Written by Charlotte Vangsgaard & Anna Ebbesen
In a conversation with Charlotte Vangsgaard, CGAP’s Gerhard Coetzee discusses how to help the financial sector discover the business potential of low-income customers.
Vangsgaard: What are the biggest challenges to financial inclusion, as you see it?
Coetzee: Access, unfortunately, remains a challenge, as well as getting people to use the products once they gain access to them. But the root cause of why financial inclusion is still an issue lies in the minds of the decision makers in the financial sector. Their approach to financial inclusion is frequently laced with faulty assumptions about the poor and the relevance of their own products. Our challenge is to assist and guide the sector’s approach to its clients, business models, and offerings.
Vangsgaard: In our work, we call those orthodoxies. They’re the assumptions our clients have about the problems they are facing or the people they are trying to reach, and we always map them, so we know what we need to address in order to move the organization from innovating from the inside out to an approach rooted in the world of the customer. What would you say those assumptions are in the financial sector?
Coetzee: The most profound assumption, as you point out, has to do with the customer. What does it actually mean for your personal finances to live on $2 a day? The second is how to assess the feasibility of a customer—how can we lower the risk and cover our costs of doing business with the poor? And, lastly, the sector’s approach to innovation—how can we deliver products and services matching the needs of the market?
Assumption #1: The poor have the same needs as the middle and lower classes
Coetzee: The banks tend to lump the poor in with other market segments. They make a lot of money on people from the middle and affluent classes but haven’t been successful with the poor, because they assume that segment is similar to the other groups, just with less money. When you take an area like income, it is clear that the poor are often different from the middle classes. Their income is inconsistent at best. It’s a variable flow, which makes it hard to predict—e.g. making it hard for the poor to pay a monthly fee for an account.
Vangsgaard: We know from past studies that poor households often have a much more varied flow of assets over the course of a year than wealthier groups, but no banks seem to cater to that.
Coetzee: It’s a wasted opportunity. I always argue that we underestimate the number of financial instruments poor people use to do consumption planning and ‘“income smoothing.” The poor might use ten informal instruments, coupled with maybe two formal instruments, while they are involved in a myriad of relationships with people where they act as lenders, savers, and creditors—same person, different obligations to different people in their community. This makes banking much more personal, infiltrating people’s lives and influencing their social life in a deeper way than for the more affluent classes.
Assumption #2: You start by assessing feasibility through cost of service
Vangsgaard: So if the banks start with the cost of service, what other implications does that have for the financial sector’s approach to financial inclusion?
Coetzee: For me, a major one is around the business model. The financial sector is accustomed to assessing feasibility by assessing the cost of a service reaching a customer—what would it take to deliver services? The opening of lower-cost branches, or partnering with agents even considering mobile phone–based accounts? CGAP works with regulators to ensure financial inclusion is considered at the policy level and has helped push technological innovation to cut costs on the ground. Still, the general assumption prevails that the poor cost too much to reach. And, for me, it’s this assumption, and the focus on the cost side of the P&L, that has blocked the sector from thinking about what a long-term revenue model might look like if they managed to successfully cater to this market.
I want the banks to go beyond this assumption, which is engrained in their business model. They should start by looking at the cost of service for the customer, not for the bank. They should ask themselves, “What is the cost for the customer to actually bank with me?” Technology has provided ample ways for financial-service providers to bring their cost per customer down—it’s time to do the same for the customer. Whether it’s a direct financial cost like transportation, a social or cultural cost, or the psychological cost of doing business. In following this approach, they would actually be working on a better revenue model, as customers with lower costs of transaction will transact more.
Vangsgaard: And if you got the banks to flip their thinking from cost to revenue, and decrease the cost to the customer to interact with the banks, you are actually solving the problem of why financial-inclusion activities haven’t been as successful as we’d hoped, as they didn’t take the cost of service for the customer into account.
Coetzee: Maybe we can get people to open an account, but they might not use it enough for the product to be profitable for the bank. And when that’s the case, the cost is too high for the bank and the customer. It only makes sense to talk about the cost of the customer when you have a value proposition that is desirable to that customer. You then have a better chance to address both sides of the business case—costs and revenue. Only then do you have a viable business case to base the analysis on.
Assumption #3: Current product portfolio will match all needs
Vangsgaard: But to get a viable business case, the sector has to rethink its approach to product innovation and accept that its current portfolio doesn’t match the needs of this new market segment.
Coetzee: Unfortunately, the sector tends to be very product-centric when it innovates. It tends to tweak things instead of starting from the needs of the customer. This isn’t so bad when you know whom you are delivering products and services to—maybe a tweak was all it needed to be perfect. But imagine not knowing. And then think of all the many times you’d have to tweak things to ensure that the product works for the customer.
Vangsgaard: If that’s the case, then the sector will end up with a self-fulfilling prophecy, right? It’s not worth catering to the currently unbanked because it hasn’t been worth it in the past.
Coetzee: Our goal is therefore to have the banks start anew and have the potential new customers as the baseline. To be more specific, we want banks to take the time to understand lower-income customers and build insights that will inform the design of bespoke products and services that will increase uptake and use, as it will be this approach that will support higher revenue.
The solution? A customer-centric business model
Vangsgaard: What are you working on now to help the banks make that shift?
Coetzee: We are currently working on what I call a customer-centric business model that would transform the relationship between banks and the poor, because its focal point is the customer and providing a service that relieves the pain points in their lives and alleviates their problems, while showing the banks that there is a profit to be made. In a way, the ultimate goal is to reach a customer who understands the product, channel, and service combination in such a way that they can use it as a tool to reach their objectives.
Vangsgaard: Can you give a good example of a product that functions more like a problem-solving tool?
Coetzee: I think M-Pesa, the Kenyan mobile-payment system, is a good example of that. It was originally designed as a system for repayments of microloans. Then it was refocused as a money-transfer system, moving money from one person to another, but people started tweaking it to fit their needs. When traveling long distances, Kenyans (especially women) feel uncomfortable carrying a lot of cash with them. So what do they do? They send money to themselves. They send it at the beginning of the journey, and at the end they withdraw it. In essence, they redesigned the product, making it a tool to meet the more profound need for security. And that’s where the potential is—look at tools for meeting needs, for solving problems, based on the context of the customer. If you do that, it’s my firm belief that, through technological innovation, it will also be viable to do business—both for the poor customer and the bank.
A shift in mindset is needed for real change to happen
Vangsgaard: It sounds like the lever you need is a mind shift, and CGAP’s role is one of pushing this mind shift to happen.
Coetzee: Yes, we can’t do the innovation ourselves; it has to come from within partners like the banks, where the mindset has to change from the C-suite down to individual managers. We believe strongly that the positive results of a customer-centric mindset seen in other industries can be emulated in the financial sector. We have learned that it takes committed leadership to change a culture, to empower employees, and to shift the focus to what customers need. At CGAP we are doing our part to change the mindset, pushing for a customer-centric approach to the provision of financial services. That’s our real challenge, our real gateway for change.
Gerhard Coetzee is a Senior Financial Sector Specialist at CGAP . Charlotte Vangsgaard is a partner at ReD Associates.