In looking at ways to bring financial services to the more than two billion people outside formal financial systems, often the focus has been on piecemeal efforts to improve specific elements such as product design, pricing, delivery, banking regulation, or consumer protection. A new report by the Bill and Melinda Gates Foundation and McKinsey and Company, however, declares that the time has arrived to consider an entirely new framework for providing financial services and payment systems thanks to the phenomenal spread of digital communications.
In short, digital capabilities finally can allow us to reconsider what financial systems should look like, what incentives and revenue options for service providers are now possible, and how services can be delivered at just a fraction of the cost. The Gates Foundation and McKinsey considered developments in developed countries as well as developing country markets to best assess the latest trends and they concluded that a combination of improved efficiencies, increased capacity utilization, and digital innovations could boost the reach and appeal of payment services to low-income markets.
The report, Fighting Poverty, Profitably, estimates that encouraging the use of mobile money and other direct electronic account activities could slash transaction costs at service providers in developing countries by as much as 90 percent. Even in mature, developed markets, the shift to paperless services and less manually-intensive account support has the potential to trim operating costs by 20-50 percent.
By lowering costs and improving margins, financial institutions can reach the threshold of finally providing a suite of financial products and services to the vast market of unbanked, low-income customers who make frequent but low-value transactions. Success in these areas will encourage greater coordination across the sector and spur the kind of investment needed to drive growth across the market. The emergence of mobile money technologies – utilizing cell phones and their networks – and mobile phone credit card readers has created tremendous potential in both cutting costs and also introducing services to those who have traditionally been too far from bricks and mortar institutions or who simply could not afford their services.
“By moving the poor away from cash, it allows them a more affordable and secure way to spend and transfer money,” said Jason Lamb, deputy director on the Financial Services for the Poor team at the Bill and Melinda Gates Foundation. “And because digital transactions can reduce costs to financial providers by up to 90 percent, it becomes an attractive business proposition.”
The Gates Foundation and McKinsey report stresses that however these elements might be applied to remake financial systems in the developing world, the ultimate goals should be to ensure that consumers trust the system, can access it readily, and have the opportunities to use it for not just deposits but also for payments, loans, and insurance. Additionally, financial service providers must look beyond account-based fees and charges to consider related activities that can generate new revenue streams, bolstering their margins and making the push into the lower-income markets financially feasible.
All these elements are brought together under what the Gates Foundation and McKinsey call the “ACTA framework” for financial services, with the acronym referring to Account activities, Cash-in-cash-out services, Transactions (paperless, direct transfers), and Adjacencies (related revenue-generating streams). Successfully overhauling a financial system to broaden its reach to the lower income customers, according to gates and McKinsey, requires that all stakeholders consider how their existing financial system might benefit from improvements and innovations – particularly through the promotion of digital payments and transfers – across all four elements of the ACTA framework. Some countries, such as Kenya, are leading the way in adoption of new technologies to expand the reach of financial services, but they might still need to do more to yield savings and new revenues from existing systems as well.
One of the strongest messages from the new report is that the advent of digital payments technologies have given the financial sector the tools to consider new ways of raising revenue in developing country markets that could be two to five times greater than those from traditional financial services, reducing one of the key economic barriers that have prevented nearly 2.5 billion people from having access to financial services taken for granted by everyone else.
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