How to develop financial services for the unbanked

15th July 2019

One of the core goals of any bank or financial institution, is to extend its services to the largest potential audience possible, powering revenue growth and socio-economic dividends. Recent reports suggest that nearly 40% of the world’s population are unbanked, which means they have no immediate access to financial services. This presents a considerable commercial opportunity for quick thinking banks and challengers. The opportunity associated with transitioning unbanked businesses and individuals into the banking and financial services sector could be worth more than $380 billion in new sales revenue to existing banks, challengers and new entrants to the fintech market. We recently explored everything you need to know about Apple Card, how Artificial Intelligence is impacting banking and Mary Meeker’s latest Internet Trends Report charting the unstoppable rise of fintech. Today we’re exploring how to develop financial services for the unbanked.

The Importance Of Financial Inclusion

When it comes to innovation and catering for the worlds unbanked and underbanked, banks have a critical role to assume and are highly relevant to solving the associated challenges of mass-market financial inclusion. They possess intimate knowledge of how financial customers behave, their characteristics and requirements. Banks also possess the knowledge, expertise, capital reserves and massive scale that’s required to dramatically accelerate the rate of global financial inclusivity. Not only that, but banks possess extreme competitive advantage when it comes to catering for the unbanked in terms of the ability to manage risk via existing banking products, networks and infrastructure. These networks include physical branches and a wide array of existing digital products and services that can be adapted and tweaked towards the needs of the unbanked.

Financial inclusion is now becoming a hot topic across both the public and private financial sectors. With access to new technologies and rising income levels, there has never been a better time to address the challenge of providing financial services and products for the underbanked and unbanked. In order for this to occur and for banks to take advantage of the growing opportunities associated with overcoming these challenges, a number of key changes need to take place. Banks need to consider their current operating models and how these models impact the way they deliver products and services to new (unbanked) and existing (underbanked) clients.

The Rewards Of Solving The Unbanked Conundrum

There are two core benefits that can arise as a consequence of helping the unbanked to become financially inclusive. The first benefit relates directly to revenue generation and the ability to grow sales through the on-boarding of previously unbanked customers. The second core benefit relates to the social dividends that are generated as a result of providing vital financial services such as business loans, mortgages and pensions, particularly for small businesses. Enabling small businesses and individuals to become financially inclusive stimulates wider economic participation. In the case of small businesses, access to loans that facilitate commercial growth can have a profound impact on the local economy in terms of job creation.

Conversely, the cost of remaining unbanked to both citizens and small businesses is high. It constrains access to essential financial products and exposes businesses and individuals to unnecessary and potentially avoidable risk. In addition, for those without direct access to financial services, the ability to leverage financial instruments such as small business loans and credit facilities tends to be more expensive in the form of higher interest rates.

In Bangalore, India, its estimated that only 70% of small businesses have access to a current account and less than 5% of these companies have access to any form of loans to stimulate cash flow or credit facility. This is a major barrier in terms of job creation and growing the local economy and represents a huge opportunity – on-boarding these customers in an efficient and profitable manner would enable forward-thinking banks to generate additional streams of revenue. The financial rewards for on-boarding unbanked customers are potentially compelling, in that once customers are subscribed, there are a wide range of products and services that can be immediately applicable.

How To Cater For The Unbanked

The core consideration when catering for the unbanked is accessibility. Understanding how to design and develop intuitive digital banking products and services whereby accessibility sits at the core of each initiative, is critical to success. In the past twenty years there has been a gentle transition away from physical bank branches, increasingly towards online services. More recently, mobile technology has played a crucial role as an alternative means of distributing banking services at substantial scale. Developing physical banking infrastructure is expensive and this is a key factor in the adoption and evolution of web and mobile based banking services and apps. The key aspect to consider here is the fact that when banking and financial services are difficult to obtain or access, the rate of engagement starts to drop off dramatically and this is true for both physical bank branches and digital banking experiences.

One key element for banks to contemplate when tapping into the unbanked opportunity would be the ability to load mobile experiences quickly in locations where access to WiFi is non-existing or extremely poor. In some instances, there will be zero WiFi and users will have to rely on cumbersome cellular networks which means that the digital banking experience, be it a native app or responsive website, needs to be designed and developed in a lightweight manner to ensure rapid page loading loading times. These considerations will help to remove friction and frustration from the overall user experience and enable unbanked customers to perform vital activities in relation to managing their finances.

Connecting consumers in developed economies to banking services is much easier (in most cases). These consumers are connected to high-speed, high-bandwidth web connections and tend to have high-end mobile devices that enable them to consume digital banking services via an app easily and quickly. Connecting consumers in developing economies to core banking services and platforms will present tougher obstacles in terms of web connectivity and the availability of sufficiently secure and sophisticated mobile hardware.

Another consideration in developing economies is the fact that Google Android tends to be the prevalent operating system as opposed to iOS (Apple). Understanding the makeup of mobile usage, device penetration/fragmentation and behavioural patterns will help businesses to make better decisions when designing products and services for unbanked customers and mobile-first experiences will play a crucial role in transitioning unbanked customers towards a financially inclusive outcome. For many of the worlds underbanked population, digital accessibility and mobile UX will play a crucial role and often be the individuals first and most profound touch point on the road towards becoming financially inclusive.

