By Angelo Bertini, SVP, MD Middle East Africa at BPC

It is no secret that traditional banks have struggled to close the financial inclusion gap, especially in emerging markets. The World Bank estimates that 1.7 billion adults remain unbanked. A big part of this is down to the rigid requirements that the incumbent banks have in place to open an account or establish creditworthiness.

Access to finance is becoming a necessity for underserved communities. But with banks now limiting their risk appetite in the current COVID-19 climate and with self-isolation commonplace; many are left more vulnerable than ever before.

However, there are signs of hope. A new generation of fintechs, neobanks and less traditional players are exploring more inclusive models and data sources to unlock financial access to communities for the first time. Understanding that the current processes simply don’t work for all, new banking players are establishing trust in new ways that make sense to the local communities they serve. So how are these new players closing the financial gap?

The challenge to establish trust

There are many barriers which leave certain groups without access to finance. The first hurdle is establishing trust. Financial institutions are overly cautious owing to their strict policies which do not always match the realities of life for individuals in emerging markets. It’s a vicious cycle: traditional banks typically require a credit history to prove creditworthiness. But many people in underserved communities simply don’t possess the information or the correct documentation to access credit from big banks.

In the current global pandemic, building trust using this method becomes an even greater challenge. People in emerging markets – in some of the poorest communities – may now be unable to work and struggling to make ends meet.

Understanding how to unlock financial access

Thankfully, a range of new and often digital players are helping to establish trust for the first time. Neobanks, fintechs and other non-traditional players are proving the need to embrace new ways to close the financial inclusion gap.

Data is the most important asset here. These new players think differently and are willing to look further; finding and using data that is already available to unbanked individuals. This is coming from existing databases for example from mobile network operators who already have a wealth of data on their customers. With advancements in machine learning, this data can be analysed to provide an assessment of payback behaviour in a way that is meaningful and accurate.

NuBank in Brazil is a mobile-first bank built with the aim to open up banking to the country’s unbanked population. Recognising the absence of credit histories and the high fees imposed on ‘risky’ individuals, NuBank launched a community referral-based model. It analyses a customer’s social network and observes the credibility of the people they are connected to. The model builds a financial profile from the authority of a customer’s social and professional circles. It assesses customers in a way that makes sense to the Brazillian community. By eliminating complex credit checks and high interest rates, NuBank now boasts 20 million customers.

It’s not just the digital-first banks that are reinventing the banking experience. Tech companies across emerging markets are looking to use their position and customer access to better serve their communities. Grab in Singapore and Gojek in Indonesia both started out as ride-hailing services but are now seeking banking licenses. Using the large volumes of customer data and insight they already possess, they have successfully repositioned themselves to offer customers a range of financial services. Both companies are proving that you can begin to build a financial identity for individuals without interacting with a bank.

TymeBank – leading by example

In other parts of the world, new banks are recognising the physical accessibility challenges faced by underserved communities. Building digital-only plays and leveraging agent networks are ways to eliminate this distance. While TymeBank in South Africa is classed as a digital challenger, it still operates a network of hundreds of kiosks across the country in partnership with two big retailers. The kiosks are even located in churches which act as another hub of local communities in the country.

TymeBank has also broken down a number of barriers by leapfrogging processes with a more digital approach. The bank onboards new customers using real-time biometric fingerprint recognition, all through the self-service kiosks. In a matter of minutes, customers can be verified and issued a bank card, opening up a whole world of opportunities. TymeBank is now one of the fastest growing banks globally with peaks of 100,000 no monthly-fee accounts opened monthly. And it comes down to truly understanding the specific needs of its customers in that community.

It’s about making it local

There are a growing number of newcomers into the global financial market who are reinventing the banking experience for the better. Innovative thinking is enabling them to serve groups who until now have been left behind by larger, traditional banks.

While there are many success stories from around the globe, what works in one market won’t necessarily apply in another. There are a whole range of new data sources, models and technologies such as AI and machine learning, all with the power to close the financial inclusion gap. New banking players can leverage these different tools and data assets to establish trust and open up financial access, but understanding the local market is paramount.

There is no one-size-fits all approach to close the gap. It’s about learning the unique challenges faced by the local community and using the tools available to create solutions and initiatives to best serve them. Challenger banks need to understand first why trust is broken in that specific community and find a way to earn it back.

Understanding the unique pitfalls is also key, whether it’s an absence of documentation, a lack of physical access, or the crippling fees imposed on ‘risky’ individuals. Only by considering this will banks and other players succeed in creating solutions that effectively serve local communities. New players have an opportunity to open up financial access in a way that traditional banks have been unable to. Local knowledge and understanding will determine who takes the lead in closing the financial inclusion gap.