The SADC Secretariat, in partnership with the South African Treasury, SADC Banking Association and FinMark Trust, hosted the SADC Financial Inclusion Indaba, a regional workshop on Financial Inclusion, on the 23 and 24 July 2015 at the Balalaika Hotel in Sandton, Johannesburg, South Africa. The purpose of the conference was to create a platform for public and private sector stakeholders across the SADC region to share their financial inclusion initiatives, learn from each other’s experiences, and discuss local innovations and approaches to increase financial inclusion.
Cenfri staff members attended the Indaba and participated as moderators and panellists in the following sessions:
Financial inclusion in SADC
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The result is that the majority of adults still rely on financial services outside of the formal financial sector. This raised concerns that current measurement methods are still too bank-centric and that financial inclusion may be overstated if the focus is on take-up of bank accounts. Going forward, there is a need to balance what is measured with what is being learnt about the market for retail financial services at the bottom of the pyramid. This may require revisiting what and how financial inclusion is measured.
Business models in financial inclusion
Unique circumstances at bottom of the pyramid require unique business models. The Financial Inclusion Indaba highlighted the challenge for formal providers to develop viable business models for the bottom of the pyramid. As with all clients, those at the bottom of the pyramid expect value from their products. Yet providers find in very difficult to serve this market in a manner that is sustainable to the provider and valuable to the client. For example, adults are less likely to use savings products that costs them R5 every time they deposit R50, or have a monthly service fee that reduces their income without any services being delivered. To provide value while still maintaining a profitable model, providers tend to focus on innovative cost-saving measures, maximising adjacencies, and generating sufficient volumes to provide a profitable model at low margins. Distribution is key to making this model of provision to the poor viable. Appropriately designed channels that facilitate convenient access matched with product and service design that drives high volume behaviour, such as utilising local retailers as agents, can play a critical part in delivering valuable products to the poor. The inability of current business models to get these aspects of pricing and distribution right contributes to the low usage of formal financial services as currently seen in the SADC region.
Making savings work for the bottom of the pyramid. Savings for adults at the bottom of the pyramid in SADC is largely located outside of the formal sector, either at home or in an informal savings group. The Better Than Cash Alliance (BTCA) highlighted that proximity is critical to tapping into the informal markets to drive usage of formal alternatives. However, distribution is costly, and the incentive to take on an expensive upfront infrastructure investment to drive volumes is often lacking. Providers are trying alternative distribution approaches to overcome this challenge. For example, providers are leveraging third-party agents as a more cost-effective alternative to bank branches or ATMs. This is due to the ability to leverage existing infrastructure from their core service offering and thereby reduce upfront investment and on-going management costs. Further, agent networks provide a face-to-face contact with the community that can be used to establish trust in the financial service provider. Bottom of the pyramid customers tend to have lower literacy levels. A human counterpoint that understands their unique context and needs can assist with consumer education and on-going servicing, promoting both uptake and sustained usage of what is often a new and unfamiliar service.
Steward Bank and Standard Bank shared how they are using agents to tap into the savings market at the bottom of the pyramid during the session on Pathway to digital financial services: Exploring the savings link
A mix of insurance business models needs to grow market. The majority of the insurance markets in SADC are split between “corporate assets” and bundled retailer products, largely driven by funeral insurance. Bundled or “piggy-backing” is the result of innovations in microinsurance that leverage existing distribution channels to leapfrog traditional insurance business models to reach a large number of adults. This is often due to the need to avoid traditional high-cost outreach through branches, brokers or tied agents that are sufficiently qualified to provide financial advice. Piggy-backing is done through providing insurance on the back of another service offering, as a means to promote its uptake. The majority of products offered through these channels are simple or “thin”. This includes minimum funeral insurance, freemium micro-life products through MNOs (Mobile Network Operators), or credit life covering only the debt of that borrower. While this has led to positive developments in inclusive insurance markets, the question remains as to how these products and channels can build a retail insurance market and diversification beyond funeral or micro-life.
Further, as most of the development has been in partnership with distribution channels or larger aggregators, the microinsurance markets are subject to the business model drivers and risks of the primary businesses of these entities. For example, MNOs often use insurance cover as a means of securing loyalty. Credit providers use it to facilitate safer and more attractive credit offerings (e.g. with credit-life products). Neither provider have demonstrated an interest to broaden their insurance offering beyond this. Further, partnering with these providers leaves insurers vulnerable and outside of the control of regulators. For example, in Zimbabwe, an insurance scheme was discontinued overnight due to a dispute between the MNO distributing the product and the payment provider collecting the premiums. Neither the insurer underwriting the scheme nor the insurance supervisor was aware until after the scheme was discontinued.
So what will it take to develop well-functioning SADC insurance markets? Participants in the session, Hollard Insurance Group and Vodacom Lesotho, provided two potential avenues to consider:
Policy imperatives for financial inclusion in SADC
Fit-for-purpose regulation essential for market development in emerging markets. Providers require a regulatory framework that takes into account the unique aspects of their jurisdiction and creates the necessary space to develop innovative products for reaching low-income adults. The “copy and paste” approach to regulation that is evident in the SADC region was highlighted as one cause of creating regulatory frameworks that do not provide enough flexibility to respond to market innovations in a facilitative manner. The “copy and paste” approach takes regulations from other model countries, often developed nations, and applies it in a developing country context without proportional adaption.
The highlighted inflexibility has resulted in a situation of “regulators chasing the market” as they are continually required to catch up to changes. The following are examples of this issue discussed at the Indaba:
The Financial Inclusion Indaba highlighted that while many achievements have been made, there are still a number of challenges that need to be overcome for adults to realise the value of formal financial services. The above are only a few of the key messages that emerged that warrant further consideration. These messages are briefly summarised as follows: