UnbankedThe issue of financial inclusion, or the lack thereof, is a critical global challenge. Yes, we still have, globally, 2 billion plus people who are unbanked. These adults live in developing economies, though. In developing economies, only 41% of adults have bank accounts. African banking penetration is just over 8.5%. The key statistics related to unbanked populations and the limited access to banking services in developing economies, especially in Africa. Let’s break down the points in this blog post.
1. Unbanked Population: There are still over 2 billion adults globally who are considered unbanked, meaning they do not have access to traditional banking services such as savings or checking accounts. This is a significant portion of the world’s population that lacks access to essential financial tools. 2. Developing Economies: The majority of unbanked individuals reside in developing economies. These regions often face economic challenges, limited infrastructure, and barriers to financial services, which contribute to financial exclusion. 3. Banking Penetration in Developing Economies: In developing economies, only 41% of adults have access to bank accounts. This statistic highlights the significant gap in financial inclusion, as a substantial portion of the population remains excluded from formal banking systems. 4. African Banking Penetration: Africa, in particular, faces substantial challenges in achieving widespread financial inclusion. The statistic mentioned, with African banking penetration at about 5% at the end of 2014, underscores the urgent need for initiatives and innovations to expand access to financial services across the continent.Africa & MFS
I was recently interviewed by the “Africa Business Review Team“. The idea of the interview for them was to get some insight into the FinTech market in Africa. Almost all the questions were about the African market related to FinTech, mobile financial services, and banking services for unbanked people.
Driving financial inclusion (or “finclusion,” as I always call it) as a basic human right is my passion. I always drive and work to ensure financial inclusion is given and taken very seriously for every human being. I would like to highlight a few questions and answers in this post below. The full post can be read at the link below (Online Magazine).
Questions and Answers with Vinod Sharma
1. How can technology/MNO/FinTech companies remain profitable while keeping costs low for Africans?
Keeping costs low while ensuring quality is always a tough job, but making services available to large numbers of subscribers will help. Partnerships that leverage existing technologies and platforms will ensure sustainability and profitability, especially with disruptors. Sustainable use of technology (for example, virtualization and cloud hosting) will reduce CAPEX and keep Opex low.
The provision of an all-capturing ecosystem will ensure 100% reliance on the services being provided, which leads to increased usage and reduced service prices.
Most of the companies coming into the mobile payments space are actually coming in with little or no experience of the sector and often fail to provide a soulful touch and product to customers. Segmenting customers based on a few simple parameters (like age, potential earnings, and spending habits) will, therefore, ensure that business models are drawn properly and will serve relevant customers.
To date, a lot of solutions are coming to the table, but the question is: are we not producing too many solutions for which the problem does not exist? Providing too many services and new functionalities will not only confuse customers but also hurt company budgets and P&L statements. Companies should, therefore, launch products one at a time and give subscribers enough time to adjust to new innovations; new services should focus on lifestyle solutions to ensure more participants.
2. Could you outline any financial inclusion initiatives that are particularly noteworthy?
There are several initiatives in Africa that address financial inclusion. Finclusion, as I like to call it, is a basic human right for every human being. Mpesa in Kenya was the first large-scale initiative that completely revolutionized the market; it was this MNO-led model that led some people to call it a ‘virtual bank.’
EcoCash Zimbabwe is the second-largest model after Mpesa, operating in the same space. EcoCash has been spearheading financial inclusion through mobile money transfer services and a product suite that includes banking services, sending money across networks, remittances, and a savings club. The savings club allows communities to save as groups with minimal KYC requirements. This initiative has captured many communities, especially farmers and women, who now take advantage of the service to securely pool their savings.
3. MNOs/FinTech companies have threatened to leapfrog banks in some instances – is this a trend that is likely to continue?
Actually, the opposite is true. Banks that have embraced this trend have made gains because the service is complementary to banking. MNOs, FinTechs, and MFS companies have only optimized the practice of ‘banking’ and have not touched anything else.
First, the FinTech disrupters are cutting costs and improving the quality of financial services with the help of the latest innovative and renovating technologies, i.e., artificial intelligence and payment intelligence. Regulators, legacy IT systems, and branch networks are blessing auspicious FinTech companies in order to ‘Finovate’ (innovate). Capital is getting cheaper as a raw material. That means it can offer better deals to the borrowers and lenders who congregate on its platform. Half of the loan applications Funding Circle gets from small businesses arrive outside normal business hours. FinTechs take a machete to the hefty fees that banks levy to send money across borders.
