The business opportunity for banking the unbanked has been on the table for quite some time. It’s like a treasure hunt with the guarantee there’s actually a treasure at the end of it.
The World Bank, 2017 Global Findex database shows that 1.2 billion adults have obtained an account since 2011, including 515 million since 2014. Between 2014 and 2017, the share of adults who have an account with a financial institution or through a mobile money service rose globally from 62% to 69%. In developing economies, the share rose from 54% to 63%.
Data is clearly making the case for a huge business opportunity. Why aren’t banks champing at the bit then? Why haven’t we seen financial institutions go all out in trying to conquer the untapped market share and capitalize on the countless opportunities?
Because there’s no map for the treasure hunt.
Banking the unbanked is a journey everyone marvels at but nobody wants the responsibility of being the first one to take on. Like with almost every business case, when the reward is alluring and luscious, so is the risk and challenges associated with it.
It takes some nerve to talk of patience in 2019. In an era and culture where speed is more important than the actual action associated with it, patience is a quality that’s slowly eroding. Apps that are downloaded on the command of our fingerprint, news-stories that are released and digested within minutes and sending money abroad with a few simple taps on your phone screen are just some of the proponents of the “plug and play” tech culture we live in.
Banking the unbanked is no “plug and play” affair.
Introducing banking to underdeveloped countries is a long-term play, a game of patience and strategic execution. Just think of all the groundwork that needs to be done by banks. These territories lack infrastructure and the relevant know-how to adapt banking. Banks need to build the tech foundation, convince the masses why they should start using it and then educate them on how to use it.
Whilst patience is a prerequisite for this endeavor, it simply won’t work on its own. Patience needs to be coupled with knowledge, expertise, disciplined execution and above all, the right infrastructure.
The entire banking system is built on the assumption that people who participate in it have a trackable financial background and an identity trail that documents their earnings, possessions and overall wealth.
The logistics of the current system are not diverse enough to welcome and onboard the people that are currently considered to be unbanked. Nowadays, in order to interact with a bank you need a solid online identity – a trail of data that proves you are who you say you are.
The unbanked population is the most extreme and difficult use case.
What happens when a farmer from a rural area in Sudan wants to enter the banking system? He’s got no birth certificate, no proof of earning cash money and the land he cultivates his crops on has no lease with his name on. How can a bank evaluate his risk profile? How can a bank issue a loan when they don’t have any information or insight on his ability to repay the loan?
Culture & New Territory
Moving into a new market is a beast of a challenge. Language is the most obvious barrier but it’s not as easy to deal with as copying and pasting chunks of text into Google Translate. New markets bring their own cultural history, have their own local dialects, idioms and phrases. The amount of time you spend on researching these areas and the level of detail you focus on, will most probably determine success or failure.
Just imagine if you land on a website with badly translated content that does not really speak to you. There’s no connection between you and the brand. It’s just a sluggish translation that doesn’t show effort to convince you as to why you should buy the product.
Then you have market research. When trying to “invade” a new business territory, banks spend tons of money to try and understand the new market. How? Market research. Whether conducted in-house or through a third-party, market research is the aggregation of data, trends and information in the form of white papers, charts, infographics and overall analysis.
Whilst market research is a great place to start, there’s so much it can teach you about a new market. It’s like trying to learn how to swim by watching a YouTube video. You can pick up a lot of tips from watching it but you will never learn what it’s like unless you throw your body against the waves. Likewise, the only way to really gain knowledge for a new market is to run tests on the ground, testing your product and services in real-life scenarios.
Having a functional product and business model in a developed country does not guarantee success in an underdeveloped country. Language and understanding the market are good starting points but in order to gain deep and meaningful understanding of your potential clientele, you need to go deep into areas like history, economy and political situation. These components will allow banks to approach, understand and eventually connect with the unbanked population.
As you can see, the challenges of banking the unbanked come in numbers and with layers and layers of difficulty. How can banks actually approach this? Can they find a solution that’s a happy medium between profit and functionality?
The simple answer is yes but there are a lot of disclaimers attached to that.
All the possible solutions fall under the FinTech umbrella. Let’s start with giving some examples of how financial technology is deploying its magic in solving one of the most complex financial conundrums of our time.
Our first example takes us to Finland where Moni, a FinTech startup, creates smart, personal banking tools for everyone, everywhere. “Our big vision is that our technology makes it possible to have a ‘banking’ account on any mobile phone for any person on the planet,” says Antti Pennanen, Moni CEO and founder.
The startup worked closely with refugees, a group of people that share a lot of similar characteristics with unbanked populations in underdeveloped countries. Refugees with no passports and sufficient documentation would find it difficult to almost impossible to open a bank account with a traditional banking institution. Moni offered them a prepaid debit card and a bank account that can be operated through a mobile app, allowing them to enter Finnish society and the banking ecosystem.
Refugees can deposit money, buy things and receive their salary in their Moni account with transactions being recorded in a public, decentralised database.
Now let’s look into lending for the unbanked. How do you assess the risk of an entity you have no traditional data about? You use non-traditional data. Social media profiles, email accounts, shopping habits, messaging, psychometric tests are all parts of the new way FinTech companies are trying to assess the risks associated with someone who wants to enter the banking system.
Unbanked populations no longer need a track record of salaries, transactions and credit scores in order to secure a loan. What they need is an online presence, an online identity that is not directly related to banking services. You don’t believe that’s possible? Just take a look at what Lenddo is doing.
Their advanced technology is helping banks and governments better understand the unbanked and offer them a way in. Using machine learning and the consent of customers to access their social media accounts and other online profiles, the Singapore-based startup is aggregating and analyzing data directly related to lending.
And then you have bKash, a mobile financial service in Bangladesh that’s dealing with financial inclusion in the most raw, direct way available: exchange cash for e-money and use it to send money to others, receive money, or even buy mobile airtime. This proposition is brilliant in its simplicity as people are introduced to a process that does not need much explaining, being the perfect way to ease them into the system.
Banking the unbanked is a work-in-progress, a project under construction, a situation that grows and develops parallel to the advancements in the financial technology sector. The signs are promising and the opportunity is immense for banks.
Keep an eye on our blog as this is a topic we’ll be revisiting and tracking for years to come.