help individuals to save for important life events.
It is not just in-country banks which stand to benefit from greater financial inclusion across the emerging APAC markets. The reality is, if banks do not capture this profitable growth opportunity, other innovative institutions will.
Jan Bellens is the Global Emerging Markets Leader at EY
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
04 Aug 2016
15 Nov 2016