Financial inclusion is the way forward

The estimated size of the base-of-the-pyramid is in the range of 2.5 billion to 5 billion people, living under $2 a day. [Source: United Nations] This base of the...

Snehal Fulzele 22nd February 2014

The estimated size of the base-of-the-pyramid is in the range of 2.5 billion to 5 billion people, living under $2 a day. [Source: United Nations] This base of the pyramid has its financial needs and these needs are satisfied by an “informal economy”. Some level of “formalization” was brought-in by the mobile banking and micro-finance institutions. But a lot more needs to be done in order to achieve “financial inclusion”. Slowly but truly this is becoming a reality with banks now increasingly viewing this base-of-the-pyramid segment as a potentially profitable market.

The rise of the MSMEs

According to a study by McKinsey, banks can realize a potential revenue opportunity in excess of $360 billion by targeting the MSMEs from emerging markets. It also suggests the over 60% of the revenue growth in banking over the next decade will be from emerging markets. The banks from developed world can look at this opportunity at the base-of-the-pyramid with a fresh perspective and find innovative practices which can be employed not only in emerging markets, but also in the developed markets.

The new paradigm

While financial inclusion is traditionally seen as a social mission essentially in developing countries, it is also true that there are many poor people managing their financial needs through the informal economy even in the developed markets such as the United States. This argument is reinstated by the recent success of Grameen America’s first branch in New York achieving sustainability. Thus the goal of “financial inclusion” should be to bring as many people as possible across the globe into the “formal economy”.

What will be challenging in this quest is how the financial institutions innovate to serve this base-of-the-pyramid living under an informal economy. Whether it is Grameen America partnering with major banks such as Wells Fargo, Capital One or Citibank to offer products that are more suitable for the financial situation of this segment in the United States, or M-Pesa enabling fast and secure money transfers to serve the same segment in Kenya, both these instances prove one thing; that financial inclusion can be achieved only when the innovations are suitable for the market that they are serving through a bottom-up approach.

The top-down model of financial inclusion is on its way out.



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