Increasing financial inclusion could yield increasing revenue to banks: EY

Financial inclusion isn’t just a worthy social goal for banks – it also represents potential revenue that EY estimates could be as high as US$88 billion by 2020 in the Asia Pacific region.

EY has published Innovation in financial inclusion: Revenue growth through innovative inclusion, a report that finds that increasing servicing of financially excluded consumers and micro, small and medium enterprises (MSMEs) could mean an increase of US$200 billion in global revenue. EY’s financial inclusion heat map show.

China as having the greatest potential revenues from financial inclusion, estimated at US$63.4bn, with Thailand (US$8.5bn) and Vietnam (US$5bn) also featuring among the top 10 countries globally.

Currently, retail bank account penetration across Asia-Pacific is at 65%, which EY estimates could increase to 74% by 2020.

“I think a lot of the banks have a little bit of an outdated view on financial inclusion in the sense that it has been difficult and often not profitable to serve these customers,” said Jan Bellens, EY global emerging markets leader. “With technology, rapid mobile and especially smart phone applications, banks are leaving money on the table that they could capture, and not just leaving money, but endangering their future growth story because these are the customers of the future.”

EY notes that mobile adoption and e-payments, national digital identity systems, open access to digital data and currency digitization are all “crucial technology considerations for banks” in emerging markets.

“If you look at the factors that are coming nicely together, in terms of technology, with digital and mobile penetration increasingly rapidly, smart phones have become cheap and consumers have more access,” Bellens said. “Secondly, in terms of, for example, credit, traditionally, it was difficult to get data on these people. … There have been rapid advances in alternative risk control measures. Not only have governments and regulators started to take initiatives here, their technology has come forward, such as India with biometric identify systems. Several other countries are taking advantage in terms of identify and biometric identify space, the launch of specific licenses for driving financial inclusion.”

Banks have historically held back on extending products and services to financially excluded consumers and MSMEs because of a lack of traditional credit history and data. However, the EY report notes that “some countries have formed MSME credit registries to enable the collation of reliable and transparent data that potential lenders can use to facilitate loan applications. Banks seeking to boost lending to underserved segments could use these registries to address information asymmetry and reduce their cost to serve.”

“You are starting to see a number of banks in the markets out there that have entered into initiatives, out of either corporate social responsibility models, or strategic models,” Bellens said. “You see more and more the banks getting into this because they believe they can actually do this economically well.”

Similarly, innovations around using new data sources such as social media profiles can provide behavioural analysis and open application programming interfaces (APIs) “allow financial institutions to collaborate with FinTechs, governments and external partners on innovative mobile applications and digital payment solutions. Such collaboration can lower the cost of customer acquisition and foster financial inclusion.”

What big banks lack in certain cases is the agility to implement programs targeting financial exclusion, and therefore are vulnerable to losing consumers to alternative platforms like peer-to-peer lending apps. Bellens notes that partnering with local enterprises is one way that banks can overcome some of their entry issues.

“Often, banks use a partner that has the operational knowledge or some particular value to the venture,” he said. “The retail lending examples in the report are jointly done with a bank. I think those examples we will see more and more where banks rely on partners often for that knowledge and that link to the customer.”

Given that a large chunk of heretofore excluded individuals and SMSEs are in the Asia Pacific region, there could be an opportunity for Australian banks to leverage their proximity and capture some of these potential clients.

“If you look at the footprint of the Australian banks in Asia, you can highlight that for the traditional business that has been an interesting journey,” Bellens said. “If you look at the footprint, certainly if you look at the markets where there are big potential – Indonesia, Vietnam, for example, where the Australian banks have franchises, there is opportunity. The banks are active there as well, with great innovation. It might not immediately hit the radar screen of analysts because in the bigger scheme of things, they’re not the biggest revenue opportunities, but I think the bank are taking great opportunities. Certainly markets like Vietnam and Indonesia are very interesting in that respect.”