The smartphone has halved financial exclusion in just 10 years. It took banking 500 years to reach the same level of financial inclusion that the smartphone achieved in a decade. So the path to global financial inclusion was never going to be through a branch. The future of banking is already here, and it’s in your pocket.
When Cosimo de’ Medici founded the Medici Bank in 1397, little did he know that it would shape the way commerce was conducted globally for centuries to come. For the next 550 years, banking hardly changed at all. But when the Stanford Research Institute, under contract from Bank of America, built the first mainframe computer designed for bank bookkeeping and check processing, it was the start of a decades-long transformation of banking and financial services focused on both core technology and customer practices.
In my recent book, Bank 4.0, I showed how these changes are accelerating and how both digitization of industries at large, along with technology-first providers continuously attacking friction, are leading to a transformation of the entire banking sector globally. It started with the introduction of self-service and Internet banking capabilities in the 1980s and 90s, and is continuing through the use of Artificial Intelligence (AI), Augmented Reality (AR), and voice technologies that we’re seeing the early stages of today.
Figure 1: Bank 1.0 to Bank 4.0 Transformation Drivers
Digital Technologies Bring the Benefits of Financial Mobilization
In 2014, I predicted that by 2025 branches in Western economies would be around 70 percent of their pre-digital peak. That estimate seemed aggressive back in 2014, but today with the impact of COVID-19, it looks increasingly likely. More significantly, by 2025, most people with a basic value store of digital money (like a mobile wallet or super app) will have never seen the inside of a bank branch. That’s because the next 2 billion people who bank won’t ever have visited one.
In 2005, if you lived in Kenya, there was a 70 percent chance you didn’t have a bank account, nor could you store money safely, and it’s likely your savings were non-existent. Today, if you’re an adult living in Kenya, there’s a 98 percent likelihood that you have used a mobile money account (stored on your phone SIM card), and that you can transfer money instantly to any other adult in Kenya. Data shows that Kenyans now trust their phone more than they trust cash in terms of safety and utility, with people sewing SIM cards into their clothes or hiding them in their shoes so they can more safely carry their money with them. This is all possible because of a mobile money service called M-PESA, created by the telecommunications operator Safaricom. Today, at least 40 percent of Kenya’s GDP runs across the rails of M-PESA.
“We’re currently sitting at about 22 million customers out of a total mobile customer base of about 26 million. Now, if you take the population of Kenya as being 45 million, half of whom are adults, you can see we're capturing pretty much every adult in the country. We are transmitting the equivalent of 40 percent of the country’s GDP through the system, and at peak we’re doing about 600 transactions per second, which is faster and more voluminous than any other banking system.”
— Bob Collymore, CEO of Safaricom/M-PESA, in 2016
When it comes to financial inclusion, Kenya has done more to improve the lot of its populace in the last 10 years than the US has done in the last 50. Indeed, Kenya today has a higher rate of financial inclusion than the United States — a mind-blowing statistic. In the US, the Federal Reserve reports that approximately 20 percent of US households are unbanked or underbanked, while 97 percent of the Kenyan adult population has access to a mobile money service that acts as a basic bank account or value store. Despite a decrease of 12 percent in branch numbers since 2008, the US remains one of the highest branch density economies in the world. How can it be that the country with the second-highest per capita density of bank branches in the world still has one-fifth of its households underbanked? The answer is identity documentation and lack of mobile adoption.
One of the primary causes of financial exclusion today isn’t simply access to banking, but access to the identity documents that are required to open a bank account. Since 9/11, documentary requirements to open a bank account in the US have become stricter, in line with the Patriot Act and the Customer Identification Program (CIP) that’s enshrined in US banking law and regulations. However, more than half of the US population doesn’t have a passport (only 42 percent had one as of 2018), and only 76 percent of the population has a driver’s license. Even if they could get to a bank branch, 20 to 25 percent of the US adult population wouldn’t qualify to get a bank account.
In India, up until 2014, less than 30 percent of the population had a bank account. The Reserve Bank of India had tried increasing branch access; in fact, they put in place regulations that meant growing banks in India who wanted to deploy new branches had to put one of every four new branches in rural areas not yet served by a bank.
