1. 136 CFI.co | Capital Finance International
he aspiration of universal financial
inclusion is increasingly prominent on the
global economic agenda in recognition of
its importance. More than fifty countries
have set national targets to expand
financial inclusion. Innovative models to extend
financial access have generated a buzz around
transformational business models. Examples
of these models include China’s Alibaba which
focuses on SME finance and is based on ‘big
data’ and supply-chain relationships; and,
M-Pesa and Equity Bank in Kenya. The former
processes payments through mobile phones
while the latter welcomes low-income clients
through alternative delivery mechanisms.
Financial inclusion provided two of the proposed
indicators in the UN High Level Panel’s report for
post-2015 development goals.
World Bank Group President Jim Yong Kim
has laid down a marker in terms of vision,
stating that universal financial access should
be achievable by 2020. At the World Bank-IMF
Annual Meetings this year, he made the case
that “universal access to financial services is
within reach – thanks to new technologies, the
use of ‘big data’ transformative business models
and ambitious reforms.” He noted that “as early
as 2020, such instruments as mobile wallets
and other e-money accounts, along with debit
cards and low-cost regular bank accounts can
significantly increase financial access for those
who are now excluded.”
PAYMENTS AS A FIRST POINT OF ACCESS
The initial point of entry to financial access for
many low-income households is the receipt of
wages, benefits or remittances as an electronic
payment credited to a card (which may or may
not be linked to a bank account), mobile wallet
or any other form of e-money account, or to a
regular bank account.
The growth of electronic payment products
– which can be used through the expanding
networks of relatively low-cost access points
such as ATMs, point of sale terminals, non-bank
correspondent agents and mobile phones
– is therefore significantly expanding financial
access. World Bank data show that these
transaction instruments are generally growing
faster than deposit accounts at commercial
banks. In those countries home to the vast
majority of the unbanked, payment cards are
growing every year at more than twice the rate as
regular bank accounts do.
BANK ACCOUNTS AS A GATEWAY TO FINANCIAL
INCLUSION
The ultimate goal is to achieve full financial
inclusion – in other words, the ability of all adults
and firms to access and use a range of financial
products and services that fits their particular
needs. To achieve financial inclusion, improving
access to financial services is only the first step.
An important next step toward financial inclusion
is a savings or checking account at a regulated
financial institution, such as a bank or credit
union. This can open up access to savings
(which evidence shows is directly linked to
poverty reduction), credit, and insurance (to
buffer the poor against the risks of sickness and
catastrophic events) – thus reaching far beyond
transactions and payments processing only.
The commitments to ambitious reforms made
by more than fifty countries to expand financial
inclusion can accelerate the expansion of access
to such regulated accounts. Barriers that limit the
power of investment, technology and innovation
to reach the unbanked with financial services
can thus be dismantled.
Government actions – such as shifting
government-to-person (G2P) payments from
cash to electronic methods and depositing these
payments directly into accounts – can help kick
start the design and rollout of new business
models and products. For example, India is
in the process of building an entire platform
for payments around its new biometric-based
national identity program. This promises to
offer huge cost savings and allows for shifting
payments to electronic transfers directly into
accounts.
Bank accounts with lower entry requirements,
fewer fees and a streamlined product offering
can enable many more low-income individuals
to open and benefit from regulated deposits, as
well as payments and transaction services, and
potentially also credit and insurance. Countries
such as Brazil, South Africa and the United
Kingdom have introduced such accounts in order
to open up access to the unbanked. Many other
countries are now following suit.
THE ECONOMICS OF ACCOUNTS FOR LOW-INCOME
CONSUMERS
Data is increasingly available to assess the
business case for serving low-income households
and microenterprises, and to develop accounts
and other financial products for that un-served,
or under-served, demographic. This includes
information on price and fee sensitivity, available
cash flows, and the relative viability of delivery
models. Such data has been developed by the
World Bank, the World Savings Bank Institute
World Bank Group:
Financial Inclusion -
Banking on Low-Income Households
Financial exclusion restricts economic opportunity and constrains poverty
reduction. Yet today there are an estimated 2.5 billion adult people worldwide who
go about their lives without any formal financial services such as bank accounts.
According to the World Bank’s Global Findex Survey, almost 80 percent of those
living on incomes of less than $2 per day are financially excluded. Low-income
households and women are disproportionately affected, which further holds back
poverty reduction and ultimately limits economic growth.
>
T
By Douglas Pearce
“Innovative models to
extend financial access
have generated a buzz
around transformational
business models.”

2. Winter 2013 - 2014 Issue
CFI.co | Capital Finance International 137
(WSBI), the Bill & Melinda Gates Foundation
and others.
