VI Latin American Financial Inclusion Congress Febraban-Felaban São Paulo, 19 August 2014 Omnichannel banking and financial inclusion: thoughts and metrics David Tuesta Financial Inclusion-Chief Economist
May 10, 2015
VI Latin American Financial Inclusion Congress
Febraban-Felaban
São Paulo, 19 August 2014
Omnichannel banking and financial inclusion: thoughts and metrics
David Tuesta
Financial Inclusion-Chief Economist
Page 2
Contents
1. Our starting point
2. Financial inclusion and the role of omnichannel banking
3. Access channels, use and financial inclusion: some metrics
4. From omnichannel banking to digital banking: future transformations
5. Conclusions
Page 3
Omnichannel banking
• This involves being close to the financial customer at all times and in all places for whatever the customer needs, whenever they need it
• Any kind of intermediation possible, whatever the channel
• Implies multiplying the value of both traditional and new channels. The jump from multi-channel. High leverage of technology
• Different channels: branches, correspondents, ATMs, Internet, mobile phone transactions, telephone banking, Smartphones, diverse mobile devices and future technologies
• A way of fostering financial inclusion?
Page 4
Omnichannel banking and technological development
• The transfer to omnichannel banking has been heavily reliant on technological progress and digital change
• Greater storage capacity, speed, new platforms and new technologies
• Gradual regulatory adaptation
• Improves the financial customer experience
• Note: The technology underpinning omnichannel banking also gives scope for non-banking, digital players to enter banking
• New channels and the option of incorporating the non-banked
Page 5
Financial inclusion, technology and omnichannel banking• An important factor if households and companies are to continue sustained
growth : better and more timely risk and resource management
• Financial exclusion, which is of particular concern in emerging markets, is a result of issues relating to use, access and the barriers to participating in the formal financial system
• Technology means financial services can be offered at a lower cost, with the potential to be everywhere and be better adapted to the customer’s needs
Page 6
Financial inclusion, technology and omnichannel banking
• Lack of access to financial services can lead to the vicious circle of poverty and greater inequality (Banerjee & Newman, 1993; Galor & Zeira, 1993; Aghion & Bolton, 1997; Beck Demirguc-Kunt & Levine, 2007)
• Providing access to financial instruments increases saving (Aportela, 1999; Ashraf et al., 2010), productive investment (Dupas & Robinson, 2009), consumption (Dupas & Robinson, 2009; Ashraf et al., 2010b) and women’s empowerment (Ashraf et al., 2010)
• Access to credit and to insurance has positive effects but the empirical evidence is less robust (Karlan & Morduch, 2010; Banerjee et al., 2010; Roodman , 2012)
Page 7
Contents
1. Our starting point
2. Financial inclusion and the role of omnichannel banking
3. Access channels, use and financial inclusion: some metrics
4. From omnichannel banking to digital banking: future transformations
5. Conclusions
Page 8
Towards financial inclusion and the role of omnichannel banking
Barriers
(by
inco
me, cu
ltural, tru
st, co
st-related
, geo
grap
hical)
Consumer protection
Financial infrastructure -omnichannel banking
Financial Education Use
AccessCompetition
Facilitating instruments
Regulation
Financial Inclusion
Results
Page 9
Omnichannel banking: issues to bear in mind
• Omnichannel banking particularly affects access to the financial system, but that does not necessarily lead to greater use of, or interaction with, this system
• The financial and technological landscape and its applications in omnichannel banking are a necessary but not a sufficient condition for increasing the use of formal financial services: other factors must be considered when designing policies to improve financial inclusion
• Instruments that might support greater financial inclusion have to overcome the barriers excluding participation in the financial system; these tend to be country-specific
Page 10
Contents
1. Our starting point
2. Financial inclusion and the role of omnichannel banking
3. Access channels, use and financial inclusion: some metrics
4. From omnichannel banking to digital banking: future transformations
5. Conclusions
Page 11
Access and use: bank branches
0 10 20 30 40 50 60 70 80 90 1000.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
0.20
0.32
Argentina0.09
AustraliaAustria
0.02
0.21
0.39
Bolivia
0.46
0.27 Brazil 0.29
0.07
0.13
0.49
0.05
ChileColombia
0.02
0.35
CroatiaCzech Republic
0.70
Dominican Rep.
