Changing demographics, education and wealth distribution, fed in recent years by the dramatic fall in the costs of technology, and stellar advances in Mobile & Digital Innovation and Globalisation, appears to have awakened new interest from major banking players to the opportunities in new and fast-growth markets, recently suggested by new Solveworx research, and reports that banks like Commonwealth Bank of Australia, are actively looking at opportunities to extend and deepen banking services, beyond traditional mass affluent segments in the fastest-growing regions of Africa and Asia
The paradox facing many banks keen to enter that segment, is that while the opportunity looks impressive on paper, when it comes to weighing up the economic business case, it appears that creative math seldom really makes the case stack up. Why is that?
Well, at first glance, the answer appears fairly straightforward. Conventional retail banking thinking says the retail banking business is (mostly) built off the back of an established account base, augmented by a growing market and deposit pool, extending margins and float, all the while reducing costs, and lowering the overall cost of borrowing etc. Rinse. Repeat.
However when it comes to the mass-market segment (the so-called ‘bottom 80%’) in fast-growing and developing economies, the business model doesn’t always add up – particularly when factoring in the reality that low and zero account balances, high account churn and even higher dormancy and correspondingly low take rates are overwhelmingly the norm, rather than the exception.
And so many of the larger established banks either abandon their efforts altogether and consign banking the lower end of their mass market segment to the ‘too hard’ bucket, or relegate it to the ‘financial inclusion’ and ‘social responsibility’ category, when the real reason is that there are apparently too few rewards and far too many new liabilities, for the risk involved.
This view is gradually changing; what is increasingly apparent is that it’s more of a case of a failure of imagination, and a fear of looking beyond the obvious, than a failure of this or that particular market condition. A few innovative banks are approaching this problem differently, with the realisation that what is really needed is an entirely new way of looking at the opportunity – rather than the problem.
Because, as in most things in life, it usually depends on one’s point of view – the cliche; are you a glass half-empty or half-full kinda-guy, which was why an article that appeared in the Australian some weeks ago, caught my attention, mostly for the fact that it was so refreshing, but coming as it did, from the Group Executive in charge of International Financial services, at the Commonwealth Bank of Australia, Rob Jesudason. Firstly it appears that the Commonwealth Bank has started shedding the rumours[see below] that have persistently dogged the organisation regarding their foray into mass market banking, since their acquisition of mass market banking play, Tyme in 2015.
Secondly, the comments made by Rob Jesudason, were engaging because they shed new light on mass market banking opportunities, and a willingness to look beyond simple deposits, margins and costs paradigm, to the possibilities innovation, and more importantly innovative thinking can enable.
Which was refreshing because it also marks a break from using “Innovation”, as a tool to drive down costs, and a realisation that simply adding and subtracting from the same columns of an Excel spreadsheet, won’t necessarily improve the business case when it comes to weighing up potentially risky opportunities.
The penny drops
In fact, its worth reminding ourselves that when entering new markets its probably not a bad idea to ditch excel altogether, and rely on the more entrepreneurial skills, increasingly absent from many meeting rooms; skills like common sense, business ‘nous’ and plans well-thought out and executed. Applying those same ‘smarts’ and having the appetite to spot the gap, take risks and try new things is key.
For CBA, at least, that penny appears to have dropped, as it looks to the new “twin pillars” of mass market banking, namely mobile technology and reliable cost-effective distribution, as the keys to cracking the mass market banking nut. And it appears as if they for one, are on the right track, because cracking the mass market banking nut lies in grasping the enormous potential that lies beyond pushing the standard bank “cards, accounts, loans” Trifecta onto a segment of customers who neither want nor need them (or have any use for them); and tapping into the real power of mobile telephony beyond creating smartphone apps for customers.
Cracking this particular nut may well prove a bit harder, and require patience because, as Solveworx research reveals, the use and take-up of traditional banking services (deposits, term deposits, savings and investments) remains low in many fast developing markets, where it has been shown that the ‘bottom 80%” are still heavily reliant on cash for meeting basic needs. However, if you are a glass-half-full kind of person, with a long-term view of the opportunity, then the benefits of engaging those customers, if the recipe is right, is a prize worth playing for.
Until banks can figure out how to make money on their own terms in challenging mass markets environments, they should be prepared to take a calculated risk, at least in the medium term…
Until then, the dilemma still remains exactly how to make all these new ways of banking for mass markets — whether by mobile phone, card readers or indeed any enhanced technology —either profitable or at least sustainable, however the smart money is on the team out there getting its hands dirty, testing to find the right recipe to build a sustainable, viable business.
Time and again, we have seen that, the early, and whoever gains the foothold first stands to harness the potential to engage almost half of the world’s population, with the right products – beyond the ‘account, cards, loans’ trilogy. And there are some very exciting examples of how it can be done coming from a variety of quarters, from Kenya to India.
While these examples are very encouraging, it also pays to be realistic, because these stories are also relatively few and far between; the facts suggest that there are only a handful of established (genuine) mass market banking success stories out there.
The harsh realities of the market, and shareholder returns, just will not go away. (In Commonwealth Bank’s case, no doubt cushioned by the fact that the $45 million contribution that South Africa, China, Vietnam, Indonesia and India makes to CBA’s overall cash profit in Australia of $9.2bn, a mere rounding error, but that is a mere detail).
The key to succeeding lies in acquiring the skills and nurturing the value of the intellectual property that lies within the organisation, knowing where to look, and how to take best advantage of relative strengths and opportunities, and by looking to who has done it well, what they do (or did), and why it worked for them.
But until more success stories emerge, which means that until banks can figure out how to make money on their own terms in challenging mass markets environments, banks should be prepared to take a calculated risk, at least in the medium term. Those that do can expect a pretty clear run while the laggards are plugging away at their spreadsheets, figuring out how to profitably address those high growth markets in Africa and Asia and watching safely from the cheap seats.
Gary Collins – Solveworx. We work with a new breed of Leaders who like executing on innovation & exploring advanced technologies and bringing together the kind of big ideas & experts that Banks, Financial Services & Insurance Industry leaders are looking for. Check out our new offering on the subject here
* CEO Ian Narev was reported at a conference last year saying that it – TYME – could be described as a “failed investment”.