Banks think of ‘banking’ as their lifelong partner, but this is no longer the case; it was the tight bind that central banks have had in the past that was keeping the status quo. Central banks have realized that it is time for them to loosen the knot between the bank and banking so that banking can breathe freely. So we can comfortably say that if banks do not accept the reality of the situation, we will very soon see retail banking consigned to the history books.
FinTech companies are making every possible use of technology and are bringing innovation to the market at a much lower cost without compromising security. FinTechs have brought concepts such as BaaP (Banking as a Platform) and BaaS (Banking as a Service) and are exploiting these to the highest possible level.
In the future, people will require banking, but not the banks themselves. MNOs and FinTechs have brought banking right into the palm of the user, and this brings so much convenience and cost savings on the part of the customer. It is up to banks to partner with MNOs and FinTechs to provide the underlying financial support services, such as treasury functions.
4. What are the challenges, if any, of convincing Africans to use technology and become ‘banked’ for the first time?
Banks have always positioned branches for certain groups who are considered to be doing well in society; some have turned away customers who are unable to raise the minimum deposit. Banks look at customers in terms of costs, and unless this perception changes, it will be difficult for them to serve both rich and poor.
There is a need to convince people to change from the current technology to that of the future. This is a particularly big challenge, as there is a need for extensive marketing, product promotion, and education. Upcoming technology relies mainly on smart devices and high-speed networks, which are mostly absent or inaccessible in most African markets. New technologies are usually expensive for African consumers due to macroeconomic, regulatory, and political factors that affect the technology adoption rate.
Adoption among Africans is generally high in terms of technology, especially among youths; if technology innovation is targeted at youths, there are minimal challenges. The major challenges will come if the target group is over age 45; they require time to adapt and lots of training and education in order to change from the status quo.
Accessibility is a critical success factor for any service. The role of informal institutions in providing financial services to the members of the community concludes by highlighting the opportunities these present for formal financial service providers, but in order to ensure accessibility of banking services, a bank has to have a wide branch network of fully branded brick-and-mortar marble banking halls with all the necessary security systems. The setup costs of these are so high, and to recoup the same, the bank has to pass on the cost to the ultimate consumer.
MNOs, on the other hand, have embraced the concept of an extensive agent network at a minimal cost. The MNO agent network is usually dense, with at least one agent for every 1km radius. Usually, the cost of setup and signage is borne by the agent itself in a bid to be more visible and to attract more customers, as revenue is highly dependent on the volume of transactions pushed by the agent.
A subscriber does not need to travel long distances or fork out any money to access an agent and perform agent-centred transactions. Due to the nature of the business, MNOs have excelled in the “24×7, around the globe, use me” phenomenon.
This assures timeless and borderless access to services, which provides ease of use, more transactions, and higher revenue for the MNOs. Banks, on the other hand, have limited operating hours, and for those who have utilized technology by diffusing access to service from banking, halls have a great limitation of country borders. MNO makes money on transactions, but banks earn money when money remains in the account.
In order for any business to thrive, it has to observe a wide cost-to-revenue ratio; however, banks are subject to a high customer acquisition cost of $10 to $100 per customer, whereas MNOs stand at between $2 and $10. This acquisition cost has a ripple effect on the charging structure throughout the life cycle of the relationship between the bank and the customer. Naturally, when the cost of customer acquisition is high, the resultant transactional cost will follow the same trend.
The cost of transacting on a banking platform is very high compared to transacting on a mobile money platform. MNOs’ interest in retaining subscribers is greater than banks by giving services that may or may not generate revenue and always trying to run promotions around the same to win them back.
Points to Note:
All credits, if any, remain with the original contributor. The points covered in this interview were focused on MNOs, FinTechs, and banks’ styles of banking services. As banks and banking are no longer married, if a customer gets better banking services from MNOs or FinTechs, then why would the customer say no? I have also explained all the basics around the myth of mobile payments, its models, and the importance of quality service implementations, usage, and practice experience for markets.
Books + Other readings Referred
- Research through open internet, news portals, white papers and imparted knowledge via live conferences & lectures.
- Lab and hands-on experience of @AILabPage (Self-taught learners group) members.
Feedback & Further Question
Do you have any questions about AI, Machine Learning, Telecom billing/charging, Data Science or Big Data Analytics? Leave a question in a comment section or ask via email. Will try best to answer it.
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Very informative.