Beyond Banks: How are NBFIs opening up new markets, and are they a threat to traditional banks?
This Post consists of notes from panel discussions at the 2019 EFG Hermes One on One conference in Dubai, UAE
The first of the two panel discussions on Sunday, 3 March focused on the future of the the banking sector. Panelists discussed non-bank financial institutions and whether they offer a real alternative to traditional banking, the role of technology in driving financial inclusion, and the value of data to the emerging industry, amongst other topics. The panel was moderated by Simon Kitchen, Head of Strategy at EFG Hermes Research, and featured three industry experts:
- Khalid Elgibali, Division President for Mastercard Middle East and North Africa
- Dirk Brouwer, Chief Executive Officer, ASA International PLC
- Walid Hassouna, Chief Executive Officer, EFG Finance Holding
Highlights of the discussion included:
Walid Hassouna, CEO, EFG Finance Holding:
- We use technology across the board — to reach clients, to steer them toward the right products at the right time, to reduce our transaction costs. Our valU consumer finance arm was the first company of its kind in Egypt to go to market with an app.
- Risk assessment is automated — we are the only company in the Middle East and North Africa able to make a decision on credit in 2-5 minutes. There is no manual intervention in the underwriting process.
- Taking valU online: We are now rolling out a product that will allow our clients to use their valU balance when checking out online with our merchants and hope to take this to the major marketplaces of our region in the near future.
- Microfinance has been growing at more than 100% each year in Egypt because in the past 3-4 years, the banks have been challenged in reaching the unbanked.
- Consumer finance has been key to keeping products affordable in Egypt across segments including appliances, mobile phones and furniture.
- We are an engine of financial inclusion. All of our microfinance company’s loans are reported to the national credit bureau. As a result, there are people who have been clients for four or five years who are now taking EGP 100,000 loans from banks because we underwrote their businesses in the first place and brought them into the formal economy.
- NBFIs drastically reduce underwriting times which expands access to financing and allowing smaller entities to build up their credit history eventually allowing them to start taking larger loans for traditional banks.
- EFG Hermes has developed a program to underwrite ride hailing drivers looking to finance a vehicle upgrade even when they don’t own the car. We look at over 25 data point from their cash flow and income to how many hours they work, when they work, and their ratings from their customers. In a twelve-month pilot program, we underwrote 250 drivers with a 0% default rate.
- Data is the new oil. Regulators and governments are becoming increasingly interested on the role that data can play in driving financial inclusion.
Khalid Elgibaly, division president, Middle East North Africa, Mastercard:
- As a technology leader, we are looking at how we can best serve all of our customers including merchants, banks, non-bank financial institutions and governments as we move toward a cashless future.
- Financial inclusion is a fundamental engine of economic growth across the Middle East, North Africa and other emerging economies.
- Physicalization is challenge and it’s why we need to design customer experiences with digital in mind from the beginning. Consider that even in developed economies, as many as 1/3 of bank accounts are dormant, as many as 2/3 of mobile wallets are 90-day inactive. The technology is there, but if people can’t do anything with it, the transaction process gets quickly physicalized again.
- Cash comes at a high cost — 1-1.5% of GDP — so going cashless drives real growth. Policymakers in Egypt know this, it’s why they established the National Payments Council headed by President Abdel Fattah El Sisi. Other countries are following suit with similar processes and initiatives. It’s about driving inclusion to make sure the benefits of a cashless society cascade to the masses.
- When it comes to accessibility, you need to think about the cost of delivery versus the benefit you get out at the end. Technology makes the cost feasible. Technology makes the whole population bankable.
- The rise of fintech isn’t a zero-sum game for technology providers or for banks or for NBFIs. That’s why we have established a global platform that brings fintech startups to the doorstep of these banks — to bring to the same markets solutions including AI, chatbots, blockchain that can support mainstream businesses. What we are seeing is different formats of collaboration. Both together have a different and distinct set of strengths. They can drive inclusion and take it to the next level.
- It’s about collaboration and not competition. The competition is cash. We see Visa and American Express as partners in driving the same vision of creating a world beyond cash. We want to focus not on take market share from one another, but on how we can grow the pie of digital transactions and use it to create the data flows that allow us to drive more effective financial inclusion bringing the benefits of economic growth down to the masses.
Dirk Brouwer, Chief Executive Officer, ASA International PLC:
- Technology is critical, but ours is still a very labor-intensive business. We may use technology to disburse funds, but clients are still working daily with cash and repaying in cash. It will be 10-15 years before our clients start trading in marketplaces using their mobile phones, but it will happen. 100% of our clients have a mobile phone, but only about 10% of them in some markets are smartphones.
- The biggest obstacle towards a cashless payment system is access. Some large banks are slowly moving away from traditional services but, in general, most are still not successful at bringing banking to a large part of the population. NBFIs can help bridge this gap and quickly increase accessibility.
- One of the keys to wider adoption of cashless payment systems is to reduce the cost at which clients transact. Today, comparatively high transaction fees make it prohibitive for our clients to go cashless. In many countries in which we operate we cannot expect people to pay a 10% fee on a $10 transaction, it quickly becomes too burdensome.
- As the technology comes into play, it is critical that the regulators and central banks become involved. Pakistan is a great example of this, of how regulators are keen to ensure that fintech works for low-income people, the largest segment of the population.
- When you formalize a large chunk of the population you suddenly have large streams of income you can tax. This opens up a lot of possibilities as long as governments use this tax revenue effectively.
- Data is key to building a great non-bank financial institution. We take data our loan officers learn from individual clients — each loan officer covers about 350 clients — and she knows how the cash flows of a vegetable seller are different from those of someone working with garments. This is key data for us that when aggregated and scaled up gives us a basis on which to lend to clients across all of our markets.
- In the West they they invested in data. They invested in getting the data knowing that it would eventually have value. You don’t see that as much in emerging markets. Real, effective payment systems at almost zero costs provide a list of benefits and creates a massive base of data that we can all use to create the right services.