The GAFIS journey (from 2010 to 2013) is one mirrored in many banks around the world—a journey from traditional, old-fashioned and often exclusive banking practices, to 21st century, inclusive retail banking. We dub this the journey from banking Proposition 1.0 to Proposition 2.0 (see Figure 1). The most advanced GAFIS banks are, at best, halfway through the journey, but the GAFIS findings and commitment to change inspire optimism that these oft-perceived “lumbering giants” can compete head to head with more nimble, tech-savvy competitors and deliver new value to low-income clients.
Traditional low-balance bank accounts (Proposition 1.0) are not close to profitable. Basic bank accounts are the workhorse product of mass market retail banking today, but they often don’t work well for the bank or for the customer. For the bank, more than 80% of these accounts typically have too low a balance to be profitable on their own; and as many as 50% lie dormant. Applying full costs, the “stylized” basic bank account with a $30 balance loses the bank $2.79 each month. With current cost structures, banks can only make a profit on these accounts if the balances exceed $800, a virtually unreachable average number across a large segment of lower income clients. Meanwhile, the customer often finds it inconvenient and costly to make the small deposits or withdrawals through a bank branch structure.
Structural and business model change precedes product innovation. Initially framed as an issue mainly of product innovation, improving the profitability of a basic account in fact demands innovation in service channels, internal structure and business model. Large banks foster strong internal competition for financial, human and IT resources. Marginal or experimental products aimed at inclusion are unlikely to succeed for long in the ongoing battle for resourcing. But external support from the GAFIS project helped to facilitate and buttress the development of new inclusive propositions. Peer learning, new analytical tools and external accountability all supported change management in each bank.
One indicator has been the creation of new inclusive banking divisions within two of the banks, with bottom-line responsibility for clients in the inclusive segment. New products and channels are now managed in a more integrated fashion—with proactive CEO and board support. In total, more than 4 million new GAFIS-linked accounts have been opened during the project; and poor savers use more than 550,000 of these accounts.
Development of an agent channel to originate and activate accounts (Proposition 1.5) sharply improves the business case. Even without changing the product offering, the deployment of agents who can originate new accounts and take deposits from clients radically improves the business case for banks by displacing more expensive branch-based transactions—reducing the net loss per account per month to -$1.02. The rollout of an agent channel is a necessary condition for a bank to sustain a mass account rollout, although it is not sufficient in itself (hence it represents only a half-step to Proposition 1.5). For the client, access to a convenient agent network makes it easier to deposit small sums as well as leave funds in the account until needed.
The GAFIS banks now collectively report some 25,000 agents, almost ten times the number at the start of the project , and five times the number of their branches. GAFIS banks provide evidence that an agent channel can play a significant role in deposit mobilization for banks, not only in processing payments or withdrawals. Building a robust large scale agent channel is not easy, however.
In addition to the agent channel, GAFIS banks are also starting to use new communication channels, sending out SMS messages with reminders, information and offers. While GAFIS banks’ use of SMS is still at an early stage, initial evidence suggests that these messages can stimulate higher activation rates in newly opened accounts, further improving the business case. At the same time, banks are fighting with mobile operators—which are rapidly emerging as competitors for both agent channels and financial services—for what they consider fair pricing on channels used for transactional banking.
The retail bank of the future (which embodies Proposition 2.0) combines new agent and mobile channels with new tailored and flexible products. A robust agent channel enables banks to focus on tailoring and targeting products to specific customer needs. GAFIS banks are starting to combine big data from their mass-market accounts with qualitative survey insights to better understand their low-income client bases. This data enables banks to identity potentially active clients, which in turn increases the odds of cross-selling other products.
Banks that shift toward Proposition 2.0 are more likely to endure and succeed as large retail banks in the 21st century. In fact, the process of learning to serve low-income clients profitably with new, flexible products should enhance a bank’s ability to serve its mid- and upper-income clients. In the process, this shift could change the face of large commercial and retail banking.