Omnichannel banking and financial inclusion: thoughts and metrics

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Lecture give by David Tuesta, Chief Economist for Financial Inclusion at BBVA Research, at the VI Latin American Financial Inclusion Congress

The transfer of the traditional financial system to omnichannel banking is based on technological progress, which have brought improved customer experiences (higher aggregate value)

Omnichannel banking, with the development of its customer service channels, is a necessary but not a sufficient condition for driving financial inclusion. Greater access will not inevitably bring with it greater use. There are other important issues

We are developing a global FII to make a multi-dimensional approach to the measurement of financial inclusion

Financial inclusion requires effort to improve use and access and reduce the barriers limiting participation in the formal financial system

Omnichannel banking can be understood as a transition phase from the traditional financial system to the next, truly digital experience, with new players on the global stage

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Omnichannel banking and financial inclusion: thoughts and metrics

  1. 1. VI Latin American Financial Inclusion Congress Febraban-Felaban São Paulo, 19 August 2014 Omnichannel banking and financial inclusion: thoughts and metrics David Tuesta Financial Inclusion-Chief Economist
  2. 2. Page 1 Contents 1. Our starting point 2. Financial inclusion and the role of omnichannel banking 3. Access channels, use and financial inclusion: some metrics 4. From omnichannel banking to digital banking: future transformations 5. Conclusions
  3. 3. Page 2 Omnichannel banking • This involves being close to the financial customer at all times and in all places for whatever the customer needs, whenever they need it • Any kind of intermediation possible, whatever the channel • Implies multiplying the value of both traditional and new channels. The jump from multi-channel. High leverage of technology • Different channels: branches, correspondents, ATMs, Internet, mobile phone transactions, telephone banking, Smartphones, diverse mobile devices and future technologies • A way of fostering financial inclusion?
  4. 4. Page 3 Omnichannel banking and technological development • The transfer to omnichannel banking has been heavily reliant on technological progress and digital change • Greater storage capacity, speed, new platforms and new technologies • Gradual regulatory adaptation • Improves the financial customer experience • Note: The technology underpinning omnichannel banking also gives scope for non-banking, digital players to enter banking • New channels and the option of incorporating the non-banked
  5. 5. Page 4 Financial inclusion, technology and omnichannel banking • An important factor if households and companies are to continue sustained growth : better and more timely risk and resource management • Financial exclusion, which is of particular concern in emerging markets, is a result of issues relating to use, access and the barriers to participating in the formal financial system • Technology means financial services can be offered at a lower cost, with the potential to be everywhere and be better adapted to the customer’s needs
  6. 6. Page 5 Financial inclusion, technology and omnichannel banking • Lack of access to financial services can lead to the vicious circle of poverty and greater inequality (Banerjee & Newman, 1993; Galor & Zeira, 1993; Aghion & Bolton, 1997; Beck Demirguc-Kunt & Levine, 2007) • Providing access to financial instruments increases saving (Aportela, 1999; Ashraf et al., 2010), productive investment (Dupas & Robinson, 2009), consumption (Dupas & Robinson, 2009; Ashraf et al., 2010b) and women’s empowerment (Ashraf et al., 2010) • Access to credit and to insurance has positive effects but the empirical evidence is less robust (Karlan & Morduch, 2010; Banerjee et al., 2010; Roodman , 2012)
