Harnessing innovative technology in financial inclusion

The speech made by Epic Lanka Chairman Nayana Dehigama at the Asian Bankers Association’s Annual Conference held in Colombo on October 4

Financial inclusion was considered merely a CSR activity early this millennium. Banks endeavoured into financial inclusion as a social responsibility to service the poor, rural customer or the unbarked. But as the years passed by, emerging economies in Asia tend to liberalize financial regulations and restrictions, mainly to support the fast growing economic development process, and opened the doors to foreign banks to play in local markets. This prompted large international banks to move in to the emerging economies, and started encroaching lucrative urban markets that the local banks used to bank on. Many local banks were not geared to compete with the techno-savvy product offerings of these international giants that attracted urban and corporate customers well and therefore they were pushed to look for options to survive.

Nayana Dehigama Picture by Sumanachandra Ariyawansa

One of the best options local banks had in hand was to expand its business into unbanked segment, as it was extremely difficult for foreign banks to move there and create impact, owing to obvious reasons such as cultural, structural and regulatory. At the same time, the Governments in emerging economies embarked on decentralization endeavours and they aggressively promoted micro-enterprise development in rural sectors. This created an added potential for banking services in the rural and currently unbanked segments.

Financial inclusion

Today Financial inclusion has been evolved to be a ‘growth/survival factor’ for many Banks in emerging markets. Saturation of lucrative urban markets, heavy competition from leading multinational Banks in the urban market due to relaxation of local regulations, and the governments’ focus on micro enterprise development through decentralization as a strategy for stabilizing emerging economies have fuelled the enthusiasm of financial inclusion among the banking community. Evolving demand from rural customers for banking services due to increasing exposure to globalization too is pushing banks to seriously consider expanding into unbanked market segment.

However, it is necessary to understand that ‘financial inclusion’ does not necessarily mean developing rural markets. Many potential customers of unbanked category still exist in the urban and suburban markets too, especially at the bottom of the pyramid.

Today, ‘Financial Inclusion’ is no more a CSR activity for banks. It should be an integral part of the strategy to achieve sustainable growth and survival for many local Banks in emerging markets. There are many lucrative opportunities available for Banks in the rural unbanked segment. Among them the biggest is the size of the market. Still 50% of the Asian population does not come within banking radar. Another is the demand. Due to the thrust in developing rural economies through promotion of micro-enterprises, a demand for banking is being generating rapidly.

Fast adaption to social economic changes and to the technology advancements and willingness to pay higher prices for services, are another notable factors that encourage banks to move into the rural sector. Banks who decide to go beyond traditional boundaries could enjoy a virgin and blue-ocean market in the unbanked sector.

Challenges in the unbanked sector

Reaching customers expeditiously and cost effectively is a challenging task for banks. There are some impediments one has to overcome when expanding operations to rural markets, both in terms of technology adoption and business modelling. Some of them are tough challenges to banks that may make them reluctant to move into unbanked segments. Scattered customers, smaller ticket size, higher service costs, lack of infrastructure and difficulties in performing KYC are some of the major obstacles banks have to face in the rural sector. Therefore, choosing appropriate ‘strategy’ with the right composition of technology and business model is extremely important to achieve financial inclusion goals of any bank.

Innovative technology plays a major role in financial inclusion business modelling. Without adopting technology, it is almost impossible for banks to achieve financial inclusion goals cost effectively. Mobile Communication Technology offers banks cost effective means to reach millions of new rural and unbanked customers. Adopting Mobile Banking Technology as a service delivery channel is one of the best and most cost effective options banks have today to reach millions of new rural customers on-line.

Research findings suggests that mobile banking channel is 19 percent cheaper compared to traditional channels (Asia Focus, 2010), and it is 50 percent cheaper if used for medium term savings and bill payments (CGAP, 2010). It is also said that smaller the transaction value the cheaper Branchless Banking is (CGAP, 2010).

‘Branchless Banking’ and ‘Mobile Phone Banking’ are two important mobile banking technology models that offer Banks greater opportunity to reach the unbanked regardless of the geographical barriers in a highly cost effective manner. Branchless Banking simulates bank branch functionalities on a mobile device (EDC/POS, EDA, PDA, etc) where a bank attendant carries the device to the field to execute a banking transaction at the door-step of the customer on-line real-time. Mobile Phone Banking offers the customers the benefit of accessing his/her account or services directly using a mobile phone to carry out a transaction without intervention of any third party or a bank attendant.

Changing market dynamics

Customer perception on banking is changing fast. Strong signals available in the markets that many customers prefer to do banking through mobile devices, remotely. Any time anywhere banking is becoming not only a trend but a necessity. Remote Deposit Capture through Mobile Technology is gaining momentum fast. Customers demand convenience, security and availability from their Bankers pushing Banks to think of innovative ways to offer their services seamlessly anytime anywhere.

Addressing the shift in generations (from X to Y and to the new generation) is another factor banks should be concerned of. New generation customers demand latest technology for convenience and speed. Human connections seem to be fast evading and the communication lifestyles of the new generation customers largely limiting to palm top devices. Therefore offering innovative technology based banking is becoming a necessity for servicing the new generation customers who will soon dominate the market. Through Mobile Banking, Banks can offer its customers two distinct service packs; additive services for existing and the new generation customers, and transformational services to the unbanked segment.

Each market segment demand unique features while some seems to be common to both. Convenience, multi-applications, lower cost of access and the flexibility are seemed to be the most prominent demand of the existing customers and the new generation customers while accessibility, availability and beyond payment applications are motivators in the unbanked segment. Demand for security, privacy and ease of use are common to customers from both segments. The service offerings to customers through your technology solution are an important factor for successful financial inclusion strategy implementation.

Banks have to be concerned of a few important aspects in choosing technology. Security and privacy for transactions, technology adoption, complying regulations and cost of ownership are some major concerns in choosing technology. Adopting appropriate technology according to the financial inclusion business model is of paramount importance in enjoying healthy returns from financial inclusion efforts. Ignoring those aspects will make banks financial inclusion efforts ineffective while making all investments in vain.

The market behaviour today makes it necessary for banks not only to adopt technology but to make it ‘innovative’, convenient, secure and ‘feature-rich’.

The good news is that the technology is available and it is mature enough to address all concerns of security, privacy, regulatory and service offerings. Cost of ownership of technology has become affordable to even smaller banks. Implementation cycles are shorter so that time to market is fast. What matters is the decision to adopt technology and to move forward and reap the fortune offered in these new market trends.