Capco Institute Blog

Despite talk about the economic boom in countries part of a seemingly never-ending alphabet soup of sorts — BRICS (Brazil, Russia, India, China, South Africa), SEVIT (South Korea, Egypt, Vietnam, Indonesia, Turkey), MIKT (Mexico, Indonesia, Korea, Turkey) — and the impending arrival of the Next 11 economies (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, Vietnam) — there is very little mention of how the boom affects the common man in these countries. The main hurdle is that broad economic measures such as reigning in inflation and astutely managing fiscal policy are not accompanied by enough changes at the micro level. One key to making this happen is to allow the financial system to cover a wider swathe of society.

For most people stuck below the poverty line, access to financial services is unheard of. Cash is scarce and precious. They would much rather hide their money under the mattress than put it somewhere else. The reason for such behavior is multi-pronged.

• Societal. People living in countries without strong financial systems and high uncertainty tend to be conservative when it comes to their money. They’d much rather invest in real estate and/or physical assets than in stocks. They believe in looking at and feeling their investment rather than in obscure market products.
• Educational. People don’t have enough knowledge about how to invest their money. Few investment products and incentive programs exist in emerging markets and there is a general mistrust of financial markets. People prefer safe investments. Financial planning is limited to paying for their kids’ education and/or making a big purchase like a house or car.
• Institutional. For most banks in emerging markets, the qualifying criteria are high. Most people don’t qualify to open a bank account in countries beginning to overcome poverty. Access is also an issue. For most banks, it is cost prohibitive to offer services in every small town or village, so they stick to big cities. Another problem is a lack of products. Banks typically cater to high-net-worth clients and their products exclude the poor. One solution is to add more products that cater on remittances — products that make it easier and cheaper to remit from one end and then receive the remittance as a bank deposit rather than a cash withdrawal.

At the government level, high interest rates on loans discourage people from taking out loans to finance their activities. Governments and banks need to work in conjunction to develop small and medium enterprises through easier access to credit. Some emerging markets like South Africa have established universal access funds for this purpose. A market for corporate bonds also can be established exclusively for smaller enterprises to allow them to tap into capital either through an active capital market and/or the general public via crowd funding platforms such as Kickstarter. In addition, banking sectors in economies still transitioning to a free market philosophy tend to be heavily regulated. Governments can address this issue by encouraging banks to offer new products, which could also lead to more competition.

In countries lacking a strong banking network, managed network operators (MNOs) such as telecommunication firms have jumped in to facilitate basic services like money transfers or local access bill paying in a big way. For most emerging markets, cell phone penetration is as high as it is thanks to MNOs (i.e., India 75percent cell phone penetration, Brazil 136 percent, Russia 155 percent, Indonesia 109 percent).

For the most part, MNOs have had to partner with banks to facilitate money transfers but banks should use such partnerships as an opportunity to build their consumer base. Remittances can be redirected into actual depositor accounts. Given the penetration of cell phones in the population, consumer access to banks also can be solved by tying carrier billing with actual holding accounts. The beauty of such accounts is that they are not limited to cash transfers — they can also include school fees, utility bills and other financial obligations, allowing banks to capitalize on more money flow.

Retailers also are jumping into the fray. Economies like Bangladesh and Pakistan already rely on hyper local stores to act as delivery services for cash exchange. For example, Norwegian telecom giant Telenor’s Easypaisa program in Pakistan allows stores to become designated Easypaisa centers in a given location. To transfer money at such a store, customers present their ID to the merchant, hand over their cash and any service charges, insert a security code into the shopkeeper’s phone, and click send. To retrieve money, customers receive a notification on their phone and go through a similar process at their local Easypaisa store.

Big box retailers aren’t far behind. Walmart has made a huge push into providing banking services in Mexico. Because qualifying criteria for customers is low and people already trust the brand, Walmart can capitalize on consumers instantly. In 2010, Mexico had inflows of $23 billion in remittances, and Walmart plans to use that to gain more customers. Future plans include launching debit cards as well as insurance products for Walmart customers.

Social media networks also are trying to break into this market, targeting users through their social graphs. Citi is working on an application that will allow users to top up their cell phone accounts through an operator website and then choose a friend on Facebook to whom they can transfer over the payment to. It’s a white label product that can be integrated with any MNO and allow payments to be made to anybody on a user’s social graph. Unfortunately, such an application would face several regulatory hurdles.

All in all, encouraging people in emerging markets to access additional financial resources, providing guidance and offering a way to receive funds will propel people at the bottom of the pyramid into more productive aspects of society. This task doesn’t lie solely with banks. Far-reaching devices such as cell phones as well as retail stores also can be used. All it takes is a little bit of planning and innovative initiatives that include building out underlying financial infrastructures.

What economic programs do you think emerging markets can offer to provide greater access to financial resources to those less fortunate? Join the discussion.