The smart path to savings growth

The challenge of financial inclusion – extending access to formal financial services – is often seen as an issue for developing countries, where the ‘unbanked’ may be the majority. But this challenge, or opportunity, might be closer than you think.

A 2011 survey by the Financial Deposit Insurance Corporation found that over a quarter of US households were either unbanked or underbanked, relying to some extent on non-mainstream financial services, while one in 12 households were actually unbanked.

According to the World Bank’s Global Financial Inclusion Database, approximately 2.5 billion people globally do not have a formal account at a financial institution. To explore ways of changing this situation, Rockefeller Philanthropy Advisors launched Gateway to Financial Innovations for Savings (GAFIS), a four-year project (2010-2013), managed by Bankable Frontier Associates (BFA), in partnership with five financial institutions in Latin America, Africa, and Asia.

The project is part funded by The Bill & Melinda Gates Foundation, which runs a Financial Services for the Poor programme to broaden the reach of digital payment systems, particularly in poor and rural areas. It set out to understand the factors that encourage or inhibit poor savers, affect institutional capacity to serve them and contribute to a sustainable business model. What the GAFIS project discovered will be the subject of a Big Issue Debate at Sibos, where BFA and representatives of the five banks will share their experiences.

No single solution Not surprisingly, experiences varied, given that the five participant banks occupy different positions in their respective country’s financial landscape. Equity Bank of Kenya is the country’s largest retail bank by number of customers. Bancolombia (Colombia), ICICI Bank (India) and Standard Bank (South Africa) are large multi-segment banking, while Bansefi (Mexico), a state-owned bank, has a direct mandate to provide financial services to the poor. The resulting report does not propose a blueprint for financial inclusion, rather a direction in which to strive.

Initially focused on product development, the project soon accepted the importance of delivery channels, specifically agent banking. “Agents made the overall ‘product offering’ more compelling to the banks, because of cost implications; and to customers because of convenience,” says Jeff Abrams, the BFA senior associate responsible for GAFIS. “Product does matter, but channel innovations were more significant at this stage of financial inclusion efforts for these banks.”

Informal competition The GAFIS report acknowledges that creating and sustaining a range of products covering credit, transactions and savings for low-balance accounts requires technology investment by banks. At the same time, competition comes not only from other financial institutions, but also community-based schemes, such as local savings clubs.

“In each market, the GAFIS banks were not the only banks pushing in these directions, although we think our banks were probably more aggressive and more innovative than most other banks in the respective markets,” says Abrams, “but banks are often competing more with informal mechanisms, when it comes to market share for savings balances.”

Informal alternatives offer convenience, comfort and low maintenance costs versus the benefits of bank accounts such as security and privacy. Abrams does not, however, see it as an all-or-nothing competition. “At one level, the banks’ task is to try to convince the target segment to shift some or more of their portfolio from informal to formal and not necessarily to completely stop the informal,” he says. “The next level of competition is versus other banks or formal service providers for that market share.”

Exponential growth Abrams’ focus on delivery channels is endorsed by Kabelo Makeke, head of inclusive banking at GAFIS participant Standard Bank. “By transforming our back-end processes and making intelligent use of mobile technology, we have been able to reduce the costs of administering these accounts and cut our bank charges,” says Makeke. “We expect the business to grow exponentially, not only as new customers come on board but as existing customers grow their financial needs.”

Writing in the ‘Stanford Social Innovation Review’ in May, Chris Page, senior vice president of Rockefeller Financial Advisers, and David Porteous, founder and director of BFA, point out that, “Today, most poor people (90% of bank clients in GAFIS surveys in South Africa, Colombia, and Kenya) have access to a mobile phone with SMS messaging. As a result, some banks are using SMS messages and on-the-ground agents to catalyse initial deposits and build trust by confirming amounts. The programme’s bank partners realised that they needed to offer services that were accessible from traditional, basic cell phones in addition to smartphones.”

The GAFIS banks now have a collective 25,000 agents working on the ground, compared to just 2,600 in 2010. In total, more than four million new GAFIS-linked accounts were created over the course of the programme. “As a result of the combined effort of the five GAFIS banks, many new savers are active users,” Page and Porteous observe. “In the last year of the project, the number of inactive accounts has gone down by about a third. If this trend continues, it would suggest these innovations have the capacity to make lasting change.”