Read the full story here.

Carla walked alone on a cold Friday night. She was relieved: it was payday. With her salary in her purse, she made plans: pay rent, buy food and — if there was any money left — bring her three children to McDonald’s! Suddenly though, her relief turned into tragedy. She was punched and stolen. Her monthly income was gone.

Like Carla, many others in Brazil and other developing countries have similar stories to tell.

What if she had a bank account?

It turns out that Carla, like 68% of Brazilians, has a bank account. However, this is of almost no use to her: she pays all her expenses in cash and does not have a credit card. Electronic transfers are prohibitive, too expensive — better to withdraw money from her bank and deposit it at the payee’s bank. The same goes for bills — they are paid in cash at the lottery outlet, after waiting in a long line. In any case, she always needs to carry cash and she always loses time.

Find out more here.

Carla is un(der)banked, like 2 billion² other people.

Source: McKinsey, Digital Finance For All: Powering Inclusive Growth In Emerging Economies, 2016.

Banking the unbankable

Turning Carla into a profitable client is nearly impossible for traditional banks. The risks are misunderstood, the cost to serve is high, and potential revenues are narrow. Serving her is considered uneconomical.

And, contrary to common sense, it is not only the low-income Carlas around the world that don’t fit in the current system — many in the middle class don’t fit either and the same goes for SMEs.

Traditional banks generally apply a low-volume, high-value approach to value creation — a handful of wealthy, high-revenue generating clients sustain the business and a large number of low-revenue clients complete the lot. To properly serve Carla, banks would need to shift their business model to make a large number of low-revenue clients a profitable unit as an aggregate. This would mean applying a high-volume, low-value approach.

While microfinance institutions specialize in low-value, short-maturity loans, many do not achieve sufficient transaction volumes to grasp benefits of scale. Additionally, the close relationship with clients for financial education, risk assessment, and loan monitoring; the often limited use of technology and, for many, physical presence in remote areas result in a high cost to serve and thus high-interest rates for clients such as Carla.

This is when FinTech steps in, increasing efficiency to better serve the un(der)banked.

Creating new business models

The universal bank model is under increasing scrutiny — high regulatory costs, large operational footprint, the slow pace of change; there are many client segments but only a few are fully understood. Full service has created a lack of focus and inefficiency. As a result, replicating this model to the un(der)banked might not be ideal. Technology can support new approaches that deliver more effective results in terms of financial inclusion.

Continue reading here.

MEDICI

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MEDICI

MEDICI accelerates global impact for all members of the FinTech ecosystem through memberships, research, advisory, and insights.

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