Kenya Will Surpass The US In Financial Inclusion

February 4th 2014

I was in India a few weeks ago speaking to the Reserve Bank and most of the primary Retail Banks about the impact of mobile and social media on the industry there. .

Enshrined in the banking culture and in bank regulations is the perceived 1:1 relationship between branches and Financial Inclusion. This is not unheard of in developed economies either, but in India it is so much a part of the culture that no one has rethought this paradigm in a very long time. The assumption simply is that if India wants inclusion, it needs more branches.

India has just 110 branches per million persons, compared with the USA which has more than 300 branches per million persons, and Spain which has an incredible 900 branches per million persons, with the next nearest in the EU being Italy with 650/mm.

In most developed economies the CAGR of aggregate number of bank branches is -2% to -4% annually these days, and is trending towards a steeper decline. Some economies like Australia have been slow to start this decline, but a normalized range of branch density for most developed economies probably is around 100-150 branches per million.

I know this in itself will generate much debate, but bear with me here.

Branch Density is inverse to Inclusion

Regardless of which branch density number is the right number, let’s compare branch density with financial inclusion numbers for a few countries where branch density is above the developed economy norm:

  • United States (330 branches per million) – 75% inclusion
  • Spain (900 branches per million) – 92% inclusion
  • Greece (360 branches per million) – 72% inclusion

What about some countries where branch density is low, how does this correlate with financial inclusion:

  • Norway (90 branches per million) – 98% inclusion
  • Singapore (90 branches per million) – 98% inclusion
  • Sweden (150 branches per million) – 99% inclusion
  • South Korea (160 branches per million) – 93% inclusion

Looking at this data, you could rightly determine that financial inclusion is actually inverse to branch density Now look at Kenya, 50 branches per million people, 20% financial inclusion through a bank, and 65% financial inclusion through a mobile phone or mobile money account.

Identity Verification in-branch is the single biggest hurdle to financial inclusion today in both the developed and developing world. In fact, the lesson here is even more stark.

No economy in the world has ever improved financial inclusion for poorer segments of the market through branch access, and no market in the world will ever get to 100% financial inclusion based on branch density and traditional in-branch onboarding. However, it is entirely possible that Kenya could surpass the US in terms of financial inclusion over the next 5 years based on the mobile phone.

Inclusion gets killed by Branch ID&V/KYC

For countries like India more branches are not the answer. Enabling more phones for payments and money movements with easy onboarding might just be. In India the Universal Identity Number (and associated Aadhaar ID card) are hailed by regulators as the mechanism by which face-to-face Identity Verification will be underpinned for financial inclusion. The bigger problem that we see is that even if you were able to get adequate branch density, people are still not going to visit a bank branch. They might visit a post-office outlet, a grocery store or a mobile phone store, but the KYC requirements have to be light.

If a regulator doesn’t have a plan for allowing the on-boarding of new bank accounts via a mobile phone, they are already out of step with the numbers when it comes to both inclusion and customer behavioral adoption when it comes to banking.

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Kenya Will Surpass The US In Financial Inclusion
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