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When will banks stop seeing financial inclusion as charity?

I was asked this question at a recent conference and yes, banks do believe that the mass poor are just that: poor.  How do you make a profit out of the poor?  Well, truth be told, the poorest are the most profitable.  They’re the ones who need loans and go overdrawn, and therefore pay all the fees for the rest of us – the mass affluent – to get our banking for free.  Thank you the impoverished.

It is the poorest who take out payday loans, but they prefer to have a payday loan than to deal with a bank, because at least the payday loan firm is upfront about what it’s going to charge them.  James Barth of Auburn University observes that payday lenders congregate in neighbourhoods with higher rates of poverty, lower education and minority populations, but at least they can get a loan, rather than an unauthorised overdraft that, here in the UK, charges more than a payday lender.

Overdraft v payday loan

Source: BBC

At least they’re only paying £90 to borrow £100, which is less than some Kenyans were being charged before M-PESA.  Sending money before mobile payments arrived used to be a tricky affair, involving getting a bus or taxi driver to take your £100 from Nairobi to the villages.  Quite often, it wouldn’t arrive.  Even if it did arrive, ti would often cost 25% or more.

Similarly, the high fees of Western Union and other remittance providers were fairly punishing … until FinTech came along.  Now those costs are dropping rapidly.   For example, here are the comparisons of a few players when sending $1,000 from the USA to the Philippines.

Ria Money Transfer is the cheapest at $6, taking 3-5 days, or $10 if you want it to move in minutes.  A bunch of other players are in the $10 or less mark – OFX, TransferWise and Abra – but this rises a little when you look at the more traditional players.  Wells Fargo is $21 for a 3-5 day transfer whilst Western Union is $28 for a 5-7 day transfer.  Interestingly, the most expensive choice would be a FinTech!  Skrill would charge you $64 for $1,000 transfer, and take 3-5 days to do it.  so don’t always assume a start-up new player is the best.

Meanwhile, as can be seen, there are many players trying to unbundle the old model of Western Union and co  .

WesternUnionUnbundled

Finally, the most exciting area of change isn’t payday loans or remittance exploiting the poor, but the inclusion of billions of people thanks to mobile, who were never included before. These vary from the millions in China who are now using Ant Financial to those in India using Paytm to the Venmo’d of America.  The numbers are stunning – 450 million people using Alipay; 200 million using Paytm; and Venmo’s user numbers aren’t quoted* – and it is the fact that mobile has moved from dealing with money in buildings, to dealing with money in apps.

Outside the apps is just, if not more, exciting as Africa and other nations stuck in poverty for decades are reinventing the whole concept of money with mobile.   This is summarised neatly by Financial Inclusion Insights research, which notes that:

  • more than 90% of the world’s poor are covered by a mobile signal
  • 60% of Africans live in rural areas and mobile money is the only way to reach them cheaply, affordably, and at scale, which is why people in Cote d’Ivoire, Somalia, Tanzania, Uganda and Zimbabwe, are using mobile money more than a traditional bank account
  • In Tanzania, ownership of mobile money accounts surged from 1% of the population in 2009 to 32% in 2014
  • digital accounts cut the costs of transactions by as much as 90%
  • digital accounts give people the ability to save and budget for the first time in their lives, allowing them to withstand financial shocks and direct money toward specific uses, such as education and healthcare.
  • 4 out of 10 adult Nigerians have no access to any form of financial services, making life not only more difficult, but also more expensive for these people.

Now we get back to that question: When will banks stop seeing financial inclusion as a charitable venture?  It’s not charity, otherwise M-PESA would be making no money.  It is making money.  In fact, it is the second largest revenue generator for the Safaricom Group, which is why they protect their monopoly in Kenya.

M-PESA

In other words, financial inclusion is a charitable venture if you are a bank with physical distribution; but it’s a good business if you’re a telco with digital distribution.  And telco’s will upscale as they learn the model, as evidenced by Orange who, after learning that this was good business in Cote D’Ivoire and Mali, opening mobile money services in Poland, Romania and other European countries and finally realised that, with their 650 stores (branches?) in France, they might as well open a bank.

PIc orange

So what’s the bottom line here.  The bottom line is that mobile financial inclusion is a massive market opportunity to bank the unbanked, make money out of it and eradicate the expense of being poor.

Two billion individuals and 200 million micro, small, and midsize businesses in emerging economies today lack access to savings and credit and, as a result, economic growth suffers. A research report from McKinsey in September 2016, finds that widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6%, or a total of $3.7 trillion, by 2025. This is the equivalent of adding to the world an economy the size of Germany, or one that’s larger than all the economies of Africa. This additional GDP could create up to 95 million new jobs across all sectors of the economy.

In other words, it’s worth it.

Unbanked map

Source: Payments, Cards and Mobile

 

* Although PayPal has 200 million active users worldwide, Venmo is only available in the USA and user numbers aren’t quoted.  The Q4 2016 v Q4 2015 difference speaks volumes though

Venmo

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Matt Gamser

    Chris, I’ve been watching your “conversion” to a financial inclusion person with great interest, enjoyment and occasional (at your intention) amusement…the final step will be when you realize, as some of us have been trying to point out for some time, that the business opportunities and margins are bigger in emerging markets for fintech, particularly compared to competing for over-served rich people in developed countries…and that you should be steering more fintechs to look in such directions, as we’ve been trying for the past few years in the SME Finance Forum. matt

    • Chris Skinner

      I guess that’s what I was underlining here … more to come …

  • sketharaman

    PayTM users must have bank accounts, from where they top up their PayTM mobile wallets. Therefore, PayTM has not brought about financial inclusion in the traditional sense of giving a bank account to a poor citizen. However, there’s another angle of PayTM that’s not explicit in this post, and that is its inclination and bandwidth to enable all kinds of mini- and micro-merchants to accept cashless payments without needing a bank account at the point of onboarding. Like everywhere else, traditional banks don’t issue merchant accounts to such merchants and, before PayTM went aggressive, they’d only be able to accept cash. Some of those merchants have always had a bank account, so PayTM hasn’t done anything to bring about FI. That said, a few of them did not have a bank account when the government announced demonetization / remonetization of high value currency notes in November 2016. There was a cash crunch. These merchants had to start accepting cashless payments. They quickly onboarded PayTM. They then opened a bank account into which they transfered their PayTM wallet balance. To that extent, PayTM can be credited with triggering a small extent of Financial Inclusion – but, then, the account itself is not provided by PayTM but by a regular bank. The government had already launched the PMJDY program over a year ago to let people, including such merchants, to open a no-frills bank account, so that’s the kind of account such mini and micromerchants opened after collecting cashless payments in their PayTM wallet. So, again, PayTM triggered FI but did not fulfill FI.

    Coming to profit or charity of FI, PayTM makes whopping losses, it’s kept afloat totally by VC funding. The banks that offer PMJDY accounts are making a loss on it. They’ve recently introduced a slew of new charges – cash transaction charges, penalty for going below minimum balance, etc. – on their regular (mass and mass affluent) accounts.

    Therefore, I wouldn’t agree with your PayTM example of creating FI. And, at least in India, FI has increased cost of banking for mass affluent.

    • Chris Skinner

      Thanks for clarifying sir

  • larizagalindo

    Totally agree Chris! Banks should move from the mindset that this is a CSR issue and start seeing this as a profitable segment. This involves to invest on research and design for them. I hope to see a bank where Financial inclusion area dissapeared because the mindset is seamlessly integrated into the entire bank.

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