BCG’s new report – How to Create and Sustain Financial Inclusion – proposes a new approach to creating and improving financial inclusion, and is the first of two jointly released publications on the topic. In the second report – Improving Financial Inclusion in South Africa – BCG applies its newly unveiled methodology to the case of South Africa and delves into the possibilities for improving its financial inclusion.
Last month, world-renowned management consulting firm, BCG (The Boston Consulting Group) released two separate publications centring on the topic of sustainable financial inclusion. The first of these publications is particularly interesting in that it presents a novel approach to thinking about and improving financial inclusion. The second of the two reports helps to illustrate BCG’s new thinking on the matter by applying its new methodology to South Africa to investigate possibilities for improving financial inclusion.
Although it is hardly secret that financial inclusion accelerates socioeconomic development, it is worth mentioning that this correlation is not well understood. BCG stresses that financial inclusion must be fully understood and quantified for stakeholders to be capable of bringing more people into the financial system and improving their general well-being and living standards. It goes on to describe several positive indicators of economic and social improvement, including: the availability of credit, the prevalence of transaction accounts, and the willingness to save and buy insurance products. GDP growth, family prosperity, and poverty reduction are all closely related to these markers.
Counterproductive markers on the other hand, include expensive surcharges, poorly suited insurance programmes, and excess credit, which, the report warns, can lead to bankruptcy and even widespread financial crises such as that of the past decade. To properly assess financial inclusion, it is necessary to balance extremes, but BCG maintains that the tools currently available are either too academic, or just too simple. These limitations make it nearly impossible to gather a full and clear view of financial inclusion, which is part of the motivation for creating its own measurement tool.
How inclusion creates opportunity
The newly developed tool sets out to evaluate three critical dimensions of inclusion as defined by BCG, starting with the full suite of basic financial services, including transaction, credit, insurance, and savings. These four aspects of financial services are described as integral to overall national and household prosperity. Likewise, all four activities can help promote economic activity, financial security, and general well being. The outline below clarifies how financial inclusion can help create opportunity for consumers, financial services firms, and the government.
Transaction Accounts | A transaction account can act as a gateway for consumers to other financial services and as a way to avoid the risks of carrying cash, especially in dangerous neighbourhoods. Account activity can help banks gain a better understanding of customer preferences. Governments can deliver social payments efficiently through the banking system, reducing fraud and corruption.
Credit | Credit can immediately benefit consumers by smoothing out income fluctuations and helping small businesses expand. Governments have a vested interest in the increased economic activity that credit can stoke.
Insurance | Insurance does not just lower risks for consumers. The more policies insurers write, the broader their exposure. A government with a well-insured population can lower its social payments and emergency spending.
Savings | Deposits provide a stable source of funding for banks and a financial cushion for consumers., which in turn helps to lower overall government social spending.
Measuring sustainable financial inclusion
In detailing its methodology, BCG asserts that adoption is a meaningless metric without a measurement of usage – the second critical dimension of this new model. It also maintains that unsustainable usage that is caused either by the lack of profitability of the financial institution’s offer, or by an offering that is too expensive or inflexible to meet the consumer’s needs, will most likely inhibit the intended beneficial effects of financial inclusion. This reasoning underlies the third dimension defined by BCG, which aims to measure sustainability. To achieve true financial inclusion, activities must benefit providers and consumers – what BCG refers to as sustainable financial inclusion.
For each of the four relevant categories (transaction accounts, credit, insurance, and savings) BCG has identified a set of comprehensive and quantifiable KPIs to measure sustainable financial inclusion. These KPIs have then been bundled to determine whether a nation was achieving satisfactory adoption, usage, and sustainability. With most of the data needed to establish these KPIs available in the public domain, a country or other entity could easily apply this tool to draw comparisons.
The figure seen above in Exhibit 3 is intended to give financial institutions, governments, and NGOs a comprehensive overview of financial inclusion that can be applied country to country. Below, Exhibit 4 presents a comparison of the state of financial inclusion among countries in mature markets versus that of countries in emerging markets.
Sustainable inclusion: what has worked?
Exhibit 5 illustrates the most important aspects of financial inclusion that countries must address. The key aspects of financial inclusion can be interpreted from the demand side (customer needs and culture) and / or the supply side, which is dependant on the innovative operating models of financial services providers.
The path to financial inclusion
To conclude its first report, BCG highlights an unsurprising finding from its informal analysis, which shows that government mandates were responsible for about one-third of financial-inclusion initiatives and that legislation was responsible for another third. Only one-third, in other words, were driven purely commercially. Financial services firms need encouragement and an economic rationale to act.
Obviously, governments cannot do it alone, but they alone can catalyse much broader efforts among financial services firms, credit bureaus, financial-technology firms, and NGOs. These organisations can help ensure stronger adoption, usage, and sustainability. For countries that have yet to begin this journey, BCG recommends that the finance ministry, reserve bank, or both acting jointly, start a multi-year journey toward sustainable financial inclusion, suggesting several efforts of significant importance to be bared in mind:
- Setting the context in order to understand the current state of affairs, identifying root causes, and beginning to build support
- Developing a vision for the future that addresses root causes and has broad support among all relevant parties
- Developing a tangible, realistic plan that allocates responsibility and authority for individual initiatives
- Establishing an implementation, monitoring, and feedback system that relies both on a centralized program management office and fast feedback that facilitates course correction
To access the first BCG report in PDF format – How to Create and Sustain Financial Inclusion – click here.
To read the second BCG report – Improving Financial Inclusion in South Africa – click here.