The WSBI’s Doubling Savings Accounts
Programme, funded by the Bill & Melinda Gates
Foundation, has supported low-income account
pilots through savings and postal banks in ten
countries since 2009. The findings from these
ongoing pilots offer valuable insights into the
economics of low-income bank accounts. The
pilots have demonstrated that making the
products work for banks may be as important as
designing products that appeal to the unbanked
and low-income target groups. The three main
lessons learned are:
1. Traditional bank branches will not reach
the majority of the unbanked, and alternative
financial service access points are needed.
While a full branch needs a minimum market
size of 9,000 clients, the minimum viable
number of clients for an agent (such as a retail
store) is only 700, while for an ATM kiosk it is
2,000. For a mini branch the figure is 4,000.
In some countries like Tanzania or Indonesia,
locations that can support a full branch or a bank
agency would only reach a quarter of the whole
population. Banks therefore need to partner
with outlets that can extend their reach, such as
mobile money operators.
2. Simplified or basic bank accounts with
clear and affordable pricing can spur adoption.
Simplified product design, proportional know-your-
customer requirements and clear marketing
messages can all induce greater client take-up.
Banks should also look to price their services at
a level that is affordable in order to develop a
future customer base. In the ten pilot countries
studied, the amounts that customers spend on
fees can equal a full day’s cost of living. Banks
should therefore target about 60 cents per month
in least-developed countries and a dollar a month
in middle-income countries, for customers to
conduct two or three transactions per month.
3. Services provided should be sustainable for
the bank. WSBI argues that sustainability should
be possible, although challenging, even at the
sub-$25 monthly balance level typical of the
poor. The key is to charge a monthly fee that
can be paid out of the household budget, and
to provide service at sufficient scale in order to
cover overhead. A significant increase in the
customer base is therefore critical to success.
WHAT IS NEEDED TO BRING THE PRIVATE SECTOR
FULLY ON BOARD?
If banks and other financial institutions see
financial inclusion reforms and other public-sector
actions as out of step with their market
realities – or if they view targets and strategies
as a top-down imposition to be avoided or
managed – then the potential impact of these
actions will be watered down. Serving low-income
households profitably is challenging, as
the WSBI pilots illustrate.
Well-intended initiatives by policymakers
often fall short of achieving their potentially
transformational impact. For example,
introducing basic – i.e. simplified and accessible
– bank accounts, or opening new accounts for
recipients of benefits, has in many cases not yet
had the intended boost to financial inclusion.
Many of those accounts remain under-used. Only
about one in five (22 percent) of accounts in low-and
middle-income countries are used frequently
(more than three times a month for withdrawals),
compared to 72 percent of accounts in high-income
countries, according to the Global Findex
Survey.
To address this challenge of dormancy or under-use
of accounts, account-related costs need to
be made affordable, financial awareness levels
may need to increase, and access to accounts
needs to be made as convenient as possible,
as the WSBI pilots also indicate. Low levels of
usage and limited uptake by consumers can
be linked to financial institutions often not
viewing new, lower-income consumers as an
attractive business proposition, and therefore
not developing sufficiently attractive and tailored
products for them. Low uptake may also be due
to account-design parameters being too strict
and inflexible, if regulators have intervened to
set or control those parameters.
Financial-service providers such as banks, credit
unions and (where permitted) telecom companies
therefore need to be engaged in informing and
taking shared ownership of financial inclusion
targets and strategic priorities. The momentum
in many emerging markets to quickly draft and
launch financial inclusion strategies with top-down
targets may need to be adjusted, and
processes may even need to be re-started, if the
prize for doing so is private sector buy-in and a
better likelihood that targets will be achieved and
surpassed.
Achieving the right balance between the private
sector participation in setting financial inclusion
targets and prioritizing reform measures – while
ensuring that financial-service providers truly
rethink business models and financial products to
fit low-income households and microenterprises
– will be central to the achievement of the targets
set. Similarly, regulators and policymakers need to
balance financial inclusion targets with stability,
competition, integrity and market-conduct
priorities, to ensure that financial inclusion is
fully beneficial to the economy, to the financial
sector, and to low-income households. i
[References in online version at cfi.co]
ABOUT THE AUTHOR
Douglas Pearce is the manager of the Financial
Inclusion & Infrastructure Practice at the World
Bank. He previously served at DFID, the United
Kingdom’s development agency, as the leader
of the financial sector team and deputy head of
the Growth and Investment Group. Here he also
chaired the Steering Committee of the Financial
Reform and Strengthening Initiative (FIRST).
Prior to that, Mr Pearce served as a senior
financial sector specialist at the Consultative
Group to Assist the Poor (CGAP), and set up
and managed a microfinance institution, among
other roles. Sarah Fathallah and Christopher
Colford, both of the World Bank, contributed to
this article.
IBRD 40406
SEPTEMBER 2013
80 – 100
60 – 80
40 – 60
20 – 40
0 – 20
NO DATA
Map 1: Adults with an Account at a Formal Financial Institution. Source: Global Financial Inclusion Database, World Bank.