  7. 7. Page 6 Contents 1. Our starting point 2. Financial inclusion and the role of omnichannel banking 3. Access channels, use and financial inclusion: some metrics 4. From omnichannel banking to digital banking: future transformations 5. Conclusions
  8. 8. Page 7 Towards financial inclusion and the role of omnichannel banking Barriers(by income,cultural,trust,cost- related,geographical) Consumer protection Financial infrastructure - omnichannel banking Financial Education Use Access Competition Facilitating instruments Regulation Financial Inclusion Results
  9. 9. Page 8 Omnichannel banking: issues to bear in mind • Omnichannel banking particularly affects access to the financial system, but that does not necessarily lead to greater use of, or interaction with, this system • The financial and technological landscape and its applications in omnichannel banking are a necessary but not a sufficient condition for increasing the use of formal financial services: other factors must be considered when designing policies to improve financial inclusion • Instruments that might support greater financial inclusion have to overcome the barriers excluding participation in the financial system; these tend to be country-specific
  10. 10. Page 9 Contents 1. Our starting point 2. Financial inclusion and the role of omnichannel banking 3. Access channels, use and financial inclusion: some metrics 4. From omnichannel banking to digital banking: future transformations 5. Conclusions
  11. 11. Page 10 Access and use: bank branches Argentina AustraliaAustria Bolivia Brazil Chile Colombia Croatia Czech Republic Dominican Rep. El Salvador Finland France Honduras Ireland Italy Japan Kenya Mexico Mongolia Nicaragua Paraguay Peru Portugal Romania Slovak Republic South Africa Spain Thailand United States Uruguay Venezuela, RB Zambia 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 0 10 20 30 40 50 60 70 80 90 100 Usage:%ofadultpopulation Access: number of bank branches per 100,000 people Bank branches
  12. 12. Page 11 Access and use: ATMs Argentina Australia Austria Bolivia Brazil Bulgaria Canada Chile Colombia Costa Rica Croatia Dominican Rep. El Salvador Finland Honduras Ireland Japan Kenya Korea, Rep.Latvia Mexico Mozambique ParaguayPeru Portugal Slovak Republic South Africa Spain United States Uruguay Zambia 0.00 0.20 0.40 0.60 0.80 1.00 1.20 0 50 100 150 200 250 300 Usage:%ofadultpopulation Access: number of ATMs por 100,000 people ATMs
  13. 13. Page 12 Access and use: mobile phones Albania Argentina Bolivia Brazil Burundi Chad Chile Colombia Congo, Dem. Rep. Dominican Rep Gabon Kenya Lesotho Macedonia, FYR Madagascar MexicoMoldova Nicaragua Paraguay Peru Philippines South Africa Swaziland Tanzania Uruguay Zambia 0% 10% 20% 30% 40% 50% 60% 70% 80% 0% 20% 40% 60% 80% 100% 120% Usage:%ofadultpopulation Access: % mobile penetration Mobile phones
  14. 14. Page 13 Access and use: correspondents
  15. 15. Page 14 How to measure financial inclusion? What factors affect it? What part do access channels play? • Despite the importance of financial inclusion, little is known about how to measure it, about policies to promote it (Demirguc-Kunt et al., 2008) and its determinants from a micro-economic point of view (Allen, Demirguc-Kunt, Klapper & Martinez Peria, 2012) • Existing studies lean heavily on macroeconomic data (Beck, Demirguc-Kunt, & Martinez Peria, 2007; Honohan, 2008; Kendall, Mylenko & Ponce, 2010). This makes it difficult to analyse to what extent specific features determine financial inclusion • How much weight do the different factors facilitating greater financial inclusion have? How does inclusion interact with other factors? Developing a Financial Inclusion Index
