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Banking the unbanked

Microsoft just launched its latest Cloud advertising campaign.

Happily, it's a campaign featuring Temenos or, more specifically, the great work we're doing together with Microsoft to extend financial inclusion across the world.

Below is some background to the campaign, to the issue of financial and some details on how technology can – and is – solving this global problem.

The campaign

The journey to this campaign started with a coffee in 2012. My colleague Murray Gardiner briefly met Satya Nadella, then EVP of the Cloud group, at a Microsoft conference in LA. He explained the pioneering work that Temenos and Microsoft were doing to bring core banking software to Mexican microfinance institutions using the Azure cloud. And Satya remembered! When the possibility arose, Satya suggested that Microsoft run a cloud campaign on financial inclusion.

And so in October last year, a camera crew took over our London office to record the TV advertisement. And then they flew off to Myanmar to film with our client Fullerton and its customers.

The resulting campaign - covering TV, digital, print and out of home – will bring great exposure to our work, but also to a very important global issue.

Why does financial inclusion matter?

There are 7.3 billion people in the world, of whom roughly 4.8bn are adults. However, only 2bn adults have access to financial services. That is, more than 40% of the world's adult population has no access to banking; an issue disproportionately affecting the young, the poor, the poorly educated and people living in rural areas – as well as developing economies.

This matters because, while we might sometimes love to hate bankers, a well-functioning banking system is critical for sustainable economic growth and wealth creation. People need a safe store for their savings. And a banking system is needed to match these savings with the needs of borrowers who need credit to acquire income-generating assets. Those assets can be tangible such as livestock, or intangible such as education.
This is how the microfinance industry came into being: to provide small amounts of finance to those who would otherwise be excluded from financial services, and so foster economic development.

Why can't financial services be offered to everyone today?

The issue is very much on the supply side. People want financial services, but financial groups aren't able to offer them across the right channels and at the right price point to meet that demand.

There are demographic factors at play, chiefly around low population density and large rural populations, that make it difficult for banks to build profitable branch operations to service these needs.

But the bigger challenge is around the size and frequency of transactions. If I borrow $10,000 to buy a new car and the bank's administrative costs are $100, or about 1%, that is not that material. If, however, I borrow $100 to buy some tools and the administrative fee is $100, then there is a problem. Typically these types of loans tend to have much shorter durations, raising distribution costs further. So interest rates tend to be high and formal banking becomes prohibitively expensive for billions of people.

How is technology helping to bank the unbanked?

There are two key technologies that are resolving this supply side issue.

The first is mobile. Mobile technology removes the need for physical distribution. Your cell phone is your bank – meaning you can bank anytime and anywhere, even if you live in the most remote rural locations. And mobile penetration rates are dramatically higher than banking penetration rates. Today in sub-Saharan Africa, 88% of people don't have a bank account but only 31% don't have a mobile. So, mobile technology can help solve this problem – and do so now.

The other technology is cloud – or more accurately modern software running in the cloud. By automating processes, eliminating errors and so on, modern banking software enables financial firms to lower IT costs and to extract economies of scale from technology as they grow. The cloud takes this to next level, allowing these applications to infinitely scale with low overheads. By enabling firms to share IT infrastructure costs, the cloud lowers costs for all.

The use of the cloud in microfinance is still nascent, but based on our experiences so far, we see that by lowering infrastructure costs it can lower the cost of borrowing to the end customer by more than 90%

Change is exponential

Temenos has been involved with the microfinance industry almost since it started in 1993. Over that time, working with our clients, we have made great progress in banking the unbanked.

But the progress is exponential. It took Temenos 20 years to bring banking to 10m people. With the help of advancing technology, it took us 2 years to bring banking to a further 10m people.

Financial exclusion is a solvable problem – and it is fast being eradicated

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