El Salvador
0.23
FinlandFrance
0.16 0.16
0.28
0.64
Honduras
0.330.32
0.17
Ireland
Italy
Japan0.21
Kenya 0.340.30
0.16
0.32
0.59
0.05
0.26 Mexico
0.08
Mongolia
0.38
0.22
0.38
0.75
Nicaragua 0.08
Paraguay Peru0.14
0.39Portugal
Romania0.17
Slovak Republic
0.67
South Africa
Spain
0.23
0.49
0.15
Thailand
0.160.190.17
United States
Uruguay
Venezuela, RB
0.15Zambia
Bank branches
Access: number of bank branches per 100,000 people
Usa
ge:
% o
f ad
ult
po
pu
lati
on
Page 12
Access and use: ATMs
0 50 100 150 200 250 3000.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
0.190.19
Argentina
0.10
AustraliaAustria
0.13
0.47
0.78
Bolivia
0.250.24
Brazil
Bulgaria
0.010.01
Canada
0.03
Chile
Colombia
0.01
Costa Rica
Croatia0.65
0.47
Dominican Rep.El Salvador
0.90Finland
0.76
0.06
0.130.07
0.41
Honduras
0.59
0.070.10
Ireland
0.41
Japan
0.24Kenya
Korea, Rep.Latvia
0.13
0.63
0.29
0.01
0.52
Mexico0.12
0.36Mozambique
0.03
0.86
0.74
0.050.03ParaguayPeru
0.17
0.45
Portugal
0.33 0.34
Slovak Republic
0.76
South Africa
Spain
0.24
0.76
0.12
0.43
0.52
0.09
0.32
United States
Uruguay
0.30
0.11Zambia
ATMs
Access: number of ATMs por 100,000 people
Usa
ge:
% o
f ad
ult
po
pu
lati
on
Page 13
Access and use: mobile phones
0% 20% 40% 60% 80% 100% 120%0%
10%
20%
30%
40%
50%
60%
70%
80%
Albania
27%
Argentina4%5%
Bolivia
2%
9%
Brazil1%
Burundi
10%
Chad
ChileColombia
Congo, Dem. Rep.Dominican Rep
Gabon
2%4%
1%
7%
Kenya
4%Lesotho
2%
Macedonia, FYR
MadagascarMexicoMoldova8%
3% Nicaragua3%Paraguay
Peru
PhilippinesSouth Africa
SwazilandTanzania
3%5%
27%
12%
Uruguay7%
Zambia
Mobile phones
Access: % mobile penetration
Usa
ge:
% o
f ad
ult
po
pu
lati
on
Page 14
Access and use: correspondents
Page 15
How to measure financial inclusion? What factors affect it? What part do access channels play?
• Despite the importance of financial inclusion, little is known about how to measure it, about policies to promote it (Demirguc-Kunt et al., 2008) and its determinants from a micro-economic point of view (Allen, Demirguc-Kunt, Klapper & Martinez Peria, 2012)
• Existing studies lean heavily on macroeconomic data (Beck, Demirguc-Kunt, & Martinez Peria, 2007; Honohan, 2008; Kendall, Mylenko & Ponce, 2010). This makes it difficult to analyse to what extent specific features determine financial inclusion
• How much weight do the different factors facilitating greater financial inclusion have? How does inclusion interact with other factors? Developing a Financial Inclusion Index
Page 16
Building a financial inclusion index
• Defining a complete set of measurements for financial inclusion with a multi-dimensional approach (access, usage and barriers)
• Harmonised financial inclusion index that can be compared between countries and time periods, allowing differing levels of aggregation
• Useful guideline for policymakers, governments, financial institutions and international bodies interested in tracking financial inclusion or in designing policies
Page 17
Financial Inclusion Index (FII)• We define an inclusive financial system as one which maximises usage and
access, while also minimising involuntary financial exclusion
• The minimisation of perceived barriers is measured by the reduction of the obstacles faced by individuals not participating in the formal financial system
• The level of financial inclusion is determined by three dimensions: usage, access and barriers
• The three dimensions are, in their turn, determined by several indicators
• The FII we have built covers 82 countries and aggregates information from a total of 11 indicators
• Methodology : Two-step PCA
Page 18
Financial Inclusion Index
• First step: estimating the three dimensions: usage, access and barriers
i : denotes country and (is a vector which contains the dimensions, where the superscripts u, a and b denote each dimension
• Second step: estimating the weights of the dimensions and the overall FI index
Page 19
Financial Inclusion Index
Page 20
Financial Inclusion Index
Page 21
Contents
1. Our starting point
2. Financial inclusion and the role of omnichannel banking
3. Access channels, use and financial inclusion: some metrics