  16. 16. Page 15 Building a financial inclusion index • Defining a complete set of measurements for financial inclusion with a multi- dimensional approach (access, usage and barriers) • Harmonised financial inclusion index that can be compared between countries and time periods, allowing differing levels of aggregation • Useful guideline for policymakers, governments, financial institutions and international bodies interested in tracking financial inclusion or in designing policies
  17. 17. Page 16 Financial Inclusion Index (FII) • We define an inclusive financial system as one which maximises usage and access, while also minimising involuntary financial exclusion • The minimisation of perceived barriers is measured by the reduction of the obstacles faced by individuals not participating in the formal financial system • The level of financial inclusion is determined by three dimensions: usage, access and barriers • The three dimensions are, in their turn, determined by several indicators • The FII we have built covers 82 countries and aggregates information from a total of 11 indicators • Methodology : Two-step PCA
  18. 18. Page 17 Financial Inclusion Index • First step: estimating the three dimensions: usage, access and barriers 𝑌𝑖 𝑢 = 𝛽1 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑖 + 𝛽2 𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑖 + 𝛽3 𝑙𝑜𝑎𝑛𝑖 + 𝑢𝑖 𝑌𝑖 𝑎 = 𝛾1 𝐴𝑇𝑀𝑝𝑜𝑝𝑖 + 𝛾2 𝑏𝑟𝑎𝑛𝑐ℎ𝑝𝑜𝑝𝑖 + 𝛾3 𝑙𝑜𝑎𝑛𝐴𝑇𝑀𝑘𝑚2𝑖 + 𝛾4 𝑙𝑜𝑎𝑛𝑏𝑟𝑎𝑛𝑐ℎ𝑘𝑚2𝑖 + 𝑣𝑖 𝑌𝑖 𝑏 = 𝜃1 𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒𝑖 + 𝜃2 𝑎𝑓𝑓𝑜𝑟𝑑𝑎𝑏𝑖𝑙𝑖𝑡𝑦𝑖 + 𝜃3 𝑑𝑜𝑐𝑢𝑒𝑛𝑡𝑠𝑖 + 𝜃4 𝑡𝑟𝑢𝑠𝑡𝑖 + 𝜀𝑖 i : denotes country and (𝑌𝑖 𝑢 , 𝑌𝑖 𝑎 , 𝑌𝑖 𝑏 ) is a vector which contains the dimensions, where the superscripts u, a and b denote each dimension • Second step: estimating the weights of the dimensions and the overall FI index
  19. 19. Page 18 Financial Inclusion Index
  20. 20. Page 19 Financial Inclusion Index
  21. 21. Page 20 Contents 1. Our starting point 2. Financial inclusion and the role of omnichannel banking 3. Access channels, use and financial inclusion: some metrics 4. From omnichannel banking to digital banking: future transformations 5. Conclusions
  22. 22. Page 21 With the digital era, financial services provision is extending beyond the classic financial institutions. There are several vectors of change : 1. Moore’s Law and cost-reductions in “doing banking” 2. Demographic shifts and digital natives 3. The learning curve of digital players transforming industries as they go 4. The incentives of high financial transaction costs and the development of financial services by non-banking digital players 5. Fixed cost barriers crashing down 6. Asymmetric regulation/supervision 7. The technological legacy of banking The digital era: beyond omnichannel banking
  23. 23. Page 22 • The consumer experience is now exposed not only to what is offered by the supervised financial institution, but also to new digital alternatives from non- banking players. Financial education is key in this context • Payment systems, electronic money and facilitators – Telecoms companies – Pure digital: PayPal (USD350mn transactions/day), Dwolla (USD35mn), AliPay (USD400mn/day), Square (USD14bn/year), Venmo, LevelUp, Simple, among others • Loans – Lending Club (USD5bn P2P/ 3% NPL), Zopa (GBP500mn/0.5% NPL), Lenddo (loans of USD400 to USD800 in emerging markets) The digital era: beyond omnichannel banking
