COVID-19 has helped to rapidly expand digital financial services which can benefit of low-income households and small firms. Inclusive banks are those focused on financial inclusion – delivering financial services at affordable costs to disadvantaged and low-income sections of society.
This pandemic could be a game-changer for digital financial services. Low-income households and small firms can benefit greatly from advances in mobile money, fintech services, and online banking. Financial inclusion as a result of digital financial services can also boost economic growth. While the pandemic is set to increase use of these services, it has also posed challenges for the growth of the industry’s smaller players and highlighted unequal access to digital infrastructure.
The shift towards digital financial services was already helping societies advance financial inclusion before the pandemic started, benefiting many low-income households and small firms with typically little access to traditional financial institutions. Lockdowns and social distancing are accelerating the use of digital financial services. As it referenced surges in mobile phone penetration being an opportunity to extend financial services widely, reaching underserved communities.
Indeed, smartphone use is expected to hit 74% in the Middle East and Africa by 2025.
Where the technology comes in:
Advanced banking technology will be required for inclusive banks to harness these new opportunities for financial inclusion. Of particular importance is Cloud computing and the Software as a Service (SaaS) delivery model.
Cloud and SaaS present an alternative way of running a bank’s IT infrastructure. Core banking and/or the digital front office operates on a public or private Cloud rather than on physical infrastructure in the bank’s premises. Banks pay a subscription to access the solutions.
Both Cloud and SaaS carries lower infrastructure costs, they allow products to be created, delivered and changed faster, and they offer immense resilience, scalability and security. Cloud-based SaaS platforms are also continuously updated, meaning banks benefit from the latest innovations.
Cloud and SaaS adoption will be key to future success in inclusive banking for these three major reasons:
1) It is a hyper-efficient model, largely in terms of cost
Cloud and SaaS offers a hyper-efficient cost model that allows banks to move away from a large capital expenditure (Cap Ex), where there is a need for expensive up-front investments in IT. It also avoids high ongoing costs associated with maintaining ageing “spaghetti software” infrastructure or running data centres in-house.
Cloud and SaaS have an operational expenditure (Op Ex) model which requires a much smaller, monthly subscription.
This is very important given the uniquely challenging environment banks operate in today. Low interest rates are impacting profitability, and fueling the need for new products.
2) Its elastic scalability makes inclusive banking manageable and efficient.
With inclusive banking, you don’t have to maintain an infrastructure that has capacity for your maximum possible need all the time.
Take mobile banking as an example of why this is important. Mobile banking presents inclusive banks with an opportunity to grow at a rapid pace. Orange Bank in West Africa — a partnership between Orange and Bancassurance company NSIA — has an aim of attracting 10 million customers in Senegal, Mali, Burkina Faso and the Ivory Coast in the next five years.
Accommodating these ambitions by upgrading on-site IT infrastructure would require major — and most likely prohibitive — capital investment. Cloud and SaaS technology is ‘scalable’: its capacity grows with the business. And consumption-based pricing means you only pay for what you use.
In addition, while other banking channels tend to have ‘peaks’ at certain times of the day, our mobiles are with us 24/7. Cloud and SaaS is particularly suited to this model as it has ‘elasticity’; it can expand its capacity to accommodate peak periods and shrink in the quieter times. Meeting this capacity through traditional on-premise systems would require a costly overprovision.
3) It helps along financial inclusion in the developed world too
With financial exclusion far from limited to emerging regions — some 6.5% of households in the US are unbanked and 16% underbanked — Cloud and SaaS can go a long way towards supporting inclusive banks in the developed world too.
The current economic crisis has made millions more financially vulnerable. And because Cloud and SaaS solutions allow new products to be tailored to customer needs and brought to market quickly, they have helped banks to step up for their customers in these tough times.
The Cloud has cleared
In the past, banks were reluctant to move to Cloud because of concerns over security and privacy. Regulators have also been sceptical because of the potential posed by Cloud for aggregated risk. However, these issues have been addressed in recent years.
Cloud is now seen as just as secure, if not more so, than on-premise. It is also equally as resilient.
Today’s advances in digital technology are a once-in-a-generation opportunity for banking. As the International Monetary Fund (IMF) suggests, this includes the chance for inclusive banks to extend financial inclusion on an epic scale. It’s a challenging environment for inclusive banks, but technologies like Cloud and SaaS are there to help them make a huge difference.