For most of us it would be hard to imagine a life without access to formal financial services: a deposit account to manage our savings and expenses, saving plans for our children’s future education, health insurance to deal with unplanned health costs, a mortgage that enables us to own a home. All these which we’ve come to take for granted ‒ simple dreams and aspirations for our families ‒ would become a complex affair without access to formal financial services.
But that is the day-to-day experience for the majority of the population around the globe. According to new data from the World Bank, in 2011 an estimated 2.5 billion working-age adults globally had no access to formal financial services wealthier people rely on. Instead they depend on informal mechanisms for saving and protecting themselves against risk. They buy livestock as a form of savings, they pawn jewelry and they turn to the moneylender for credit, and they endure illnesses and other life events relying on the uncertain help from other family members, neighbors and friends. These mechanisms are uncertain, expensive, and often risky to use.
Access to formal financial services helps improve welfareof people in poor and economically vulnerable conditions and working capital loans help micro-entrepreneurs spur economic activity and growth at the grassroots of developing economies.
In the past, the microcredit revolution found a way to provide loans without collateral: distributing liability through group lending effectively replaced physical collateral. However, the challenge for broaden the offering brings on additional challenges. For small denomination savings and remittances the key challenge is the need for ultra-low transaction costs; for insurance, risks must be pooled and managed at an actuarially-relevant scale.
Innovations in business models are helping close that gap. Mobile-phone based models leverage infrastructure setup for mobile communications to offer an electronic account where people can store, send and receive money, and make payments remotely. Broader financial services that can “ride” on the rails of electronic money benefit from lower costs in distribution. Therefore, different forms of electronic money (based on mobiles and cards for instance) help lower the barriers for broader low-income formal financial products.
Ultimately, though, no single type of provider will be able to overcome the very different product-specific business model challenges. What is needed is a variety of financial service providers that create an ecosystem that serves the poor profitably.
Business model innovation has thus far driven the development of new approaches, particularly leveraging technology such as mobile and ATM/POS networks. The experience to-date demonstrates that a high level of effort is needed to make these ecosystems come to life.
The development of these ecosystems has brought along an over-emphasis on solving the access barrier. What providers are learning now is that beyond access, they need to make products real for poor, unbanked people. This is, they need to deliver products that are relevant and useful in their day-to-day life. At the forefront of innovation, providers are doing things differently:
Improving understanding of customers’ needs – Providers commonly design products based on an offering that they are familiar with and can relate to. But these products often seem far from the day-to-day reality of poor, unbanked people and the way they use money and manage their finances. Providers require a deeper understanding of people’s finances in order to develop products that can successfully address their unmet needs.
Adopting more agile product development strategies – Historically the financial services business has delivered products with characteristics that remain somewhat stable throughout the years. Compliance requirements and complexity of information systems have resulted in product development processes that are long and costly. What financial service providers require in reaching new, lower income segments is the ability to develop early prototypes that can be used to learn about customers and their needs, and get to a refined product propositions faster, driven more by understanding demand response than by supply-side requirements.
Building partnerships that allow for experimentation – Partnerships are the glue that brings the ecosystem together. But robust, traditional partnerships where providers “split” the value created are difficult to come by in a business that has many uncertainties, and that needs to be built from the ground up. Providers need to build space in these relationships to account of unknown variables and experimentation, and need to align well the expectations of performance and business results.
Fortunately, enough momentum globally is driving innovation targeting the poor and unbanked. These innovations are demonstrating that the vision of serving the poor with a broad range of useful financial services, can in fact be real.