4. From omnichannel banking to digital banking: future transformations
5. Conclusions
Page 22
With the digital era, financial services provision is extending beyond the classic financial institutions. There are several vectors of change :
1. Moore’s Law and cost-reductions in “doing banking”
2. Demographic shifts and digital natives
3. The learning curve of digital players transforming industries as they go
4. The incentives of high financial transaction costs and the development of financial services by non-banking digital players
5. Fixed cost barriers crashing down
6. Asymmetric regulation/supervision
7. The technological legacy of banking
The digital era: beyond omnichannel banking
Page 23
• The consumer experience is now exposed not only to what is offered by the supervised financial institution, but also to new digital alternatives from non-banking players. Financial education is key in this context
• Payment systems, electronic money and facilitators– Telecoms companies– Pure digital: PayPal (USD350mn transactions/day), Dwolla (USD35mn), AliPay
(USD400mn/day), Square (USD14bn/year), Venmo, LevelUp, Simple, among others
• Loans– Lending Club (USD5bn P2P/ 3% NPL), Zopa (GBP500mn/0.5% NPL), Lenddo
(loans of USD400 to USD800 in emerging markets)
The digital era: beyond omnichannel banking
Page 24
Contents
1. Our starting point
2. Financial inclusion and the role of omnichannel banking
3. Access channels, use and financial inclusion: some metrics
4. From omnichannel banking to digital banking: future transformations
5. Conclusions
Page 25
Conclusions
• The transfer of the traditional financial system to omnichannel banking is based on technological progress, which have brought improved customer experiences (higher aggregate value)
• Omnichannel banking, with the development of its customer service channels, is a necessary but not a sufficient condition for driving financial inclusion. Greater access will not inevitably bring with it greater use. There are other important issues
• We are developing a global FII to make a multi-dimensional approach to the measurement of financial inclusion
• Financial inclusion requires effort to improve use and access and reduce the barriers limiting participation in the formal financial system
• Omnichannel banking can be understood as a transition phase from the traditional financial system to the next, truly digital experience, with new players on the global stage
Thank you very much
Page 27
Channels, access and use
Korea, R
ep.
Portugal
Australia
SpainBra
zil
France
Slovenia
Belgium
Estonia
Bulgaria
New Zealand
Kazakhsta
nLa
tvia
Romania
Turkey
Malaysia
Poland
Slovak Republic
Argentina
Mexic
o
Sweden
Venezuela, R
B
Armenia
Bosnia and H
erzegovina
Colombia
Mongolia
Dominican Republic
Peru
Botswana
Swaziland
Vietnam
Philippines
Angola
Nicara
guaIndia
Zambia
Moza
mbique
Tanzania
Uganda
Cameroon
Chad
0
50
100
150
200
250
300
ATMs per 100,000 inhabitants
Page 28
Estonia
Netherla
nds
BelgiumFra
nce
Sweden
Austria
Canada
Australia
Czech
Republic
Croatia
Spain
Malaysia
United Sta
tes
Belarus
Poland
Greece
Bulgaria
Costa Rica
Russian Federa
tion
RomaniaKenya
Mace
donia, FYR
Argentina
Swaziland
Botswana
Albania
Uruguay
Mexic
o
Dominican Republic
Georgia
Tanzania
Bolivia
Indonesia
Paraguay
PeruGhana
Gabon
Nicara
guaNepal
Cameroon
Congo, Dem. R
ep.0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
ATM use as % of adult population
Channels, access and use
Page 29
SpainIta
lyPeru
Brazil
France
Greece
Russian Federa
tion
Croatia
Japan
PolandLa
tvia
Lithuania
Slovak Republic
Mace
donia, FYR
Costa Rica
Albania
Netherla
nds
El Salvador
Armenia
Turkey
Venezuela, R
B
Austria
Colombia
Uruguay
Thailand
Dominican Republic
India
Malaysia
Bolivia
Pakistan
Indonesia
Nicara
guaNepal
Ghana
Zambia
Vietnam
Leso
tho
Burundi
Tanzania
Ukraine
Chad
0
10
20
30
40
50
60
70
80
90
100
Offices per 100,000 inhabitantsChannels, access and use
Page 30
Ireland
New Zealand
Austria
Denmark
Slovenia
Greece
Finland
France
CanadaIta
ly
Bosnia and H
erzegovina
South A
frica
Poland
Netherla
ndsKenya
Korea, R
ep.
