After working around the world in the extremely complicated field of emerging financial services, I am now of the opinion that addressing the challenges of the financially excluded may be easier than we are making it. From the beginning of traditional banking with its branches and deposit products, banks have only successfully served a portion of people. The percent depends on the country and conditions. For small African countries, banks can serve as little as 5% of the population; for some European countries banks reach almost everyone. But in most places in the world it is a mix.
Technology has given us new tools to efficiently reach and serve those who want to be banked. The physical branch is not important to most people, and since most people have mobile or online access to their bank, communicating with the bank has never been easier. That being said, in countries which have traditionally been cash centric (India, Africa, most of Southeast Asia, many Eastern European countries, and most of Latin America), many things need to happen to create the services and have them adopted.
Although the change is significant it is also desperately needed – many pain points exist including slow and expensive money transfer, security challenges of living and working with cash, business friction, extra travel time to pay for things, lack of an easy way to buy online… and on and on. So many pain points that good solutions will surely be adopted once the provider “gets it right.”
But what will make this all easy is something very boring – regulations. If regulators get the rules governing financial services right, there will be a Tsunami of new services in the area, and the best ones will be adopted and scale. Here are the most important rules they need to get right:
- Let Non-Banks Offer Financial Services. Allow responsible non-bank actors to provide financial services. Retailers, Telcos, online companies, and Fin-tech startups should be able to be licensed to provide various financial activities like load/unload cash, move money, hold funds in trust for others, electronically pay, and lend. Many of these non-banks are not only innovative; they have great assets like trust and distribution which can be effectively leveraged to reach and serve customers.
- Lower the Barriers for Customers to Enter the Banking System. In many places in the world, people who want to open up a bank account have to go through a difficult process of identifying themselves and proving they are who they say they are. Long forms, id checks, and in-person meetings – all of these are intimidating and take time. It puts up major obstacles to people entering the banking system. Regulators can lower these barriers for newly banked customers and allow small deposits and basic services initially. Over time the financial services provider can graduate the information they have about the customer to collect more due diligence information.
- Prevent Toxic Behavior by Existing Players. With the Internet we have seen the benefit of net neutrality and an open playing field. Without it, a large incumbent could have stifled innovation through tricky methods. This can and does happen with financials services. Put the necessary regulations in place to prevent this from happening. This will mean there will be more competition, which will increase options and lower prices. These regulations will need to be added to the telecom regulations and the banking regulations.
Once regulators do these three things, then the change will happen quickly. New services will enter the market, people will try them, the best services will be adopted, behaviors will change, and the transformation will begin. The pain points are too great, and the innovative spirit of new and existing businesses will take hold.
Now, there are many other things that can make it happen faster and better – high tech identification systems, real time ubiquitous settlement for moving money, and smart phones. All of these will multiple the results. But I’m sorry to say those are insufficient without financial inclusion favorable regulations. That is where we have to start. And when it is in place, everything else has even more impact.
There will be even more information about the necessary enabling environment, technology pioneers, and a blueprint for the future of banking in my upcoming book, Financial Inclusion at the Bottom of the Pyramid. Like my book on Facebook to receive information about pre-sale and release dates.