Innovations in Retail Banking – Part 2
I was quite overwhelmed by the comments to my earlier post, here as well as offline! Most readers agreed that digital alternatives to cash are becoming prevalent. Many also alluded to the so called ‘unbanked’ segment of society and what service providers are doing (or need to do) to enlist them into the mainstream. That thought is an interesting lead into what I wanted to post as a sequel!
According to a 2004 Federal Reserve Board study, nearly 10 percent of American households are unbanked! One would assume that a developed economy like the US, with Banks at every street corner, would not suffer from such a glaring deficiency! It is this underserved segment that is now becoming the focus for some of the large financial institutions.
Bank of America found an innovative solution to capture the wallet share of individuals who did not have a bank account, yet wanted to transfer money frequently to their relatives abroad. It focused on the Hispanic segment of the US market which tops in money remittances from US to Mexico. Typically, such remittances used to be the exclusive preserve of money orders or specialized money transfer agencies like Western Union. Bank of America introduced a service called ‘SafeSend’ in the form of a pre-loaded Card, which could be used to transfer money securely from the US, with the ability to be withdrawn from designated ATMs in Mexico, using a secure code. After the initial success of this service, the Bank took the next step of converting its SafeSend customers to regular accountholders. SafeSend allowed the Bank to penetrate a new segment, which existed on the fringes of its core financial services franchise and gather data about their unique needs; in turn, that segment of the population grew comfortable in dealing with a traditional financial services provider – a win-win for both parties.
While the services typically used by such segments may not yield high per-capita transaction revenues for a Bank, their sheer volume and growth potential cannot be ignored. Most financial service providers will realize this sooner or later and tune their cost structures, to serve traditionally underserved segments, where the initial costs of market penetration are bound to be higher. Hence I was not surprised to read a recent news report on JP Morgan Chase (another Top 5 US Bank) piloting a Mexican remittance program called ‘Rapidcash’. The more interesting piece of news was from a recent conference organized by the parent organization of the reputed industry journal, American Banker, wherein Private Equity players evinced a keen interest in financial services for the unbanked (Read here - subscription may be required)!
Luring unbanked customers into a Bank Branch to cash a check or remit money overseas is just the first step; the Center for Financial Services Innovation, in a recent research paper on the ‘under-banked’ segment in the US, has underpinned the lifetime value of such customers, based on their future needs for a home loan, retirement account and various such financial products and services (Read the press release here).
Shifting focus to the global arena, Citibank has been a pioneer in penetrating new segments in developing country markets over the past decade. It’s ‘Suvidha’ branded account targeted the emerging middle class in India and lowered the minimum deposit requirement for opening new checking accounts. Citibank managed to service such accounts well, through ‘localized’ cost structures. I am sure other ‘Flat World’ oriented banks will start exploring innovative ways to expand their reach to the unbanked.
The larger innovations in retail banking are going to be, quite literally, outside the branch! Consider this – the number of mobile phones on this planet will soon outnumber (if not already!) bank accounts. Ubiquity of cell phone technology, coupled with Web 2.0 developments will push service providers to innovate and offer feature-rich, user-friendly mobile banking applications. And, as one of the comments to my earlier blog suggested, mobile phones can bridge language and literacy gaps and empower many more people who are currently outside the purview of traditional financial services. I hope to discuss more about mobile banking in another post!
Comments
No doubt, innovation lies in process and retail banking is no exception.Various factors contribute to the innovation process whether its technological advancement or regular change.Change in every form is essential and beneficial.I appreciate your post and looking forward to know more.
