Financial inclusion – described by the Banking Association of South Africa as a “central aim” of the banking sector – is about improving the range, quality and availability of financial services and products offered to the unserved, the under-served and the financially excluded.
Ultimately, it aims to support people in creating wealth and contributing to the economy – and it must start bringing in small, medium and micro enterprises (SMEs), says Murray Gardiner, business director for inclusive finance at banking software provider Temenos.
He points out that job creation is most likely to happen within the informal sector, where many SMMEs operate, and urges the financial services industry to cater to these enterprises with suitable products supported by appropriate technology.
“Let’s say a small business is enabled to receive digital payments from its customers,” he says. “The acquiring bank will be able to view that merchant through its digital transactions. The bank can then use technology, artificial intelligence and data analytics to calculate the business’s cash flow without needing to physically see its inventory. This means the bank can view past turnover and predict future turnover, allowing it to risk-weight the business based on this intelligence.
“From there,” he adds, “it’s a short step to designing customer-focused products such as a credit facility, micro-insurance or alternative payment methods.”
Gardiner notes that financial inclusion is not just about giving someone a virtual account. “These types of products – virtual accounts or digital wallets – are often introduced with a great deal of hype. Then you see high initial take-up rates, and a year later, the dormancy rates on the same accounts are between 40% to 60% or higher, because they are unaffordable, inappropriate and not useful.”
Financial inclusion and nano credit
Gardiner says that until recently financial institutions considered merely providing access to a bank account and short-term micro-credit to be a satisfactory answer to financial inclusion. “Over the last 30 years, the big wave of financial inclusion has been around access to credit and transactional accounts and we are seeing increasing fintech innovations in the last five years,” he says.
He drives home the point that financial inclusion is not just about access to a transactional account but should be about giving people a stake in the market economy with access to all aspects of financial products and services they need to manage their financial life, to create wealth and to contribute to employment creation and opportunity in the local economy.
“If you consider the options available to consumers in rural areas, or even in urban areas where they are not comfortable in a financial institution, the choices are poor. Do you save in cash – which is negative in inflation and risky? Do you save in physical materials, which are unusable to anyone else? If you stay in a rural area, do you save in livestock, which is prone to all sorts of risk? Those are the traditional methods of saving, but if those assets are locked out of the economy, it stalls the whole process of economic development,” he says.
Gardiner notes that the purpose of the financial market, in terms of economic development, is the intermediation of assets between those who have some wealth and those who need investment in an enterprise or some urgent risk mitigation to smooth out cash flow for their monthly financial cycle.
“Financial institutions – whether they are credit co-operatives, non-bank financial institutions or tier 1 commercial banks – have to earn and then protect their relationship with their customer and ensure that the customer journey is not disrupted by opportunistic fintech that can cherry pick the business. Financial institutions of all kinds need to compete for their customers’ business and partner with fintech to deepen financial markets by including more people in the financial market with a full offering of competitive and important financial products and services,” he says.
Gardiner warns however that financial institutions and fintech companies need to be cognisant of the need to introduce appropriate products, based on real needs. “Digitising old product from the bank out is not going to do it. It has to start with the customer and be designed from the customer’s perspective.
“You can’t just launch an app and expect people to be able to use it when the majority don’t have smartphones,” he says. “Ideally, an app aimed at improving financial inclusion should be USSD-enabled so that it can be accessed on any type of mobile phone.”
Gardiner advocates the use of local infrastructure such as an agriculture depot or a spaza shop as agents. “Financial products should be leveraged off the existing rural and peri-urban infrastructure to achieve a low-cost yet profitable product.”
He notes that in countries such as South Africa with a well-established formal banking infrastructure, banks have the relationships in place already. “In this case, partnerships between banks and fintech make sense, with banks leveraging off fintech to improve their customer journey and to defend local financial markets,” he says.
Gardiner advises that financial institutions look to interoperability with a domestic payment scheme before considering foreign card-based payments. “In South Africa, why would the South African Social Security Agency use MasterCard for social payments? Card penetration in Africa is very low. The use of card infrastructure is one of legacy in a banking context and banks need to realise that they actually have to go back to the drawing board and start from scratch to create solutions that can benefit the greater population and promote financial inclusion,” he says.
Benefits of financial inclusion
According to the Centre for Financial Inclusion (CFI), the benefits of financial inclusion include increases in savings, investments and productivity. For example, in Kenya, women vendors who were granted savings accounts ended up investing 60% more in their businesses, while farmers in Malawi with savings accounts spent 13% more on farming equipment and increased their crop values by 15%.
While these are discernible benefits, the barriers to financial inclusion remain high. The CFI lists these barriers as high costs, long distances, lack of documentation, and distrust of the financial system in general. Gardiner says consumer advocacy and awareness can go a long way towards alleviating distrust and ensuring that people aren’t taken advantage of.
“Too often we see digital apps being launched that are hailed a means of improving financial inclusion but actually promote the use and misuse of consumer credit often at extortionate rates,” he says.
“Unsuspecting, uninformed consumers then access these micro-loans which often have such wide margins that they anticipate default. Of course, once the consumer defaults, their credit profile is compromised and this can lead to them being financially excluded from the system.”
Gardiner reiterates that financial institutions have a responsibility to ensure that consumers are well informed and properly advised before they sign up for a new financial product.
“There are social, political and economic imperatives to include the majority in the financial system,” he says.
The United Nations has projected that the African population will reach 2.5 billion by 2050, just over 30 years from now.
“We are going to see a lot of new entrants in the marketplace looking for jobs, looking for access to financial services, looking for active engagement with the economy,” says Gardiner. “And if we don’t find an appropriate way for people to participate in the financial market, we’re going to have difficulty managing the expectations of growth and stability that the continent wants and so desperately needs.”
Brought to you by Temenos.