The Importance Of the Digital & Physical Banking Experience

Historically, the only way to deliver much needed banking services into developing economies would’ve been via a physical branch (which in many cases would be unachievable and economically prohibitive for banks and financial services companies to deliver). However, access to new technologies, particularly mobile, change the shape of the conversation for banks and provide a highly accessible means of engagement for unbanked customers. Of all the technological tools available to banks, mobile may be the most powerful of all.

It’s now estimated that in low-income, developing economies, that the number of activated mobile devices now outsrips the number of active bank accounts. Getting to grips with how to deliver mobile products and services for unbanked and underbanked customers will be crucial in order for fintech companies and banks to be successful in delivering intuitive digital products and cost effective transactional capability. Although digital banking experiences will play a crucial role moving forward, the importance of physical experience cannot be underestimated. Enabling access to human touch points is essential in terms of fostering trust and stimulating confidence in new users of banking services. Provision of ‘physical’ facilities such as field agents or call centres will play a crucial role in converting unbanked customers into active users, even when digital products and mobile apps sit at the core of transactional experience.

Accessibility is one key factor in terms of engaging the unbanked, but it is by no means the only factor. Product design also plays a crucial role. For the unbanked, engagement relies heavily on financial products and services being developed in the right way which means removing some of the traditional barriers which might be in place for mass-market banking customers in developed economies. This means developing services at the right price point and not making products prohibitively expensive for unbanked customers to leverage. This also means that acceptance criteria, regulatory and administrative policies should adequately reflect the unique circumstances of unbanked customers. This could mean enabling account setup for unbanked customers with no fixed address, historic credit score or banking history. Banks and financial services companies must decide what constitutes an acceptable level of risk when it comes to onboarding unbanked customers who may be perceived as a commercial risk based on an absence of credit score or prior financial history.

One of the key challenges here is for banks to overcome traditional operating priorities and legacy operating models. Providing an attractive banking experience, that’s accessible and easy to use is fundamentally important, but catering for the unbanked population requires the ability to adapt existing business models and calculate how to deliver vital products and services in a profitable way at extreme scale, whilst moving faster and more efficiently than the competition.

This is a complex undertaking but the rewards for getting it right are potentially vast. The key focus should always be to consider the tendencies and requirements of low-income banking customers and to stimulate adoption through appropriate financial incentives, the correct price points in terms of cost and other strategies that underpin these ideals. The importance of financial education and stimulating literacy around how to use banking services should not be underestimated in terms of not only widening adoption, but also in terms of developing trust. Trust is a fundamental component of solving the unbanked conundrum as without trust, adoption is very difficult or impossible to stimulate in terms of repeat, ongoing engagement and usage patterns.

Developing Technology Driven Business Models For The Unbanked

In order to tap into the commercial opportunity associated with service provision for the unbanked, banks and financial services companies need to adopt technologies such as the cloud, mobile and data-driven analytics. These technologies play a crucial role in providing cost focused business models that provide sufficient accessibility to unbanked users in developing economies. Adoption of cloud based infrastructure, analytics and mobile technology dramatically enhances both the speed and usefulness of banking products and services. In terms of adoption, speed plays a crucial role, but these technologies also provide a highly scalable distribution model, that can be accessed by vast numbers of customers across disparate locations.

Mobility has a crucial role to play and is already reaching critical mass in developing economies throughout the world. Even in developing, low-income territories, mobile penetration is more than 50% of the overall population. New payment based solutions and mobile banking products are presenting new routes to market for existing banks and new entrants to the market that go far beyond the capabilities of traditional banking platforms.

These technologies are already in the hands of many of the world’s unbanked population, particularly when it comes to a younger demographic. This is a significant factor, as physical banking services in these locations tend to be vastly underdeveloped, which creates significant challenges in terms of accessibility. It’s also essential to consider that the transactional cost of mobile is much lower than any other banking related distribution mechanism, particularly when compared against the cost of transacting through traditional brick and mortar bank outlets. It’s now estimated that the cost of transacting through mobile is the equivalent of 2% of the cost of transacting via a physical branch.
Catering to the unbanked and underbanked represents an enormous commercial opportunity for banks and financial services companies, which until recently has been overlooked and perceived as a highly complex problem to solve.

In today’s global financial services landscape, there are two critical factors that are converging in order to fully strive towards the goal of globally ubiquitous financial inclusivity: firstly, the advancement of digital technology, particularly mobile, to drive accessibility and widespread engagement and adoption and secondly, the increasing income levels of low-income consumers in emerging markets across the world. This means that there has never been a better time for banks to tap into the vast commercial scope associated with catering for the unbanked and underbanked, estimated to be a $380 billion market opportunity.

Targeting the unbanked population with appropriate services and products requires new business models and new ways of operating. This involves adaptation across a number of areas of the business in terms of infrastructure, processes and people, with a long-term focus on high-volume operations that are capable of functioning at a massive scale. This also involves new attitudes in terms of how banking apps and services are developed with adaptive acceptance criteria to cater for unbanked customers with no address or credit history.

If you’re interested in transforming the unbanked landscape and how highly innovative digital products and services can be deployed to capitalise on this substantial commercial opportunity, contact us here today to start the conversation.

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