How to reach out to the unbanked

The question of how banks can use digital technology and partnerships to facilitate the delivery of financial services on a sustainable basis to those on the lowest incomes will be the subject of a talk by the Microsoft founder at this year’s Sibos. PAUL MELLY looks at what’s on the agenda

When Bill Gates gets up to make the closing speech at this year’s Sibos international banking conference his listeners will be in for some original ideas.

There might seem nothing out of the ordinary in seeing the co-founder of a global software firm address an international audience of finance specialists who will have spent much of the previous few days discussing the technological innovations that support their industry.

But Gates will approach those issues from a less mainstream standpoint – which he must hope will stimulate fresh thinking among many of the 7000 bankers and other professionals due to gather in Boston for this year’s event.
For he will be present not as the former Microsoft chief but in his capacity as co-chairman of the Bill & Melinda Gates Foundation, which has become one of the world’s most important private philanthropic institutions active in developing countries.

And his address will focus on how to provide financial services to the poor, and how digital technology and partnerships can be used to facilitate the delivery of these services on a sustainable basis.
For while local micro-finance networks have helped low-income communities develop basic savings and credit schemes, many conventional banks have decided that it is simply too difficult to provide services for the least well off sections of society – a stance that, of course, contributes to trapping the poorest in poverty, without access to credit or capital to build up their livelihoods.

But technology is starting to change this picture, reaching those who are often beyond the reach of traditional banking. Indeed, one of the earlier sessions at this year’s Sibos – which runs from 29 September to 2 October – will look at a Kenyan scheme that provides financial services through mobile phone accounts.
And although this is a subject most often seen as applicable to Africa, Latin America and South Asia, it also has considerable relevance to the Middle East. For while the region is home to many affluent consumers, even the most prosperous economies have large numbers of people living on lower incomes.

Many, of course, are foreign workers. But there are also many locals of modest means, particularly in Jordan, Egypt, Yemen and even Saudi Arabia or Oman, both in the major cities and in widely scattered rural communities.
Finding ways to provide the less well off with financial services on a basis that is commercially viable is a practical business challenge for local banks – and it particularly applies to the key retail transaction banking activities such as deposits, payments and cash transfers.

So while Gates’ comments will certainly have application to charitable activities in the developing world, they will also be directly relevant to the business issues that confront big Middle Eastern banks seeking to provide effective and affordable service to all sections of society in their home markets.

The broader canvas
But, of course, this year’s Sibos – following on the event’s highly successful Gulf debut in Dubai in 2013 – will also be looking at a host of other major issues that confront banks and associated service providers today.

And transaction banking will occupy much of the agenda. According to some calculations, it now represents more than 40 per cent of corporate banking revenues worldwide.

But as essential and sometimes routine as this activity is, it can no longer be viewed as an assured source of easily accumulated revenue.

Competition, in technical and pricing terms, is intense and the service expectations of business customers are constantly rising. Banks that want to retain their clients are under pressure to keep up with the latest trends.

The globalised nature of business today means that major MENA companies are very much in touch with the standards of service that prevail in other regions of the world.

Many either use services provided by banks in Europe, the US and East Asia themselves or they are routinely dealing with commercial counterparts based in those regions, and so learning secondhand about the latest service innovations from which their business partners benefit.

Indeed, this pressure to ratchet up performance standards is now being seen in American capital markets, with a move to reduce by one day the three-day (T+3) time cycle required for settling transactions in the US. This is being driven by pressure to move in line with the two-day (T+2) cycle that has prevailed in Europe for some time and is also applied in much of Asia.
The pressure to increase the speed and reliability of transaction banking services stimulates a wide diversity of initiatives, both within countries and within institutions, many of which are on the agenda for Sibos 2014 in Boston.

For example, amidst growing interest in e-invoicing, efforts have been made in Italy to develop a standardised approach that will facilitate mass adoption and the gradual phasing out of paper invoices.

Meanwhile, Lloyds Banking offers a model of internal innovation within one bank. So that it can better adapt to regulatory changes and the complex and evolving condition of payments, the bank created a “transaction management hub”, overhauling its own payment systems to achieve economies of scale and make them more flexible.

Pressure for change is driven not only by customer demand and competitive pressure but also by regulation, and in particular the Basel III latest round of prudential standards.

One area where these impact directly on transaction banking concerns the issue of liquidity.

Many banks face large liquidity exposures during the course of a business day. A delay to incoming funds can impose strain on a bank when it is supposed to be making a substantial outward payment; to honour the payment obligation it may have to dip into its own resources if the expected inward payment has not yet arrived.

To contain the pressure this can impose on their resources and the risk of being over-exposed, banks seek to match the timing of the incoming and outgoing payments that they expect to be handling.

And now under Basel III some regulatory limits are also to be introduced, to reinforce this risk control – another issue that will feature on the Boston agenda.

For the first time, banks will be subject to stringent liquidity requirements that will start to come into effect next year; and by the end of 2019 the new rules will be fully applicable to all major international banks. n