By Tilman Ehrbeck
The ability to access and use financial services is critical to managing day-to-day life, weathering unexpected events, and capturing opportunities. Yet, some 46 percent of working-age adults in developing countries remain excluded from the formal financial system. That doesn’t mean they don’t use finance. It means they use the age-old informal mechanisms such as the moneylender, the pawnbroker, or the rotating savings club that can be unreliable and very expensive. In developed countries, working families are more likely to be under- or badly served rather than outright excluded. In the US, for example, every year some 25 million households use alternative services such as payday lenders or check cashers. And research suggests that more than half of American households are not able to reach financial health goals, such as saving $2,000 to make up for an income loss in case of an emergency.
Technology-enabled, 21st century insights and business models can make a huge dent both towards financial inclusion in developing and household financial health in developed countries.
Imagine a world where your financial life is aggregated by a trusted party and all information is neatly summarized in a smartphone app; where your cash flows are optimized to avoid penalties or late fees, and built-in credit is available should there be a temporary need to manage a bigger expense; where intelligent algorithms based on Nobel Prize-winning insights help you save for retirement or a rainy day and make you pause before indulging in an ill-timed impulse purchase. Such a world could reach far more people with a far superior value proposition at far lower costs.
While nobody has pulled it all together yet, the key building blocks exist around the globe to capture this opportunity: User-centric, individualized, technology-enabled retail financial services that create long-term, trust-based customer relationships and help people improve their lives.
At the foundational level, some 950 million people in India have gotten unique, biometric IDs using iris scans and fingerprints under the government’s Aadhaar Program. The Indian Banking and Securities regulators are now allowing use of Aadhaar-based identification for the set up of new bank and investment accounts. This makes account opening convenient, instantaneous, and coupled with digital contracts, crushes costs by an estimated 75 percent relative to the previous, signature on paper-way.
Instantaneous connectivity dramatically accelerates reach. In Kenya, the largely unknown and small Commercial Bank of Africa (CBA) partnered with the dominant mobile telephone provider, Safaricom, and its leading mobile money service, M-Pesa. Because of the easy digital connection, M-Pesa users could become instant savings account holders, and and within 24 months CBA became one of the largest retail banks in the country based on the number of accounts.
Digital bank-to-bank account connections make payments cheap and fast. The National Payments Corporation of India (NPCI) enables SMS-based payments at negligible cost. Average transaction fees are about 7 cents (5 INR) for transfers on any amount up to $1,500 (100,000 INR). Settlement is immediate. NPCI is now introducing an open interface that will allow users to make instant, “any-to-any” payments — that means between wallets, banks accounts, prepaid cards, and other instruments — without the need to reveal account or card details. The power of digital connectivity to fundamentally change convenience and economics is also evident for international remittances. Without any bitcoin wizardry, a number of startups offer international remittances using the digital account-to-account corridors for well under 1 percent transactions fees.
Digital transaction data unlocks small credit. In emerging markets around the globe, there are at least one billion adults without a traditional credit profile such as a FICO score in the US. Big data innovators are using mobile phone usage, social media activity, and browser history data to help establish creditworthiness for low- and middle-income consumers in emerging markets. Their algorithms increase access and help price credit risk to “thin-” or “no-file” consumers around the world. In Kenya, the CBA/M-Pesa partnership provided over 20 million such small denomination loans to 2.8 million borrowers in the first two years after starting operations.
The digitization of retail financial services also allows for better advice. In Colombia, for example, financial services startup Juntos worked with Bancolombia to help improve savings via SMS-based, targeted customer engagement. The interaction increased account balancesby 50 percent and activity by 32.5 percent. In the US, we are seeing personal financial management tools or robo-advisors for mass-market investment management, and other markets are working on similar concepts.
It is only going to be a matter of time before the first financial services providers in the most conducive market environment will put all the existing digital building blocks together to deliver a vastly superior, comprehensive consumer value proposition.
In the developed world, the UK is poised to get there first. British regulators are keen to have neo-banks compete with the small group of big, traditional banks, and have issued the first set of licenses to two digital-only, mobile-first challenger banks, including Tandem Bank, which is preparing to kickoff operations later this year. The UK’s faster payments inter-bank infrastructure allows for near real-time settlement. The government is working on an open-API regime within the financial services industry, which would allow consumers to have their financial data easily consolidated with a provider of their choice in a secure, regulated environment.
Financial services are central to people’s lives. They are needed to better manage day-to-day affairs, and they are crucial to protect from downside risks and to capture long-term opportunities. Traditional financial services have left too many working families behind. Opportunities abound for technology-led business model innovations, soft infrastructure investments, and smart policies to come together to create a promising new paradigm, where better financial services can help more working families achieve healthier financial outcomes at lower costs.
Omidyar Network is an equity investor in both Juntos and Tandem.