This is the first in a series of articles which will share insight about the important role of Alternative Delivery Channels in financial inclusion for Digital Financial Services providers, compare efficiencies of various channels and highlight use cases and lessons learned from the field.
Who are the Unbanked?
The Unbanked are consumers who don’t have regular access to basic financial services. Most unbanked live in Africa, Asia and Latin America – where the informal economy is king. The Global Findex (World Bank’s financial inclusion database) shows 3/4 of the world’s poor do not have a bank account; this is not only because of lack of income, but also due to monetary (transportation costs) and opportunity costs (time to reach nearest branch), travel distance to a bank branch or outlet and bureaucracies, like obtaining the required paperwork to open a bank account (eg. Utility bill to serve as proof of address). Women, youth and rural residents are at the greatest disadvantage.
With the exception of high income economies, borrowing from friends, family and community lenders is the most commonly reported source of credit for current loans in all geographies. This informal source of credit ranks high in convenience but lacks in security, structured products and regulations which protect both lender and borrower. IMF (International Monetary Fund) suggests the informal economy in Sub-Saharan Africa represents an average of 40% of GDP.
The informal financial system varies accordingly to country, but it’s commonly characterized by the lack of supervision by the Central Bank (or equivalent institution) and is usually composed by money lenders and saving groups within a rural or urban community. All transactions are made with cash, increasing the chances of theft or other loss (e.g. natural disaster, fire).
What is financial inclusion and why is it critical?
A basic bank account gives access to products and services that have the potential to enhance the unbanked life. Mobilizing deposits contributes to macroeconomic development, and secure savings and credit can end the poverty-cycle in low income economies. Consider as an example rural farmers: with support from financial institutions, small account holders can increase their income, reduce their vulnerability to risks and evolve from subsistence farming to commercial agriculture.
Today, there are 2 billion unbanked. This number has been dropping since 2011, from 2,5 billion due to the remarkable investment of the financial inclusion ecosystem, including banks and other formal financial institutions (like microfinance), Governments, NGOs and private companies which are strongly investing in important initiatives to increase availability of banking services. Governments and regulators are shaping their regulatory frameworks to support these financial inclusion initiatives. NGOs are frequently a direct point of contact with local population, assessing their needs and consulting with partners to promote best practices targeted to the unbanked. Private companies develop technologies and products to support the whole network. Banks and other formal institutions are the last mile of the financial inclusion strategy by connecting the unbanked to the formal financial system.
The role of Alternative Delivery Channels (ADC)
Traditionally, banks and other financial institutions deliver services to customers through branches, where it’s possible to physically perform operations like opening accounts, deposit and withdraw cash, apply for loans, etc. However, to reach the unbanked, banks need to adapt their products and services, their communication and, more importantly, their delivery strategy. For unbanked consumers, a branch can be located many kilometers away from his or her home; this prohibits access to many who might need it due to time and transportation costs to reach the nearest branch.
This is why it is critical for banks to have low cost and easily scalable channels to efficiently address the unbanked. These channels are the so-called Alternative Delivery Channels (ADCs): they include all the ways of serving customers outside of physical branches and are often enabled by technology:
Alternative Deliver Channels are strategic for banks and other DFS providers, as they enable:
- reduced operating costs – branch costs are much higher than any ADC
- improved client convenience – enabling access to financial services nearby or locally
- exploration of new market segments (low-income segments)
A basic bank account can have a powerful impact if it can bring the remaining 2 billion unbanked to the formal financial system. This impact could be felt across the all ecosystem:
The McKinsey Global Institute has conducted extensive research on estimating this impact. Banking the unbanked could increase the GDPs of all emerging economies by 6%, totaling $3,7 trillion by 2025 which would create up to 95 million new jobs worldwide. In low income economies, like Nigeria and Ethiopia, McKinsey estimates a 10 to 12 % increase in their GDP.
In addition to expanding their customer base, financial services providers will see their balance sheets increase by $4,2 trillion.
An account at a financial institution gives access to products and services that have the potential to enhance the lives of currently unbanked consumers. This enables them to keep their assets safe and to allow them to plan their expenses and investments in the longer-term.
To make this possible, Alternative Delivery Channels are a convenient, low-cost method to scale services and to reach clients and geographies previously unserved.
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