It is estimated that less than 30 percent of people in developing countries have access to formal financial services. The other 70 percent are not getting help from banks and other formal financial institutions to manage—as safely and efficiently as possible—the little they have or to invest to improve their livelihood options.
Financial inclusion has become a hot topic. The G20—a kind of global “steering committee” composed of the leaders of the 20 major developed and emerging economies—has put it on its agenda as a cornerstone of socio-economic development. Plenty of passionate conference delegates discuss how poor people would benefit from formal financial services. And a few brave banks and mobile operators are showing that new models are possible.
The topic deserves the attention it is getting: Four out of five people in Sub-Saharan Africa do not have any kind of connection with a formal financial institution. Formal financial institutions are simply not helping them manage their money, their business opportunities, and their risks.
But how serious are we all in making this happen? Many hurdles remain, but we would like to highlight two asks of regulators and two asks of financial service providers.
On the regulatory side, we are not going to succeed while government regulations make it difficult for poor people to register for bank accounts. If people want to initiate a banking relationship, they shouldn’t be hassled into bringing documents they don’t have and their bank shouldn’t be hassled into transporting and storing paper copies they don’t need. Of course, there are legitimate concerns about money laundering, but all those protections don’t need to kick in upfront when the risks are low. Give people first an opportunity to try the service with low amounts. Let clients present documents only after certain account activity thresholds are met.
We are also not going to succeed while banking regulations limit unnecessarily the range of providers who can contest effectively the market for poor people’s savings needs, or while regulations do not offer a level playing field across authorized providers. Financial exclusion arises when there is too little competition at the base of the pyramid. Mobile operators are now helpfully stepping in; regulations should allow them to play but without favoring them over banks. An explicit policy objective should be to increase the contestability of the market at the base of the pyramid.
On the financial service provider side, we are not going to succeed if providers do not move to a radically reduced cost model. That means escaping the fixed cost of branch networks with limited reach and offering customers mechanisms to access banking services beyond their own branches. It also means building much more scalable transactional platforms that are shared across multiple providers. There is a mass of transactions at the base of the pyramid, and providers wanting to tap into that will need to play an interoperable game.
We are also not going to succeed while providers do not have the sufficient confidence that poor people will be profitable and loyal consumers of a range of financial products. Banks need to be better at figuring out customer needs in a much more segmented basis.
If we overcome these obstacles, banking can become a mass-market service. There are so many products that reach every village and neighborhood throughout Africa. With today’s technology, there is no reason why banking products can’t join them.