Mobile technology has greatly expanded access to financial services over the last decade, but the range and quality of services available to low-income customers still remains limited. Despite new opportunities, incumbent financial service providers as well as new providers like mobile money operators have shown themselves to be constrained in different ways by legacy business models, tech stacks, and organizational cultures. Change may however be on the horizon, as the financial services landscape starts to be reshaped by powerful forces of digital transformation that have already upended sectors like transport, travel, music, and retail commerce. These forces are evident not least in the flurry of fintechs, platforms, and neobanks entering financial services with promises of change. This webinar, led by Peter Zetterli, Senior Financial Sector Specialist at CGAP, Arisha Salman, Financial Sector Analyst at CGAP, and Elizabeth Friend, Managing Director at The Small-Scale Sustainable Infrastructure Development Fund, aims to answer the question: Does the current wave of digital banking challengers offer something genuinely new—and what could be the implications for excluded and underserved customers?
Digital technology has helped advance financial inclusion but that inclusion still lacks depth as other products such as savings, credit and insurance are barely rising despite the increasing numbers seen in ownerships of a formal account. The lack of depth limits the usefulness of the account and progress towards full inclusion. MSME’s represent about 90% of businesses and more than 50% of employment worldwide, yet the IFC estimates that 40% of formal MSMEs lack access to credit and that gap widens to tens of millions of informal MSMEs. The total financing gap is estimated to be around $8 trillion dollars. So how are digital banks providing some hope for MSMEs?
New business models are allowing digital banks to increase the reach and depth of products and services to customers and allowing for customisation and seamless service. Broadly there are three different business models:
- Fully digital retail bank – their products are similar to the standard model with a card being issues followed by additional products being added on. The significant difference is with the infrastructure (no branches and they partner with a retailer for services such as CICO) and with newer, innovative stack technology. This allows them to acquire customers and provide products cheaply and efficiently and improved user experience. An example is Tyme Bank in South Africa.
- Marketplace Banking – these providers find and curate appropriate products for their customers (both their own and competitors) and make onboarding seamless. Their revenue comes from B2B referrals or API calls as well as from their own products in a B2C route. The philosophy is a shift from selling your products to helping find solutions that meet customer needs and preferences. Through working with partners you can provide customers access to a wide range or products and services. Revolut, Staring Bank and N26 are examples.
- Banking as a service – this is a B2B approach where white label banking products and capabilities are provided allowing other players to offer financial products and services without the burden of requiring a banking license. From a regulatory perspective the customers belong to the banking as a service client who take accountability. For example Apple offers products and the customer would see themselves as being a client of Apple, but the Goldmansachs is providing the banking license and is responsible for ensuring regulations are met. Examples of those providing banking as a service are Solaris Bank and Green Dot.
Digital banking is providing a space for customisable, seamless, one-stop shop approaches for customers, so we shouldn’t underestimate its role in increasing the breadth and depth of financial inclusion.