A new report by EY titled Innovation in Financial Inclusion has revealed a “potentially significant growth opportunity for banks” within emerging markets by servicing financially excluded individuals and enterprises.
Of the 7.6 billion people in the world, 21 per cent (or 1.6 billion) went underbanked, while over 200 million micro, small and medium enterprises (MSMEs) did not have access to banking services.
Many of these MSMEs were located in emerging markets, with over 40 per cent reporting difficulties in obtaining financing compared to 30 per cent in middle-income countries and 15 per cent in their high-income counterparts.
By reaching out to these underbanked groups and furthering financial inclusion, bank revenue in the Asia-Pacific region could increase by US$88 billion by 2020, with China representing the country with the greatest potential revenue at US$63.4 billion.
“EY believes that driving greater financial inclusion will not only generate sizable economic benefits — boosting gross domestic product (GDP) by up to 14 per cent in large developing economies such as India, and 30 per cent in frontier markets, such as Kenya — but could also increase banking revenues by US$200 [billion],” the report said.
However, furthering financial inclusion would be easier in some emerging markets than others, and the report highlighted the role of certain new technologies, “market infrastructure” and government policies in enabling banks to service the underbanked.
Banks would also have to “adapt” their operations and strategies in order to best service this segment and promote trust, according to the report, as “standardised accounts” may not be adequate in catering to the needs of particular communities.
“For example, a traditional monthly loan payment may not be possible when an individual or MSME relies on a seasonal income stream,” the report explained.
“This can result in underutilisation of such accounts and may leave customers not truly financially included.
“To drive financial inclusion, banks must structure highly relevant and potentially simplified financial solutions that meet the specific needs of their customers at an affordable cost.”
Banks would also have to develop deeper customer understanding and create more tailored products and services.
“Examples include savings accounts with insurance coverage, community savings accounts, personalised credit facilities, affordable trade financing, equipment purchase facilities or unsecured loans for MSMEs,” the report said.
“By [ensuring] that their product portfolios have a sufficient mix of innovative products and services, institutions can earn the loyalty of newly onboarded customers and drive cross[-sell] and upsell opportunities.”
Through digital channels and advancements in technology, financial institutions can now better engage with new customers, which would bypass infrastructure and geographic challenges in developing countries, the report said.
“Moreover, digital technology can streamline the lending process, enable direct origination of loans and significantly reduce decision times, while also enabling greater transaction volume.”
That being said, it was likely that some physical branches would still be needed in a “bricks-and-clicks” model in order to promote financial literacy and awareness.
Finally, creative strategies to address the absence of credit history is needed as MSMEs and financially excluded individuals are often cut off from access to banking credit without the relevant documentation or identification details needed to satisfy the traditional requirements of a bank.
Neobanks developing different underwriting and credit scoring analytics are leading this space, the report said.
“These are exploring non-traditional data, such as consumers’ internet footprint, social media usage, psychometric test results and biometric digital trails, as data sources to assess lending risk,” the report said.
“Banks should partner with or emulate these non-bank counterparts to develop innovative techniques to fill potential customers’ credit history gap.”
Concluding, the report said: Institutions that “seized the opportunity today” to extend financial inclusion in emerging markets will be “well positioned to capture market share and play a transformative role in the growth of EMs for years to come”.