Revenue growth in financial inclusion


Business World (10/01/2018 – p.S1/2)

Traditionally, banks operating in emerging markets (EMs), including the Philippines, did not consider financially excluded individuals as profitable target customer segments. These financially-excluded sectors included micro and small to medium enterprises (MSMEs).

However, technological advances are greatly reducing the cost of serving these customers. Such opportunities are now opening doors for banks to reach a whole new portfolio of clients. We at SGV believe that driving greater financial inclusion will not only generate sizable economic benefits for banks, but could also generate incremental annual revenue of up to $200 billion by better serving financially-excluded MSMEs in 60 emerging countries. Specifically, 44% or $88 billion of such incremental annual revenue could be generated from the Asia Pacific region.

Improving financial inclusion will be easier in some markets than others, and are largely dependent on the types of available market infrastructure, as well as clear and supportive government policies.

In the Philippines, expanding the breadth and depth of financial inclusion is a policy priority of the Bangko Sentral ng Pilipinas. Some examples of policy and systemic drivers that spur financial inclusion include strong customer safeguards, responsible financial literary programs, bankruptcy regimes, regulatory incentives for banks, diverse financial ecosystems, and interoperable financial systems.

According to the World Bank Group, financially excluded MSMEs are predominantly located in EMs. More than 40% of MSMEs in the least developed countries reported challenges in obtaining financing, compared to 30% in middle-income countries, and just 15% in high-income regions. What is interesting to note is that 75% of the financially-excluded respondents reside in just 25 countries, with 2.2% of them in the Philippines.

Specifically for banks, the growth opportunities brought about by financial inclusion will yield a large impact on markets that are active and progressive with technology-led innovation.

The combination of these new technologies can significantly advance the financial inclusion agenda, particularly for countries with high levels of mobile adoption, e-payments, national digital identity systems, credit data infrastructure, and currency digitization. Much of this, of course, also relies on new technology and systems to safeguard banking systems and customer data. The more these digital applications progress, especially in the areas of cybersecurity protocols for banks and other financial institutions, the better the ability to securely exchange up-to-date, and even real-time customer information.

These are important features that can help MSMEs find consistent and simplified ways to identify and verify themselves with various parties, including credit providers. In fact, some markets are already using Digital Passports, which uses a secure and trusted system for multiple providers to exchange information, identify and scrutinize customers, and help build credit histories. Such a system would also facilitate Know Your Customer (KYC) and onboarding processes for customers who are switching between providers.

Assuming the presence of the right infrastructure and policies, banks can then adapt their operations to achieve profitable financial inclusion. We believe that focusing on the following three actions will be most successful:

1. Create offerings that are more relevant to customers and deepen account adoption

For banks to drive financial inclusion, they should develop relevant, affordable, and simplified financial solutions that meet the specific needs of their customers. This will require deeper customer understanding and a compelling customer proposition. These can include savings accounts with insurance coverage, personalized credit facilities, affordable trade financing, equipment purchase facilities, or unsecured loans for MSMEs. By developing a wider range of innovative products in their customer portfolios, banks can further engage and earn loyalty with newly on-boarded customers, and leverage on their growing relationships to drive cross-selling and up-selling opportunities.

2. Identify innovative channels to reach customers more effectively

In recent years, more and more banks have been looking at digital channels to enhance customer convenience without incurring significant costs. Digital assets can help banks overcome challenges caused by infrastructure and geography in developing countries, and can even enhance the lending process. These assets can also enable direct origination of loans and greatly reduce decision waiting times while delivering higher transaction volumes at the same time.

3. Find creative ways to manage risks brought about by a lack of credit history

One of the main issues faced by financially excluded individuals and MSMEs is the lack of a financial track record – which is what banks traditionally rely on to make lending decisions. Another issue is the inability to prove identity, address, and security details. To illustrate, loans granted to China’s agriculture sector account for just 1% of commercial banking credit portfolios. Farmers’ access to conventional bank loans are limited by the lack of typical credit scoring data. Consequently, many are forced to secure credit from “shadow banks” or moneylenders, leading to exorbitant interest rates. If banks can develop more creative credit profiling techniques, they could boost lending to a sector that sorely needs financial support.

Ultimately, a financial institution’s business model will identify the route it must take to achieve financial inclusion. Some may choose to develop innovative products or credit-scoring techniques, others may choose to evolve and upgrade delivery channels. Case in point, a microfinance institution is already aligned to meet the needs of small customers, which makes it easier for them to customize products. Meanwhile, telecommunications or Financial Technology companies are probably better placed to use innovative delivery channels, or to create alternative credit scoring techniques.

Given the current economic status of emerging countries, the time seems ripe to drive revenue growth through financial inclusion. Forward looking banks that take the opportunity to tailor customer offerings, develop innovative channels, and manage systemic risks to build market share early, may reap significant rewards and become big players in the development of EMs in the future.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Vicky L. Salas is a Partner and the head of the Financial Services Organization service line of SGV & Co.