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The myth of the unbankable

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James Bladen
James Bladen joined Alpha Southeast Asia in 2015. He has written on a wide range of issues covering capital markets, Islamic finance and M&A. He worked as a consultant in Indonesia (2013-2017) and moved to New York in 2020 where he continues to cover Southeast Asia.

Farmers, street vendors, low-salaried clerical workers: With a few exceptions, banks in emerging economies have traditionally regarded this large group of lower-income customers as out of their reach, as unbankable. Banks often can’t see a way to serve these customers profitably. As a result, a substantial percentage of households have been left without access to financial services – in Thailand, this percentage is nearly 20%.

McKinsey’s experience shows that serving these groups profitably is possible. Moreover, these groups add up to a global market that we value at some US$35 billion.

This positive outlook springs from the results we have seen since banks in emerging markets the world over have started applying lessons learned from companies in an unlikely industry: automotive manufacturing.

Tata Motors’ explicit intention is to put car ownership within reach of people who have never been able to afford it before. The first lesson learned from this Indian innovator is to offer simpler products: The no-frills standard version of their new Nano will be the world’s cheapest car at just US$2,500: a price 65% lower than the average mid-range Indian car.

For banks, the equivalent of the Nano could be a transactional account that costs very little to open and service. One such product has been developed by a microfinance bank in South Africa, which serves some 1.8 million customers. It keeps costs ultra-low by eliminating cash or paper processes in the branches; using biometric authorisations, such as fingerprints and photographs, instead of identity cards that would need to be validated; and offering unlimited free debit card usage for transactions. To get cash, customers pay a small fee to use ATMs or receive cash back when using their debit card at certain retailers.

Just as the Nano comes in deluxe models with more features for customers with deeper pockets, banks can build enough flexibility into their basic account to offer extras for customers who need these. The South African bank offers one savings product and three loan products to supplement its basic account. So streamlined is the process for applying for one of its microloans that the bank claims it takes less than four minutes: The teller enters the customer’s details, receives an electronic authorisation, and issues the loan on a one-time ATM card, which can be used there and then to draw the money.

Lean as Toyota: While Tata’s principles of simplifying products could go a long way toward reaching the ideal of providing banking services to the so-called unbankable, there is another approach that can help banks lower theirs costs enough to make this a reality: reducing all waste in their processes. The South African microfinance bank mentioned above, for example, managed to eliminate all back-office paper and streamline every process: when customers open a new account, they don’t have to fill in an application form; instead, a member of staff asks them for the necessary information and enters it into the computer while they watch the screen to check that the data is correct.

By contrast, a test with one of the top five banks in Thailand showed that 14 signatures were needed to open an account. In another multinational Thai bank, account opening can cost up to one hour of paperwork. A second comparison: Italian and Spanish banks manage to reply within 24 hours for mortgages or fewer than five days for SME loans. Leading Thai banks still take up to one week to approve mortgage applications. SME loan applications can take twice as long. These seem like unnecessarily lengthy (and expensive) processes and, if they neither add value for the customer nor help control risk, simplifying them could save costs and make banking more affordable.

The best way of reducing inefficiencies is an approach known as “lean”, first developed by Toyota in the 1950s to improve production at its carmaking plants. It has since been adopted by a wide range of manufacturing and service businesses across the globe. In essence, lean applies a combination of techniques to identify and then minimise activities that don’t add value for the customer (waste), to reduce differences in performance (variability), and to overcome barriers that prevent organisations from adjusting production rates and volumes as customer demand changes (inflexibility).

In Europe and the United States, where banks have been applying lean for five years or more, the lean principle of doing what the customer values and only that has enabled banks to cut costs by 20% or more and serve their customers more effectively. In recent years, emerging markets banks have begun to apply these lessons as well.

We have learned that lean can help banks overcome the special challenges of emerging markets, enabling them to address the scarcity of talent and key skills; combat poor data, telecom, and legal infrastructures; and adopt new techniques to deal with volatility. Another big advantage of lean branch formats is that they can be quickly rolled out to ensure that best practices are spread systematically across all operations. Not only the banks, but also the customers and employees benefit.

Lean makes customers’ lives easier by eliminating many of the glitches and delays that can plague processes like opening and managing an account. A bank that is geared to what customers truly value (not what it thinks they value) provides better products and services. One UAE bank managed to cut average queuing times by 85 when it applied lean. Branches with shorter queues and staff with more time and skills make for happier customers.

Top managers may wonder whether their organisation would be receptive to such a transformation: Our own experience is that people in an organisation develop a real appetite for this once they fully grasp what lean can accomplish. In summary, we believe there is both a real appetite and huge opportunity for this type of thinking in Thailand. Even if one allows for local regulation and guidelines by authorities, which are not always designed for customer friendliness, there still are significant improvements to be made. These would ultimately make customers more satisfied and increase their appetite to test out more products, which would increase profits for banks.

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