With The Unbanked’s Financial Product Needs, One Size Does Not Fit All

The world’s unbanked population needs new services and could benefit from a new approach from financial institutions, MasterCard Advisors finds.

In the research effort by Amit Jain, principal at the Global Payments Strategy Knowledge Center with MasterCard Advisors, key takeaways include the fact that myths about the people with little or no active use of financial products could be hindering the ability of financial institutions and other stakeholders to deliver services.

One of the myths may color the others: The perception that the unbanked lead static, or simply do not have, financial lives. In this way the potential size of the unbanked opportunity is underestimated by the notion that these individuals/households have limited funds to manage and cannot do much with those funds.

Broad numbers show that there is indeed income, and movement of that income, among the unbanked populations globally. According to Jain, the bottom 40 percent of the global population earns roughly $3 trillion in annual income, as measured by the categories of low and middle income economies, which in turn represent unbanked individuals. Five years from now, in 2020, that same population will collectively earn $5.8 trillion annually – in real, not nominal, dollars. In presenting individual nations as refutations of the myth that the unbanked are financially static, Jain writes that in Nigeria, the unbanked account for more than $50 billion in customer expenditures on an annual basis. Other nations can have triple digit consumer expenditures for the unbanked, Jain continues. For instance, Mexico marked expenditures at $125 billion to $175 billion.

Some smaller nations with largely unbanked populations show significant activity with their income, disproving the notion that fund management remains static, Jain reports. In Kenya, for example, low income households, made up largely of unbanked individuals, show themselves to be very active money managers. “In fact,” Jain notes in his white paper, “they move around 128 percent of their income by constantly moving the same money.”

Noting high volatility in income and consumption spending in Kenya, Jain writes that the former can fluctuate as much as 55 percent month to month while the latter moves by 43 percent. “The day to-day-strategy,” Jain writes, “of juggling income and spend probably makes the unbanked even more active managers than the banked” and given that constant flow and management of money “the unbanked own and use several financial products. For example, in Kenya, low-income households are found to have as many as 17 financial devices on average, mostly of which are informal.

The transaction sizes are, of course, smaller among the unbanked than their banked counterparts.  But, cautions Jain, that shouldn’t dissuade financial institutions. “In fact,” he reports, “[relative size differences] highlight an important point: that scalable business models and solutions specifically developed for the unbanked with unique economic approaches are required.”

The second myth about the unbanked, according to the white paper, is that the unbanked population can be viewed as a homogenous group.  Though there have been many, many studies across many years on the banked and their needs, declares Jain, “[you would] be hard-pressed to find a financial institution that has not developed segmentation for the banked.” There is the misconception in place that unbanked have similar needs.

The result, says Jain, referring to financial institutions and other stakeholders, “if you don’t know their needs, you cannot develop and market a product to them.”

In reality, the unbanked population likely comprises different segments defined by factors including location (whether urban or rural), types of income (i.e., formal salary or self-employed) and even gender-specific needs.

By way of illustration, Jain offers two hypothetical unbanked individuals, each with separate ways of managing money and cash flow, and each with separate financial product needs. In one example, via a receptionist who lives and works in Lagos at a mid-sized company, there’s a formal salary in place with a paycheck received every two weeks. That paycheck represents the primary source of income – and the salary is received, and spent, only as cash. Through the eyes of this would-be financial institution customer, ease of use in registering for a financial service would be important, as would a simplified and secure process by which to deposit and gain access to the paycheck.

Given the steady nature of the paycheck itself, the ability to save, Jain maintains, is more important than the ability to borrow. For a possible solution to this unbanked individual’s needs, says Jain, the employer seems a good place to start, in order to distribute funds, with a convenient enrollment process in hand, and one that does not demand a “know your customer” process. For cash withdrawals, an agent network with sophisticated cash replenishment logistics might be useful, and a long-term savings product, tied to a payments product, could fit this unbanked profile.

For a second unbanked example, Jain offers a taxi driver in Lagos who also owns the vehicle with which he works. This driver receives cash payments from customers in each ride, and this is also his main source of income. In this case, as with the aforementioned receptionist, simplicity and ease of use remain important in banking needs.  Yet the taxi driver has no employer to handle distribution.  He’d need to make frequent cash-based deposits and withdrawals daily.

Credit, rather than savings, would be of great importance to this unbanked individual – ensuring, Jain says, enough gas can be bought to get through a day’s work even if enough cash does not come in to cover that cost.

For the taxi driver, product distribution at a trusted local establishment, say a post office or retail location, would be a strong option. The product could also feature a line of credit.

Jain notes the differences between these unbanked individuals’ financial needs, and cautions that if a financial institution were to treat them the same it would be a “risky game and a recipe for disaster.” In fact, MasterCard’s research shows that there are four to eight unbanked segments, noting that in Nigeria, segments could range from 5 million to 35 million people.

Jain notes that in reaching the unbanked populations globally, financial entities must use rigor in market research comparable to its processes serving its banked clients with product development, yet maintain a fresh approach with this untapped population.

Between 2011 and 2014, the World Bank has estimated, roughly 700 million people around the world gained entry into the banking system. And the Bank has set 2020 as its target date for global inclusion of all citizens. In an interview with MPD, Jain says of MasterCard that “we believe that universal access to financial services is a very real, yet ambitious goal.

“It’s only possible if financial institutions, governments and other stakeholders work together to make it happen.” Speaking specifically of MasterCard, Jain points to the company’s efforts that have “already helped make the financial system more accessible to more than 150 million people previously excluded, and we’re committed to connecting 500 million by 2020.”

But, the executive notes, there can be a disconnect for the unbanked between owning a financial product and putting it to use. “In Kenya,” he says, “over 85 percent of adults own payments products, but only 2 percent of consumer purchase transactions are non-cash. We need to break down barriers to usage and clearly articulate the value of moving away from cash, including safety and security, economic empowerment and convenience.”

Amit Jain

Principal, Global Payments Strategy Knowledge Center, MasterCard Advisors

Amit Jain is part of the Global Payments Strategy Knowledge Center in MasterCard Advisors. The Payments Strategy team works with MasterCard clients around the world to develop and implement successful strategies across their payments businesses.

Mr. Jain is a seasoned professional with nearly 15 years experience in the industry including financial services, management consulting, venture capital and technology. A key focus of Mr. Jain’s career has been to work with senior executives on key strategic issues affecting their business.

In his current role at MasterCard Advisors, Mr. Jain oversees thought leadership and knowledge management globally across the organization. Mr. Jain has also led large global payment strategy projects including Global expansion strategy for MasterCard Bill Pay, Impact of Durbin and eCommerce trends in Europe. Prior to MasterCard, Mr. Jain worked in a senior strategy role at Citi. Mr. Jain joined Citi from Booz Allen, where he was an engagement manager in the strategy practice and worked across a broad set of industries to drive growth strategies for senior clients. Mr. Jain has also worked in venture capital and started his career by spending five years in IT leading large technology projects.

Mr. Jain received an MBA from the Ross School of Business at University of Michigan, Ann Arbor and a BS (eng) from Indian Institute of Technology, Delhi.