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Digital disruption - more than an opportunity in inclusive banking

By Murray Gardiner 19 Apr 2018

Getting access to basic banking services is challenging for many.

According to The World Bank, an estimated 2 billion adults worldwide don’t have a basic account. Many more are underserved. And the issue isn’t just from a personal banking perspective; more than 200 million formal and informal micro, small and medium-sized enterprises (MSMEs) in emerging economies also lack adequate financing to thrive and grow. The World Bank Group has put forward an ambitious global goal to reach Universal Financial Access (UFA) by 2020. To achieve this goal (and profit), new financial players, including Fintechs, realise that digital is the answer. But why? And how can banks compete with these new, nimble players?

Accessibility supported through online relationships

Location and opening hours can be a hindrance. Operating branches remotely is costly and inefficient, relative to the value of the transactions and the inability to scale. However, with mobile banking, a retail branch is less essential (once the bank account is open). Banks are starting to realise this; making banking and payments services available through digital channels and social media. For example, in Nigeria we are seeing some traction here; in January 2018, UBA launched ‘Leo’, a “chat banker” allowing customers to open new accounts, receive instant transaction notifications, check account balances, and transfer funds via Facebook Messenger. Customers can also confirm cheques, pay bills, apply for loans, freeze accounts, and request mini statements. Similarly, in December 2017 Ecobank launched the Ecobank Xpress Account. The account can be opened via Ecobank’s mobile app for smartphone users or via US$ for feature phone users with no account servicing fee.

This approach to utilising mobile (often with Artificial Intelligence and on-line access) is now being adopted by commercial banks to minimise the need for face-to-face interactions. Commercial banks are now utilising video, screen-share and even live-chat assistance which offers instant and easy access, saving time and money on travel for more high-value accounts and mobile almost exclusively for transactional banking. In general, digital services can increase interactions due to the greater ease of communication, and, in turn, boost retention and cross-sale rates.

Addressing issues with Mobile Money services

Some banks have looked to Mobile Money services (such as M-Pesa) as a quick fix to offer digital services. Going beyond just payments performed from a mobile phone; to offer a limited range of other financial services. With a well-developed agency network, or access to a national switch for non-card present ATM access, allowing users to access their money anywhere, and at any time, without the need for a traditional bank relationship, providing financial access for the lower-income population. When associated with a bank, it can be the first step in developing a bank relationship and establishing a credit rating. Successes include the Commercial Bank of Africa’s (CBA) strategic partnership with mobile network Safari.com to launch M-Shwari in Kenya, a revolutionary mobile-phone based virtual banking platform.

On the other side of the globe, in Asia, services such as GMobi’s Oxymoney in India and Coins in the Philippines are also using Mobile Money to address the 31% of unbanked adults in East Asia and the Pacific and 54% of unbanked adults in South Asia. These channels are set to be instrumental within the region which still has a long way to go in terms of financial inclusion. In fact, according to a recent report by EY, Innovation in financial inclusion: Revenue growth through innovative inclusion, ‘banks across Asia-Pacific are yet to maximize the growth opportunities of financial inclusion, with the potential to boost bank revenues in emerging markets across the region by US$88b by 2020’.

Yet, despite the success of offerings like M-Pesa and the ubiquity of Mobile Money, there are some countries who have failed (so far) to fully exploit the opportunity. Replicability of the model can depend on the regulatory context. Regulators in some countries want to see a bank behind the value in order to have massive float value exposed to risk management rules and offer transparency for financial crime monitoring. The ‘bank-led’ model, requires a more nimble approach to engagement that banks are now just beginning to understand. Whether the back office operations are owned by the Telco Bank or the bank is using the Telco as a channel, the right banking software provider can provide the end-to-end digital experience and agility to enable commercial banks, Telcos and community banks to build their own integrated digital services. What is essential is the provider, regardless of their pedigree is providing quality financial services to the community keeping customer spend local and providing access to quality financial services. With the advent of cloud computing even the smaller community bank or network of informal non-bank FIs can provide the same quality services as any Tier 1 financial services provider.

Reducing credit rating importance

Financial institutions (FIs) are challenged in serving clients who have limited credit history and ambiguous income sources. These prospective customers/ members have proved to be reliable and profitable, but are susceptible to over indebtedness from online pay-day lenders, some with an 600% APR. Established, local FIs have the very significant advantage of client relationship and a community profile that mitigates default risk. But, if their service offering is slow and cumbersome, these reliable and profitable potential customers remain out of reach. However, with a truly digital approach (leveraging Open Banking) FIs can work with Fintechs to realise this opportunity together.

Open Banking is based on a different premise. It encourages Fintech partnership rather than competition allowing the Fintech to provide a complimentary service. There are many areas of potential partnership, KYC, Risk Management, Scoring, Mobil Apps, Social Media integration, micro-insurance, e-commerce, and so on. But to work, banks need an agile core banking solution behind it. Building a digital experience on a shallow, weak or rigid legacy back office will severely limit the service and betray the promise of modernity. A solution that can be easily integrated, upgradeable and scalable, built on Open Banking architecture offers essential flexibility and adaptability that a rapidly transforming industry player requires. FIs must be able to utilise robust open APIs to operate collaborative business models, ideally, working with an ecosystem of third parties to add more value to their customers' financial lives.

Realising Digital Opportunity: Cloud Computing

The biggest challenge to digitizing has always been the cost of software, computer services and the expertise to run new systems, however, by taking a networking shared services approach, this challenge can be overcome. By sharing common software, infrastructure and services, a subscription based ‘Software as a Service’ approach can quickly provide features bank customers want without the one off investment in software, hardware or in house technical expertise. This approach is perfect for community banks or commercial banks that create subsidiaries to approach financial inclusion; low in running costs, on payments alone, the first few transactions pay the entire cost of the services, future proofing the network.

Established banks have choices. One is to replace the core. This can be traumatic but, through a progressive renovation approach, taking the functionality that you need gradually when you need it, it does not have to be. Or, alternatively to create a new fully digital bank and move into the new digital market by migrating existing clients to the new digital experience, leaving the more corporate and complex business behind until the time is right.

Ultimately, the digital opportunity cannot be realised without the right (agile) technology.. Digital is more than online banking, it is about next generation banking to grow and ultimately, serve the mass unbanked opportunity quickly and efficiently. 

Digital is more than an opportunity for inclusive banks, it’s about to become a way of life. So, what are you waiting for?

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