In my long career in banking, I’ve utilized technology to increase efficiency, balance books and more importantly, ensure growth of customer profitability and value for shareholders.
In the past year as a leading microfinance bank’s new CFO, however, I’ve learned an important lesson that many of my peers at traditional banks rarely gain: financial technology is revolutionizing how low income and bottom of the pyramid (BoP) customers are accessing financial services.
Catering finance for the BoP is not just socially responsible; it also is good business. This low-income group is estimated to represent four billion people in the developing world who earn less than 1,500 dollars a year and their untapped market is estimated to be worth five Tn dollars. Of this group, two billion people around the world do not have formal financial accounts, according to the World Bank.
Innovations in technology are accelerating progress to close this gap. With the help of banking technologies, access to basic financial resources can change lives, build markets and sustain communities. Innovation is also an impetus for CFOs to change too: at FINCA, where we are in 22 emerging markets globally, I’ve learnt how to be nimbler than money center banks when it comes to innovation.
“Catering to the bottom-of-the-pyramid may require rethinking traditional banking standards but innovative tools and technologies are making it easier to accomplish this”
Here are three ways financial technology can help those at the bottom-of-the-pyramid.
How do you determine if a customer at the BoP is an acceptable credit risk, especially if they not only have no history of credit or live in a country without a centralized credit bureau? New innovations in alternative credit scoring tools and analysis can help to analyze a customer’s loan payment potential as well as process loans more quickly and easily. For example, in Africa, we are piloting an approach based off of mobile phone usage, payment behavior, and demographic data. In Latin America, we are testing credit scoring based on psychometric data. Most recently, through a partnership with First Access, a credit scoring organization, we will be offering Enterprise Scoring, which capture consumer data from loan applications, pull recent or real-time data from a core banking system or historical database, incorporate credit bureau information, and retrieve data from external sources like borrowers’ smartphones, mobile network operators, mobile money platforms, data aggregators, solar companies and other digital product and service providers. There are other approaches that use internet searches, social media, and mobile apps to determine credit scoring for low-income individuals.
For many at the bottom of the pyramid, visiting a bank branch is not an inconvenience; it can be a dangerous, cumbersome endeavor. They have to travel long and sometimes unsafe distances just to make financial transactions. The journey often leads to loss of money, time and productivity that could be spent elsewhere. A solution to this problem is agency banking and the use of POS biometric machines. Agency banking utilizes a network of local merchants and shopkeepers to provide basic banking services in areas where banks do not have presence. The agents are equipped with biometric fingerprint POS machines that safely process all transactions and allow semiliterate users the ability to access their account without having to read.
At FINCA, the alternative banking method was launched in the Democratic Republic of Congo in 2012. Today, the network has grown to over 650 agents across the country who help to transact over 75 percent of all transactions for the bank.
It isn’t news that the developing world, especially in Africa, has been a major catalyst for the growth of mobile banking. Digital financial services offer a major opportunity to increase the inclusion of the poor within the financial sector, leveraging mobile phones to reach the most marginalized communities. A recent report by GSMA, found that the number of mobile money accounts increased by 31 percent in 2015. Sub-Saharan Africa accounts for the majority of live mobile money services in 2015 but more than half of new services launched last year were primarily in Latin America and the Caribbean.
In Tanzania, we’ve seen first-hand how mobile phones are increasing banking activity. Through a partnership with a major mobile operator, we’ve enabled our banking clients to transact directly from their mobile e-Wallet platform, saving them significant travel and other transactional costs typical of banking operations. In the first year of launching the e-Wallet service, 28 percent of the total value of deposits and 34 percent of the total number of transactions were being remitted through the mobile wallet platform.
Catering to the bottom-of-the-pyramid may require rethinking traditional banking standards but innovative tools and technologies – like alternative credit scoring methods, agency banking, biometric machines and mobile banking – are making it easier to accomplish this. Despite having limited incomes, this market is responsive to innovations that ultimately improve their livelihoods.