Specializing Banking Channels to Reach the Poor

This is a guest post by Ignacio Mas of the Bill & Melinda Gates Foundation.

Microcredit started with a simple financial product – the idea of group lending.  Since then, much work on financial inclusion revolved around refining products.  The field has made a lot of progress,  but there is still much to do: structuring products that address poor people’s real needs, packaging them with rewards they value, reminders they find useful, and constraints that help them maintain discipline. Moreover, these products need to permit transactions that are sized and timed in a way that is consistent with their cash flows.

But better products mean nothing if they can’t be delivered to customers.  The biggest challenge is how to offer products in a way that customers find relevant and convenient, reliably.  Access costs on the customer side (in the form of trips to distant branches, long queues once there) or channel costs on the provider side (centered on the fixed costs of building, staffing and maintaining branches) often conspire to obliterate the economics of new products and hence dampen product innovation.

We need to think harder about delivery channels.  The starting point is that cost is only one factor. Building strong relationships with customers – and using them effectively – has been essential to early microfinance models.  To bring effective financial services to millions more poor households, providers need to continue developing a high level of intimacy with their customers.  Those relationships help providers learn from customers and permit them to propose the right products at the right time.

We can learn, for example, from the “private banking for the poor” model of KGFS in India.  KGFS’s strategy entails high-touch individualized service and product recommendations based on thoughtful analysis of livelihood sources and asset portfolio analysis. It may seem counter-intuitive to provide high-touch services for the poorest, but the KGFS premise is that private banking seems right for the very affluent (who have complex wealth management choices to make) as much as for the very poor (who have vital risk management choices to make). It’s the people like you and me in between who feel adequately served by helping ourselves from a menu of off-the-shelf banking products.

Building a high-touch channel reaching millions of poor people is an expensive proposition, involving steady investment in staff training. Making this idea work requires being strategic about where to spend resources.  High-cost activities should be focused primarily on the highest value activities: acquiring new customers and proposing new products to existing customers.

A key is to separate out lower-value account servicing activities (fundamentally, accepting and dispensing cash) from these kinds of selling activities. The over-arching principle is to separate customer contacts in which relationships matter from purely transactional contacts. This is the mode outside of banking: most businesses separate sales from service.

For the model to work, service providers need to retain close control of the higher-touch sales channel.  But they can easily push servicing activities to a parallel channel – and that can often be outsourced. The servicing channel should reach closer to customers (i.e. have a much higher level of geographic density) than the sales channel, since customers will need to access it more frequently (daily or weekly versus monthly or quarterly). The servicing channel needs to operate at a much lower cost per transaction, and hence at higher volume.

Once the separation of tasks is in place, it’s easier to figure out who should do what.  Responsibility for managing this high density, high volume cash in/out network can take advantage of everyday retail shops (under an agent banking or cash merchant model).  With a strong product range and sales channel (which builds strong customer relationships), financial service providers should feel comfortable delegating cash management activities to third party stores.

This is our vision: local private banks for the poor with dedicated sales channels, powered by scalable (and shared) cash merchant channels.