03 Apr How incumbent banks can beat Fintech startups to the unbanked opportunity in frontier and emerging markets

Financial inclusion is one of the biggest developmental challenges and opportunities of the 21^st century. The unbanked, a vast multitude in frontier and emerging markets, are people without banking accounts that do not use financial institutions as a medium to make financial transactions. By some estimates around 2 billion adults are without a bank account and over 5% of these are in Pakistan.

However this number has come down by 20% recently as innovative Fintech companies and category heavyweights from outside Financial Services have taken advantage of incumbent banks’ comfort with their business models and muscled their way into the Financial Services space. Judging from the invite lists on Fintech events for the unbanked, the thought leaders with mindshare on this topic and the relevant news items carried by the media, it seems Fintech Startups and their telecom allies are the ones who are carrying the torch for innovation in this space.

Can incumbent banks use digitization in their favor? Is there a way that they can retain their traditional banking customers but find new growth areas in a bottom of the pyramid play? We feel there are three core strategies they can attempt. A combination of the three personalized around a bank’s strengths and cultural singularities can yet save the day for them.

Self-actualize and innovate: Culture may eat strategy for breakfast but it eats agility for lunch. Banks burdened by some of the most consuming, complex and overbearing regulatory environments in the world are by nature process driven with robust checks and balances. These may mitigate risk but they enforce a culture where disruptive innovation can be hard to come by. The first part is to be aware that banks need to be in the unbanked game to stay relevant. The second part is to admit that the normal product approach will not work. Once this self-actualization has taken place banks can work on creating innovation labs and incubators within the company but insulated from its culture that can get them back in the game. These initiatives use design thinking, customer journey mapping and lots of primary research to come up with the best course forward.

Choose an attack vector. Then attack: There are four key areas of disruptive innovation in financial services. 1) Ecommerce portals for personal financial management and investment. 2) Virtual and mobile wallets, 3) Data driven and machine learning led digital only banks and lending platforms, and 4) Infrastructure like ATM’s as a service, Payment gateway/ switch stack and reimagining POS. Banks must identify which portfolio of products creates lasting value for their shareholders.

Do whatever it takes for a faster go-to-market: Acquire startups. Do not make this a one-time thing either. Have an investment arm that consistently identifies targets aligned with strategy, and have support functions seamlessly incorporate them into the broader culture. Partner where you need to. An alliance can be a powerful meeting of resources and knowledge. Lastly replicate your existing model but scale it by making it digital. A core services digital bank has attractive customer acquisition costs compared to traditional banking.

Digital banking is as much an attitude as a set of capabilities and products. More and more competitors are becoming good. To be better banks have to be flexible, and ideate and create relevant products faster. We feel these three strategies will help banks achieve this. Getting scale at lower costs is possible. Smartly positioned in growing markets will mean acquisition of the middle class as its being created. These are customers for life and generations if managed right.