Angola
Lithuania
Latv
iaBra
zil
Botswana
Bolivia
Swaziland
Estonia
Colombia
Kazakhsta
n
Albania
Uganda
Russian Federa
tion
IndonesiaGabon
Peru
Leso
tho
Tanzania
Philippines
El Salvador
Uruguay
Moldova
Pakistan
Chad
Congo, Dem. R
ep.0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Office use as % of adult population
Channels, access and use
Page 31
UAE
Finlan
d
Gree
ce
Russ
ia
Italy
Aust
ria
Singa
pore
Germ
any
Israe
l
Irelan
d
Esto
nia
New
Zeala
nd
Rom
ania
Spain
Neth
erlan
ds
Slova
kia
Hung
ary
Cape
Ver
de
Kore
a, Re
p. o
f
USA
Arm
enia
Gam
bia
Slove
nia
Barb
ados Iran
Arge
ntina
Gabo
n
Jord
an
Viet
nam
Braz
il
Tuni
sia
Geor
gia
Mor
occo
Libya
Ukra
ine
Mald
ives
Guat
emala
Thail
and
Polan
d
Cong
o, R
ep. o
f
Para
guay
Azer
baija
n
Kaza
khst
an
Mau
ritius
Cana
da
Guya
na
Koso
vo
Sri L
anka
Peru
Mau
ritan
ia
Sout
h Af
rica
Egyp
t
Cote
d'Iv
oire
Sene
gal
Chin
a
Swaz
iland
Pakis
tan
Nige
ria
Nica
ragu
a
Bang
lades
h
Afga
nist
án
Leba
non
Liber
ia
Guin
ea-B
issau
Tanz
ania
Beni
n
Cam
eroo
n
Sierr
a Leo
ne
Zam
bia
Keny
a
Yem
en
Cost
a Rica
Rwan
da Mali
Chad
Burk
ina F
aso
Mad
agas
car
Butá
n
Moz
ambi
que
Timor
-Les
te
Nepa
l
Com
oros
Solo
mon
Islan
ds
Eritr
ea
0%
50%
100%
150%
200%
250%
Mobile phones, % of adult population
Channels, access and use
Page 32
Kenya
Albania
Angola
Swazi
land
Philippines
Ukraine
Camero
onBoliv
ia
Mongolia
Lesotho
Kazakh
stan
Mexico
Burundi
Turke
yLat
via Peru
Pakist
an
Honduras
Thail
and
Venezu
ela, R
B
Congo, D
em. R
ep.
Ghana
Georgi
a
El Sa
lvador
Madag
ascar
Argentina
Indonesia
0%
10%
20%
30%
40%
50%
60%
70%
80%
Mobile phone use in financial transactions, % of adult population
Channels, access and use
Page 33
Kenya
BangladeshBra
zil
ColombiaChile
Peru
Pakistan
Ecuador
Guatemala
NigeriaChina
Mexic
oIndia
Uganda
Malaysia
Argentina
Moza
mbique
Rwanda
Venezuela, R
B
Panama
Paraguay
Bolivia
Tanzania
Ghana
Malawi
Botswana
France
Germany
New Zealand
Saudi Ara
biaSpain
Sweden
0.000
50.000
100.000
150.000
200.000
250.000
300.000
Correspondents per 100,000 inhabitants
Channels, access and use
Page 34
Denmark
Sweden
United Sta
tes
Belgium
Georgia
Canada
Slovak Republic
Netherla
ndsChile
Kenya
Mace
donia, FYR
Croatia
Portugal
BulgariaIndia
Ukraine
Costa Rica
Kazakhsta
n
Uruguay
South A
frica
Colombia
Greece
Peru
Bosnia and H
erzegovina
Indonesia
Belarus
Paraguay
Ghana
Mongolia
Moza
mbique
Malaysia
Moldova
Albania
Turkey
Swaziland
Venezuela, R
B
Azerb
aijan
El Salvador
Leso
tho
Armenia
Madagasca
r
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Use of correspondents, % of adult population
Channels, access and use
Page 35
FII correlations
Page 36
FII correlations
Page 37
FII correlations