  24. 24. Page 23 Contents 1. Our starting point 2. Financial inclusion and the role of omnichannel banking 3. Access channels, use and financial inclusion: some metrics 4. From omnichannel banking to digital banking: future transformations 5. Conclusions
  25. 25. Page 24 Conclusions • The transfer of the traditional financial system to omnichannel banking is based on technological progress, which have brought improved customer experiences (higher aggregate value) • Omnichannel banking, with the development of its customer service channels, is a necessary but not a sufficient condition for driving financial inclusion. Greater access will not inevitably bring with it greater use. There are other important issues • We are developing a global FII to make a multi-dimensional approach to the measurement of financial inclusion • Financial inclusion requires effort to improve use and access and reduce the barriers limiting participation in the formal financial system • Omnichannel banking can be understood as a transition phase from the traditional financial system to the next, truly digital experience, with new players on the global stage
  26. 26. Thank you very much david.tuesta@bbva.com
  27. 27. Page 26 Channels, access and use 0 50 100 150 200 250 300 Korea,Rep. Canada Portugal UnitedStates Australia RussianFederation Spain Japan Brazil Austria France Croatia Slovenia Italy Belgium Ireland Estonia Ukraine Bulgaria Thailand NewZealand Greece Kazakhstan Chile Latvia Denmark Romania SouthAfrica Turkey Hungary Malaysia Netherlands Poland CostaRica SlovakRepublic Macedonia,FYR Argentina Lithuania Mexico CzechRepublic Sweden Georgia Venezuela,RB Belarus Armenia Uruguay BosniaandHerzegovina Finland Colombia Albania Mongolia ElSalvador DominicanRepublic Azerbaijan Peru Moldova Botswana Bolivia Swaziland Honduras Vietnam Paraguay Philippines Indonesia Angola Gabon Nicaragua Kenya India Lesotho Zambia Nepal Mozambique Pakistan Tanzania Ghana Uganda Madagascar Cameroon Burundi Chad Congo,Dem.Rep. ATMs per 100,000 inhabitants
  28. 28. Page 27 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Estonia Finland Netherlands Japan Belgium Latvia France Slovenia Sweden Korea,Rep. Austria NewZealand Canada Ireland Australia SlovakRepublic CzechRepublic Portugal Croatia Lithuania Spain Hungary Malaysia Turkey UnitedStates SouthAfrica Belarus Denmark Poland Thailand Greece Italy Bulgaria Mozambique CostaRica Mongolia RussianFederation Brazil Romania Ukraine Kenya Venezuela,RB Macedonia,FYR Chile Argentina BosniaandHerzegovina Swaziland Kazakhstan Botswana Angola Albania Colombia Uruguay Philippines Mexico Zambia DominicanRepublic Lesotho Georgia Azerbaijan Tanzania Moldova Bolivia Vietnam Indonesia ElSalvador Paraguay Armenia Peru Uganda Ghana India Gabon Honduras Nicaragua Pakistan Nepal Chad Cameroon Madagascar Congo,Dem.Rep. Burundi ATM use as % of adult population Channels, access and use
  29. 29. Page 28 0 10 20 30 40 50 60 70 80 90 100 Spain Mongolia Italy Portugal Peru Bulgaria Brazil Belgium France Denmark Greece Slovenia RussianFederation UnitedStates Croatia NewZealand Japan Romania Poland BosniaandHerzegovina Latvia Australia Lithuania Ireland SlovakRepublic Canada Macedonia,FYR CzechRepublic CostaRica Sweden Albania Honduras Netherlands Georgia ElSalvador Korea,Rep. Armenia Estonia Turkey Chile Venezuela,RB Hungary Austria Finland Colombia Mexico Uruguay Argentina Thailand Moldova DominicanRepublic SouthAfrica India Angola Malaysia Azerbaijan Bolivia Paraguay Pakistan Botswana Indonesia Philippines Nicaragua Swaziland Nepal Gabon Ghana Kenya Zambia Mozambique Vietnam Kazakhstan Lesotho Uganda Burundi Belarus Tanzania Cameroon Ukraine Madagascar Chad Congo,Dem.Rep. Offices per 100,000 inhabitants Channels, access and use