As of 2018, more than 1.2 billion Indian nationals had been enrolled in the Aadhaar identity card program. That’s a whopping 88 percent of the Indian population. The effect of identity reform in India is that the number of those included in the financial system has skyrocketed. The segment of the population most excluded in the old banking system — lower income households and women — has seen 100 percent year-on-year growth every year since the Aadhaar card initiative was launched in 2009. As of 2015, more than 358 million Indian women (61 percent) had bank accounts, up from 281 million (48 percent) in 2014. This is the biggest single jump for ‘banked’ women among eight South Asian and African countries. Meanwhile, Paytm, the largest mobile money service or mobile wallet app in India, has exploded in popularity. Back in 2016, Paytm aimed to have 250 million users by 2020, but they are already at more than double that number. Branch activity has continued to decline in India.
The benefits of financial mobilization are numerous. In Kenya, where approximately 49 percent of GDP flows through M-PESA, Kenyans are reported to be saving up to 26 percent more today than when they only used cash. Crime is down, savings are up, but the most interesting effects are in response to poverty, credit access, and employment. Access to mobile money has lifted two percent of Kenyan households (194,000 families) out of extreme poverty, brought 185,000 women out of subsistence farming and into business, and increased access to basic credit facilities for starting a business or dealing with emergencies.
In China, the use of mobile payments capability has transformed the economy in just six short years. Despite the difficulties of the COVID-19 pandemic, China’s citizens have remained productive financially because of a very strong mobile financial services capability built on top of Ant Financial’s Alipay and Tencent’s WeChat Pay. In 2019 mobile payments in China exceeded US$31 trillion, almost 30 percent higher than the estimated US$23 trillion in plastic card payments globally. Yes, that’s right: China’s mobile payments transaction exceed the entire world’s transactions on credit and debit cards.
One of the most successful savings products in history, Ant Financial’s Yu’e Bao, and the most successful challenger bank in the world, WeBank, have both emerged on top of this mobile ecosystem. With more than 34 percent market share of the world’s smartphone market, and the leading 5G technology on the planet, the mobile ecosystem of China rivals that of any other nation today.
The Future of Banking Is in Your Pocket
If you are a bank emerging from the Coronavirus crisis, then, what should you do?
One thing that has become glaringly clear during COVID-19 is that, as a result of reliance on physical branches, most major banks neglected building real engagement capabilities with customers in the digital sphere. We only really focused on the acquisition of customers (revenue-side) and self-service capabilities that reduced costs to the bank; we didn’t see value in engaging customers digitally when they could do that in a branch, and that was a strong use case for ongoing branch relevance. But challenger banks have come through COVID-19 with much stronger perceived engagement and service metrics than traditional players. That’s because their tone of communications, their ability to respond to critical service issues, and their capacity to adapt in terms of offerings have all stood out above traditional players.
Secondly, most challengers and startups in general have found working from home a trivial matter, and they’ve also appeared to weather this storm much better than traditional players. For example, Twitter announced in May that it was making working from home optional moving forward, and many companies will find their large retail office spaces increasingly questioned in an arena where telecommuting has become strongly viable, and even critical. In fact, many organizations have found productivity increases have come with employees working from home, too. But this is a radical shift from the compliance-heavy structures we find in banks still reliant on 20th century organizational thinking.
By 2030, it is estimated that more than 90 percent of the world’s population will have access to the Internet through a smartphone. Smartphones are increasingly getting cheaper to manufacture and deploy. Today brand new basic smartphones can be found on the streets of India, South Africa, and Nigeria for under US$50. By 2030, it’s expected that such devices will be available essentially for free, with basic subscription services for access to the Internet. It’s expected that tech giants like Facebook, Google, Tencent, Alibaba, and Amazon may move to give away smartphone access to individuals who subscribe to basic services through their infrastructure. By 2050, access to basic internet infrastructure will be all but ubiquitous across the planet, meaning everyone will participate in the digital economy. Cash won’t be illegal; you just won’t find anywhere to use it — at least that’s what William Gibson predicted in his book Count Zero.
“He had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that nobody ever did anything legitimate with it.”
— William Gibson, Count Zero (1986)
Will branches still exist? Yes, but you won’t need them to do banking; in fact, banking will be smart, real-time, and embedded in your life. To think that banking will still be done predominantly in branches instead of on our smartphones would be ludicrous. That isn’t even the situation today, where mobile banking transactions outnumber branch interactions by 10,000:1 globally. But the path to global financial inclusion was never going to be through a branch. The smartphone has halved financial exclusion in just 10 years. It took banking 500 years to reach the same level of financial inclusion that the smartphone achieved in a decade.
The future of banking is already here, and it’s in your pocket.