The Institute of International Finance (IIF) and the Center for Financial Inclusion (CFI) issued a timely report earlier this month: “The Business of Financial Inclusion: Insights from Banks in Emerging Markets.” This report is notable because its release comes at a time of expected – some would even argue inevitable – disruption within the financial services industry, specifically in the banking sector.
Currently, most, if not all, of the talk in the banking industry is about would-be disruptors—that is, the predators, not the prey. The report gives the prey’s perspective and outlines how they plan to confront the potential threat to their business in emerging markets.
But the market is changing. In the case of banking, the change required to service the majority of consumers and businesses in emerging markets is radical. These potential new customers have never been banked before. Compared to established consumers, they have different needs and radically different expectations in terms of banking products and corresponding price points that they can afford. Their financial needs cannot be addressed with conventional banking formulas. Are traditional banks prepared to pivot?
A Time for Growth
Many observers are signaling the death knell of the old guard. They predict that banking is poised to be the latest casualty of the digital age. Funders are supporting the very start-ups that are innovating in the financial services space and changing the industry dynamics, so much so that the banks could be marginalized, if not totally disintermediated, from the market.
Not so fast, argue the report’s authors as emerging markets are concerned. Banks in these markets are not going away any time soon; instead, the most nimble and forward thinking among them will reinvent themselves. The authors state that of the 721 million new accounts opened between 2011 and 2014, 90 percent of them were opened at financial institutions. Admittedly, it is not clear whether the growth in new accounts is due to regulatory imperatives (in many countries a mobile wallet must be linked to a traditional bank account) or the result of the banks’ concerted efforts to tap into new markets. However, the fact remains that traditional banks, at least for the foreseeable future, will continue to be essential to achieving full financial inclusion.
Although banks are an essential component of the solution, they are not optimally structured to take advantage of the efficiency that technology requires and allows. This limitation prevents banks from extending their reach to underserved communities. Out of necessity, the banks have to work with a variety of partners, to access this global unbanked and underbanked market. They have to adapt.
Preparing for the Future
In a rapidly evolving industry, the traditional players need to be strategic, understanding where they are strong and where they are weak, so they can partner with others in ways that play to their strengths and compensate for their shortcomings. By forming new types of partnerships, all involved can not only survive but prosper, creating new markets and new opportunities.