* New technology allows big banks to target the poor
* More than 2.5 bln people do not have bank account
* Achieving scale remains a problem in fragmented market
By Julia Fioretti
LONDON, Dec 9 When the Afghan government used
mobile phones instead of cash to pay some of its policemen, the
officers thought they'd just had a 30 percent pay rise. In
truth, they had just been paid the full amount, with nothing
skimmed off by middlemen, for the first time.
This anecdote from the U.S. Agency for International
Development shows how technological innovations such as mobile
banking and biometrics have helped integrate more people in
emerging markets into the formal financial system, opening up
opportunities for banks willing to take a chance.
While the market for more affluent and business clients
becomes saturated, providing the world's poorest with access to
financial products is an unmatched growth opportunity.
Half the world's adults, over 2.5 billion people, do not
have a formal bank account, according to the World Bank. In
low-income economies it can be less than a quarter.
Many developing countries also offer banks the allure of a
growing working-age population and an emerging middle class.
"Twenty years ago we spoke about the poor with a sense of
futility, and I think now when you talk about the base of the
pyramid, more often than not you're talking about markets and
opportunities," said Michael Schlein, chief executive of Accion,
a non-profit organisation that invests in microfinance
institutions and companies advancing financial inclusion.
Between 2010 and 2020, the world's poorest 40 percent will
nearly double their spending power to $5.8 trillion from $3
trillion, according to Accion's Center for Financial Inclusion
The idea of providing the world's poorest with small loans
was pioneered 30 years ago by Nobel Peace Prize winner Mohammad
Yunus and Grameen Bank in Bangladesh.
Microfinance grew into a global industry with a loan
portfolio of $78 billion in 2011, according to data provider MIX
Market, but it has come under fire for high interest rates and
excessive credit expansion during the financial crisis.
Big banks, which suffered more than a little reputational
damage of their own during the crisis, realised they needed to
go beyond branch-based models to profitably reach such customers
in a market traditionally reliant on cash.
"The competition and the saturation in those (developed)
markets are getting higher and higher, so they have to look for
the next wave, the next area of possible profitable ventures,"
said Gerhard Coetzee, Senior Financial Sector Specialist at the
Consultative Group to Assist the Poor, a think-tank housed at
the World Bank.
Citigroup launched a mobile payments scheme called
Mobile Collect for small stores in the Dominican Republic
earlier this year, while MasterCard teamed up with the
Nigerian government in May to roll out 13 million national
identity cards that double as electronic payment cards.
COMPETE OR COLLABORATE
Tapping the potential in the market of the unbanked requires
alternative business models. Fragmentation makes it harder to
achieve economies of scale, and banks also have to overcome the
hurdles of poor communications infrastructure and the often
non-existent credit history of many potential customers.
"Many banks think of the digitisation opportunity around the
world. There is, however, a constraint, which is the whole issue
of infrastructure," Aigboje Aig-Imoukhuede, chief executive of
Nigeria's Access Bank, told a recent conference
organised by the CFI.
Another issue is competition. Banks' biggest rivals are not
their peers but rather mobile network operators and large
retailers. Coetzee says they face a difficult balancing act of
rolling out competing products and collaborating to serve a
bigger chunk of the market.
Banks also need mobile network operators to allow their
payment systems to work across rivals' systems - a commonplace
in developed banking markets - if they are to achieve scale.
M-Pesa, Safaricom's successful mobile payment
system in Kenya, benefited from the telecoms operator's hefty
market share to roll out its service, so it had an in-built
advantage. But that doesn't apply everywhere, Schlein said.
Bob Annibale, Global Director of Community Development and
Microfinance at Citigroup, also highlighted the importance of
integrating different payment systems.
"It is about that financial architecture ... The bank
payment system also connects to the mobile payments system. If
that becomes the norm, it's a lot easier for us."
But getting competitors to collaborate is not easy.
"If you're waiting for the industry to come together and
collaborate, it's like asking the turkeys to vote for
Christmas," a participant said at the conference.
Clearing such obstacles could unlock huge rewards.
Barclays, which teamed up with NGOs Care International and
Plan UK to form the Banking on Change partnership, connecting
village savings groups with the formal financial system,
estimated that $145 billion - about a quarter of the Nigerian
economy - could be injected into the global economy each year if
all 2.5 billion of the unbanked were included in the scheme.
Tapping in to existing networks could be the key.
"Coca-Cola is consumed by everybody ... How difficult is it
going to be for us to tag on payments, savings and so on around
the value chain by which Coke is sold?" Aig-Imoukhuede said.
"Once you have scale ... I think it's easy."