Home Finance Three Key Trends Shaping Financial Services in Emerging Markets

Three Key Trends Shaping Financial Services in Emerging Markets

by internationalbanker

By Andrée Simon, president and CEO, FINCA Impact Finance

Imagine you’re one of the nearly 40 million Tanzanians who live in a rural community. It would most likely take a day of your time and a considerable portion of your earnings just to travel to the nearest brick-and-mortar financial institution. Whether you need to repay a loan, pay school fees, transfer funds or deposit money, you’re likely to spend a signification portion of the time and resources that should go into growing a business simply trying to transact with your bank.

But even as transportation infrastructure remains relatively underdeveloped, digital infrastructure is advancing rapidly. Utilizing digital technologies, more convenient and flexible ways to conduct banking are emerging as we speak. Why shouldn’t you be able to manage your account using only a mobile phone? Instead of spending the day traveling to a branch, shouldn’t you be able repay your loan by visiting a banking agent at the corner store in your town or village?

Due to Fintech innovation, the rapid expansion of mobile networks and the efforts of FINCA Impact Finance, financial services are becoming more accessible, even for the most excluded. Because of this convergence, we are now able to integrate digital technologies into new and existing services, so that more people in Tanzania and elsewhere are now able to access crucial financial services without ever setting foot in a bank branch.

As emerging markets demand more financial flexibility, banks and microfinance institutions will need to adapt quickly to survive. Digital financial services are becoming the norm. And the good news? They keep getting better.

Having spent nearly 20 years working to expand financial inclusion in emerging markets worldwide, I’ve noticed three key trends shaping financial services:

1. Financial Inclusion is Advancing, But Access Isn’t Everything

The World Bank’s Findex 2017 showed that new technologies are making financial services available at unprecedented levels – especially for low-income people in emerging markets; the very people who have traditionally been excluded from the formal banking system. 

Since 2014, 515 million people have gained access to financial services. Of the 1.7 billion adults who remain unbanked, a full two-thirds now have a mobile phone. That means there’s a real opportunity to close the remaining gaps in financial inclusion by providing mobile financial services.

However, we should remember that inclusion is not a panacea. Financial services need to be more than simply available, they need to be responsible and impactful.

The global gap in savings is one area where more intentional action is needed. While the Findex shows tremendous progress in access to financial services overall, the percentage of savers in emerging markets has actually declined in recent years. In 2014, 53 percent of adults in emerging markets reported saving or setting aside money during the past 12 months, whereas only 43 percent reported doing so in 2017.

Financial services providers need to do a better job of reaching customers with savings products—and promoting a culture around saving. Expanded financial literacy is critical to preventing over-indebtedness. As financial service providers, we have a responsibility to use technology for education and transform the paradigm of financial services. With that goal, our clients will be equipped with the knowledge and training they need about the products and services they’re enrolling in, so they are empowered to responsibly take control of their finances.

FINCA Impact Finance is offering savings products and implementing financial literacy programs across our global network. In Tanzania, we recently launched HaloYako, a free-to-use mobile savings product accessible via feature phone. Using HaloYako, customers can create a savings account in less than five minutes and earn free mobile airtime as they reach savings targets. More than 100,000 people have already used the service since it launched less than a year ago.

2. People Want Banking, Not Banks

Technology and big data have irrevocably disrupted traditional banks. The microfinance sector, though successful in reaching low-income people with credit and savings products, is not immune to these changes.

Therefore, a financial services model that depends on transaction fees to be profitable, relies on armies of loan officers to reach customers and requires customers to physically travel to bank branches, is unsustainable and outdated. The future of finance is a world where payments, remittances and transfers will be made free of charge, and these capabilities will be accessible to customers anywhere and anytime they need them. Given the prevalence of digital technologies, it’s no longer viable for a small business owner to close up shop for the afternoon to travel to a physical bank branch and make a deposit.

Credit will increasingly become commoditized in emerging markets as more providers enter the space. Customers are becoming increasingly savvy, putting the onus on banks and financial service providers to create products that meet the needs of the customers. Credit scoring will become more accurate; risk will be better managed; and people will have greater access to appropriately-priced responsible financial services. Mobile Network Operators (MNOs) will flood emerging markets with expensive but convenient $10 loans.

In keeping with this trend, FINCA Impact Finance launched Pakistan’s first free-to-use mobile e-wallet, SimSim. The app is MNO-agnostic and users can create an account in less than a minute, enabling them to easily make point of sale purchases, pay utility bills, transfer funds, top up mobile balances and access a range of other services—all without incurring transaction fees. Launched in September 2017, SimSim already has roughly 185,000 users.

3. Viability Will Depend on Adaptability

Financial institutions of all stripes must adapt to survive in today’s evolving emerging-market landscape. This means integrating digital technologies into their existing services. Next, it means innovating new technologies to develop the financial services of the future.

At FINCA Impact Finance, we’re partnering with like-minded fintech organizations to stay on the cutting-edge of digital finance. Because of our work on the ground, we bring a deep understanding of our customers while our fintech partners bring innovative technologies. Together, we’re able to integrate digital technologies to greatly improve our services, for example through credit scoring, digital field automation, biometrics and mobile and online banking.

Recently in Guatemala, we piloted psychometric credit scoring, an innovative method that involves having potential borrowers fill in an interactive questionnaire via tablet. And in Tanzania, we piloted credit scoring based on mobile phone usage, using metrics like the number of calls individuals make to determine their connection to the community. So far, the information gleaned from these initial interactions have been accurate predictors of customer behavior and ability to repay loans, and are examples of how we can take traditional metrics and conduct them in a lighter-touch, more efficient way.

People, Not Products

While technology is key to surviving and thriving in today’s rapidly-evolving landscape, one important factor hasn’t changed. This industry is about people. For FINCA Impact Finance, our frontline staff continue to play critical roles providing services, representing our values and providing financial education to members of the communities we serve.

Digital solutions to maximize reach and efficiency are necessary for any financial institution to remain viable, but they don’t substitute for personal, trust-based relationships. Our on-the-ground staff are what set us apart; fintech innovation will help them do their jobs faster and more efficiently.

Our customers are waiting for a new generation of financial service providers—in short, they’re waiting for us and other like-minded organizations who are undergoing tech transformation while continuing to provide responsible financial services. In a global financial landscape that is constantly changing and innovating, we’re rising to the challenge of providing convenient, flexible products that allow our clients to take control of their financial futures.


Related Articles

Leave a Comment

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.