  30. 30. Page 29 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Ireland Mongolia NewZealand Spain Austria Australia Denmark Thailand Slovenia UnitedStates Greece Macedonia,FYR Finland SlovakRepublic France CzechRepublic Canada Sweden Italy Croatia BosniaandHerzegovina Portugal SouthAfrica Belgium Poland Mozambique Netherlands Venezuela,RB Kenya CostaRica Korea,Rep. Hungary Angola India Lithuania DominicanRepublic Latvia Bulgaria Brazil Ghana Botswana Malaysia Bolivia Mexico Swaziland Chile Estonia Nepal Colombia Romania Kazakhstan Belarus Albania Zambia Uganda Japan RussianFederation Ukraine Indonesia Honduras Gabon Turkey Peru Georgia Lesotho Vietnam Tanzania Paraguay Philippines Cameroon ElSalvador Armenia Uruguay Argentina Moldova Nicaragua Pakistan Burundi Chad Madagascar Congo,Dem.Rep. Azerbaijan Office use as % of adult population Channels, access and use
  31. 31. Page 30 0% 50% 100% 150% 200% 250% UAE Finland Greece Russia Italy Austria Singapore Germany Israel Ireland Estonia NewZealand Romania Spain Netherlands Slovakia Hungary CapeVerde Korea,Rep.of USA Armenia Gambia Slovenia Barbados Iran Argentina Gabon Jordan Vietnam Brazil Tunisia Georgia Morocco Libya Ukraine Maldives Guatemala Thailand Poland Congo,Rep.of Paraguay Azerbaijan Kazakhstan Mauritius Canada Guyana Kosovo SriLanka Peru Mauritania SouthAfrica Egypt Coted'Ivoire Senegal China Swaziland Pakistan Nigeria Nicaragua Bangladesh Afganistán Lebanon Liberia Guinea-Bissau Tanzania Benin Cameroon SierraLeone Zambia Kenya Yemen CostaRica Rwanda Mali Chad BurkinaFaso Madagascar Bután Mozambique Timor-Leste Nepal Comoros SolomonIslands Eritrea Mobile phones, % of adult population Channels, access and use
  32. 32. Page 31 0% 10% 20% 30% 40% 50% 60% 70% 80% Kenya Gabon Albania Uganda Angola Tanzania Swaziland Chad Philippines Macedonia,FYR Ukraine SouthAfrica Cameroon Botswana Bolivia DominicanRepublic Mongolia Vietnam Lesotho Paraguay Kazakhstan Moldova Mexico Belarus Burundi Zambia Turkey India Latvia Armenia Peru RussianFederation Pakistan Malaysia Honduras Colombia Thailand Mozambique Venezuela,RB Lithuania Congo,Dem.Rep. BosniaandHerzegovina Ghana Nicaragua Georgia Chile ElSalvador Brazil Madagascar Bulgaria Argentina Romania Indonesia Uruguay Mobile phone use in financial transactions, % of adult population Channels, access and use
  33. 33. Page 32 0.000 50.000 100.000 150.000 200.000 250.000 300.000 Correspondents per 100,000 inhabitants Channels, access and use
  34. 34. Page 33 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Denmark Australia Sweden NewZealand UnitedStates Ireland Belgium CzechRepublic Georgia Latvia Canada Slovenia SlovakRepublic Poland Netherlands Nepal Chile Brazil Kenya Philippines Macedonia,FYR DominicanRepublic Croatia Spain Portugal Finland Bulgaria Honduras India Lithuania Ukraine Estonia CostaRica Mexico Kazakhstan France Uruguay Pakistan SouthAfrica Chad Colombia Cameroon Greece Japan Peru Tanzania BosniaandHerzegovina Hungary Indonesia Gabon Belarus Korea,Rep. Paraguay Austria Ghana RussianFederation Mongolia Angola Mozambique Vietnam Malaysia Nicaragua Moldova Romania Albania Congo,Dem.Rep. Turkey Bolivia Swaziland Botswana Venezuela,RB Argentina Azerbaijan Burundi ElSalvador Thailand Lesotho Uganda Armenia Italy Madagascar Zambia Use of correspondents, % of adult population Channels, access and use
  35. 35. Page 34 FII correlations
  36. 36. Page 35 FII correlations
  37. 37. Page 36 FII correlations

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