Financial Inclusion Will Require Simplicity

Can we reach full financial inclusion in 5 years? Given the World Bank FI2020 goals, apparently our world leaders think the answer is yes. But those of us working in the commercial banking segment see all sorts of barriers to financial viability. Just what would it take?

• A set of financial products that actually meet the needs of the poor and very poor. There is good research going on now (for example CGAP’s latest Financial Diaries of the Poor activities). But there are far too many assumptions being made by all of us (present company included) about what is really needed. I’m sure we’ll find out that it depends on a number of factors. So the ability to pick and choose products will be important.
• A standard set of financial products that need essentially no manual intervention at all. Operational cost is driven first by operational intervention, and then by technology costs (recovery of investments and/or ongoing usage costs, for example for Software-as-a-Service (SaaS). This means that exception possibilities must be very low, which in turn means very few transaction options, and very tight up-front editing. Of course this can loosen over time as volumes build, but still need to be managed in order to keep costs very low. Realistically this may mean mobile-delivered banking products only, apart from agent (or PoS) sign-up, cash-in and cash-out capability. It also means a critical need for simplified KYC procedures (such as acceptability of just a scannable national identity card for a low transaction size limit).
• National infrastructure will need to be streamlined. This could impact telecommunications, taxation, payments mechanisms, regulatory agencies, etc – to bring down costs for handling of small accounts and transactions.
• Some standard open and interoperable technology will need to be developed for mobile platforms and payments mechanisms. These are works in progress: for example Mifos X and Quisk both represent open-source digital banking platforms, and the Gates Foundation has recently released plans to develop an open-source national digital payments clearing platform.
• Financial enablement activities will need to be driven by governments and NGOs alongside product development and roll-out. The goal is not just to increase sign-ups for accounts, but also to facilitate effective usage of products. This will in turn drive volumes up and unit costs down. Product design will also need to take into account low levels of verbal, financial and technical literacy in many areas.
• On the whole it is initially likely to be just smaller players who can be nimble enough to introduce services – community banks, cooperatives, and deposit-taking MFI’s, for example. Perhaps later they will get swept up (hopefully to everyone’s benefit) by larger institutions, and perhaps that will bring some economies of scale, but not until there is a critical mass of digital banking usage.
• In many countries, regulatory changes will be needed to allow smaller players into the space, and to relax KYC and other requirements for small transactions (whether payments, loans or deposits/savings).
• Perhaps most important of all, financial inclusion must be integrated with other major prerequisites for the new Sustainable Development Goals. On its own, financial inclusion will accomplish next to nothing. It is simply an enabler – a means to an end, not an end in itself. Most people will not use financial products unless they benefit from them. Holistic national and regional planning is necessary, which partners government, commercial and non-profit organizations. As we’re already seeing, this will be much easier in some countries than others.

Bottom line? Simplicity – simple (but relevant) products, simple technology, simple regulation, simple organization structures. This is a whole different set of products than the financial services industry as a whole currently markets. Is this impossible? No, though perhaps pretty unlikely by 2020, certainly in many parts of the world. In any case, it is worth a shot.