Posted by: Ashutosh Bose | July 23, 2007 07:31 AM
I found your article very interesting and a bit shorten on the whole picture of retail banking innovations. Your articles, as I have understood them, only address the issues of how banks reach out via services and products. Though innovation comes from many aspects such as education and strategic planning. Many "Retail Banks" are not truly thinking retail, nor are they prepared to be truly "Retail". Servicing the consumer does not always mean you are retail, but simply a provider. One innovation that was introduced in 2006 was a site that assesses the core strategic capabilities of being a retail entity and the potential to grow as a "Retail Bank". I find that the ability to clearly measure and compare an organizations core to its ability to deliver is critical to becoming a true retailer. This assessment is called WayPoint and was introduced at the BAI conference in Las Vegas in 2006. http://www.ourwaypoint.com Innovation begins at the core thinking of each of its governing body of any institution. Measuring and assessing your fundamental perceptions and the ability to service the market is critical to growth and increasing market share. Really, isn't that what the major part of innovation about, enhancing and improving?
Posted by: Kevin Dulle | July 23, 2007 03:59 PM
The entire talk of financial inclusion from the Western Economist's view point is either opening a bank account or enabling him to remit money.
In the third world countries, the question is not of saving or remitting but that of providing credit needs. Various Government programs focus this segment of directed credit, which failed often due to bureaucratic pitfalls.
Provision of Rural Credit or Agricultural Credit has always been looked upon as a charitable activity rather than a profitable activity. Indeed, it is profitable with innumerable unorganised money lenders making hay, while "rains fail".
Organised Banking has failed to focus in this area as it is very costly to finance micro units in remote areas.
Technology can change all this by reducing the costs of low unit financing.
The focus of Banking technology has only been to manage the liabilities side than the assets side of bank balance sheet.
Hope some pioneers like Infosys will focus on developing a software and rural database in identifying eligible and creditworthy borrowers to help mass financing rural needs.
It is a gigantic task but considering the fact that it covers over 3/4 of human populace, it is worth it.
Posted by: JJ Rao | July 24, 2007 05:34 AM
America's unbanked 10% are always on time with their payments. It is America's banked system in the middle to upper bracket burdened with real debt at 130% of real income that looked good on paper. These 'Banked' are the first ones to keel over with economic cycles and interest rate fluctuations owing to overextension of 'cost of living credit'. It seems that the crisis was named subprime to avert the apparent chaos of bankable America over investing into speculative risky unsystematic and incorrectly reported real estate growth in a form of greedy frenzy almost resembling a ponzi scheme. I have yet to see a US Economic report in the last 7 yrs claiming real income and real job growth showing as a positive number. The results finally burst with a historic drop of .75 in the Fed Funds rate today showinng clearly that American consumers have a negative marginal propensity to consume with increasing interest rates as debts grow faster than incomes also owing to the high level of leveraged funds in the consumer and business sectors. Only a real value on the 30 year fixed mortgage such as 2.95 or less will replace 40 years of household instability andn impoverishment in America, obviously by that time gold will approach $ 1400 plus minus an ounce. Remember that the banking system in America survives only because of their ability to charge up to $30 or $40 on returned check fees and credit cards real effective rates add up to
almost 39% p.a. This also reflects that the trend of free market capitalism without a standard of stability in the fiscal markets approaches a cycle from the fourth stage of economic devlopment back to the first stage as banking approaches usury. A vicious cycle of debt.
Posted by: vik bagai | January 23, 2008 04:31 AM
Speaking from India's point of view, innovation should not only be technological in nature but it should also be in the form of human approach and simple to use to tap new markets. The basic Indian tendancy is to save money for future use and generations so institutions should tap the market specially the rural ones which corporates really ignore. This is really nice and would like to hear more comments about the same.
Posted by: Shreyas Kurkure | January 25, 2008 04:12 AM
The article is very interesting. In today's world, especially in India, where considerable no. of population is unbanked, delivering financial services effectively is not easy. We have other challenges like lack of connectivity, proper access roads to villages which will hamper the growth and will be a constraint in delivering financial services to the unbanked. In India various companies like FINO have implemented offline model(using biometric) partnering with various leading banks to deliver various financial products to our unbanked society.
Posted by: Raman Taneja | May 16, 2008 11:29 AM