One Billion Opportunities: Banking the Unbanked Globally

Published on 24th November 2008
Mobile Banking is taking Centre-stage
An exciting landscape is  emerging in the banking arena, one where there is a billion-strong market actively seeking financial services but remains largely unattended to. These globally distributed prospective customers represent enormous earning potential for banks, but constitute the unbanked.

The unbanked are those who do not utilize banking services and have limited banking needs. The unbanked are not the poorest of the poor. However, they certainly include those whom banks need to serve but cannot do so profitably in the existing banking environment. Though these consumers need access to banking for savings, loans and microfinance, they do not have bank accounts. The reasons for this are compelling. For instance: lack of steady and substantial income leading to a fear of insufficient funds for an account; limited access to banks especially in remote areas; lack of formal employment that precludes a financial history; poor financial literacy and psychological factors such as mistrust of financial institutions.

This unbanked billion is not outside the banking sector by choice. An important reason for their predicament is that banks do not offer products tailored to their needs. In effect, they have been excluded by the banks’ inability to understand their requirements and the unwillingness to adopt innovative models to serve them.

However, this billion also constitutes an enormous opportunity – if banks are willing to accept the challenge of including them with an eye on the bigger picture. This paper provides a regional perspective to this issue and examines what banks can do to capitalize on this opportunity.

How to bank the unbanked

In China and India, only about a third of the population participates in the formal banking sector. In Africa, the number is just 25 percent. India has the second-highest number of financially excluded households in the world – 135 million – after China’s 263 million. Africa as a whole has 230 million unbanked households. Central and Eastern Europe and Latin America have 19 million and 42 million respectively.
But irrespective of where in the world they might be, this unbanked section of society has similar needs for financial services. Apart from the obvious requirements of savings,loans,transactions and investments, the unbanked need flexibility in savings and repayment schedules owing to lack of stedy income;simplicity and speed in processing;small product sizes when it comes to loans and low-balance savings accounts;proximity and ease of access and basic financial education or information.

Most banks find it difficult to meet these needs because of the high economic cost of servicing these demands. However, a little out-of-the box thinking in devising products that are simple and accessible can help ensure inclusive growth.

Some of these measures could include tying up with an NGO or with a retailer and using village residents and empowerment groups as representatives. These can lower customer acquisition costs and increase customer base, thus helping banks overcome the high cost challenge. Such groups also help banks mitigate risks associated with dealing with the unbanked. An estimated 2.6 million self-help groups in India are linked to banks, giving financial institutions access to 40 million households.

It is important that the products are downsized without being downgraded to match the unbanked population’s smaller requirements by offering low installments and flexible repayment options. Banks also require performance metrics and regulatory conditions that are more suited to including the unbanked in the financial mainstream.

Some banks are using inter-industry partnerships to increase financial inclusion. For example, banks in Brazil have added 100,000 point-of-sale locations to distribute products by tying up with retailers. Not only are these channels cheaper for banks but they are also more convenient for consumers.

Banks must realize – and they are seeing the light – that since the unbanked have remained unaddressed by traditional financial institutions, they will not hesitate to choose newer players for basic banking services such as payment and deposit transactions. Collaborating with telecom players, adding a mobile channel, and utilizing cross-selling opportunities will go a long way in meeting the needs of the unbanked.

In many emerging economies, mobile consumers are growing at a much faster rate than bank customers. Mobile banking is taking off because it is convenient, fast, simple, and secure. Moreover, it is a cost-effective option for banks. Gartner has estimated that there will be 33 million mobile payment users worldwide in 2008, with the Asia Pacific taking the lead. Gartner expects this number to triple to 103.9 million users in 2011.
Other forms of branchless banking and e-payment gateways such as payment cards and the Internet can also help banks increase their outreach. Banks need to experiment and include the next billion consumers not merely for the socio-economic assistance they will gain. The step will also have a strong business imperative for banks. Not only will a bank increase its customer base, but it will also ensure increasing numbers of future customers as incomes increase.

Let us examine how banks are reaching the unbanked in Africa.


According to the IMF, African countries are enjoying their best period of sustained economic expansion since attaining independence. Real GDP growth is expected to rise from 5.7 percent in 2006 to 6.8 percent in 2008. Still, only 20 percent of families in Africa have bank accounts.

Ethiopia has less than one bank branch per 100,000 people – a developed nation like Spain has an average of 96 branches. Even in South Africa, where the sector is more sophisticated, only 40 percent of adults have bank accounts. But there is a huge demand for bank services. Finding this demand unfulfilled, millions of Africans turn to informal services or invest in cattle.

But banks are increasingly adopting innovative methods. South Africa has physically taken branches to the unbanked, either as prefabricated units, or in vans that make visits to under-served areas. In remote areas, machines have been installed in shops where customers print out a slip and present it to the shopkeeper, who provides the cash. Some rural branches and ATMs rely on solar energy and satellite phone.

The ‘Big Four’ banks of South Africa (ABSA, First National Bank, Nedbank Group and Standard Bank) and the government developed the innovative Mzansi account in 2003 which is a low-cost transaction account. It enables banks to cover at least 70 percent of the unbanked market in a relatively short time. The government provided a small subsidy to cover the cost. It is targeted at people who earn less than R2,000 (US$264) a month. It now has more than 4 million subscribers.

Studies conducted by Genesis Analytics for the Finmark Trust in 2004 have suggested that point-of-sale (POS) facilities can play an increasingly important role in providing the unbanked access to basic financial services in South Africa.

West African financial services biggies Zenith Bank and Ecobank and multinationals Citibank and the International Finance Corporation have set up the Acción Microfinance Bank in Nigeria. It aims to provide low income earners and entrepreneurs with credit facilities and finance.

Mobile banking seems to be the most promising option in Africa. Few Africans may have bank accounts, but many have mobile phones. Wizzit (a financial services provider), First National Bank (FNB) and MTN Banking (a joint venture between Standard Bank and a mobile-phone network), are targeting the 14 million unbanked South Africans.

In Kenya and Botswana, 17 percent of the unbanked own a mobile phone, according to the FinMark Trust. In Kenya, Vodafone and Safaricom, Kenya’s leading mobile operator, launched an m-commerce payment service, M-PESA, aimed at the unbanked in March 2006. Within three months, it had 150,000 customers, with 2,500 new users signing up each day.

First Bank linked-up with Nigeria’s second biggest mobile operator, Globacom. The partners introduced the GloFirst card in conjunction with the switching company Interswitch. GloFirst can be used to withdraw money, check card balance, print mini statements, change the Personal Identification Number (PIN) and transfer money to another cash card or bank account.
The numbers involved in meeting the needs of the unbanked may seem daunting, but in reality they represent a billion-strong opportunity for banks. By paying greater attention to their wants and developing sensitivity to their needs, banks will be able to develop customized products and include the unbanked in their scheme of things.

Banks may do well to remember that they have a business imperative in converting the periphery into the mainstream.

By Gautam Bandyopadhyay
Principal Consultant at Infosys Technologies

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