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Editor’s blogJune 5 2014

Who will bank the unbanked?

Capturing the world's large unbanked market will require an innovative approach. Are banks up to the challenge or will technology companies beat them to it?
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There are 2 billion people in the world with bank accounts. There are 6 billion mobile phones. That means there are 4 billion people connected up who do not have a bank account. The challenge for banks is to reach out to those 4 billion and get them onboard as customers. Starkly different views of who will capture this business were presented at the IIF Spring Membership Meeting in London.

Nick Shalek of Ribbit Capital, which invests in financial start-ups, is convinced the banks cannot do it because at best they can only take an evolutionary rather than a revolutionary approach. He thinks bank branches have no future. "We are looking for entrepreneurs who will disrupt the financial marketplace," he said during a panel discussion on the impact of technology on financial services.

The classic response of bankers to this kind of attack is to say that only banks have the branding and the security to be trusted as a safe home for customers' savings. Perhaps it is more a question of only banks have the capital and can deal with the regulators.

Derek White, chief design officer for the UK's Barclays, admits that 40% of younger customers have more trust in a technology company than a bank. The challenge then is how to attract these customers while at the same time still serving older customers who required branches. Barclay's Ping It service, which enables money to be sent between mobile phone users, was part of the answer for the bank.

Panellists agreed that what mobile customers are now demanding is the ability to make a loan application from their phone in 30 seconds. The lender then has to source all the information needed to support the application and get an answer back in a few minutes.

Mr White described how Barclays has tried to foster innovation in a large organisation with small teams ‘cleansed’ of conventional thinking. The challenge was to keep the evaluators and systems folks away so that projects can advance at a rapid speed.

A member of the audience pointed out that the majority of the missing 4 billion live in Africa and south-east Asia and that much of the innovation was likely to happen in those markets. Kenya’s mobile-phone based money transfer and microfinancing service, M-Pesa, is a great example.

 Most likely a lot of the innovation will also happen outside of the banks, but in the end it may be banks that buy these small companies and commercialise the ideas – only they have the capital and the ability to deal with the regulators.

Mr Shalek is therefore right to focus his investment dollar there, even though picking winners will be hard. But, whether the disruptors take out the banks is a harder case to make. The key difference between banking and other industries transformed by the internet, such as the music industry, is regulation. Non-banks can probably only escape regulatory scrutiny as long as they are small. Similarly, when they grow, the new technology companies will find it harder to innovate.

For sure, banking will be shaken up. The players may not change as radically as tech investors expect and the banks may onboard a substantial part of the 4 billion in the end.

Brian Caplen is the editor of The Banker.

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