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Optimism for the Underbanked: What does CSV have to offer?

I am an optimistic man. When considering a challenging situation, I focus on what can be done, rather than what cannot be done.

When my optimism is muted, I think of my son, Diego. One day, about 6 years ago, I was driving Diego to kindergarten. Like many younger brothers, Diego is very impressed by his older brother, Bron. Diego announced from the back seat, “Daddy, when I grow up, I’m going to be taller than Bron!”

I replied, “Maybe, Diego, we’ll just have to see.”

Diego persisted. “Daddy, when I grow up, I’m going to be stronger than Bron!”

I replied, “Well, Diego, we’ll see.”

His voice getting more urgent, Diego insisted, “Daddy, when I grow up, I’m going to be older than Bron!”

I paused and then said, “Well, Diego, you might get to be taller or stronger than Bron. But one thing we know for sure – you can never be older than Bron.”

Diego caught my eye in the rear view mirror. Undeterred, he replied, “We’ll see!”

The U.S. banking industry would put even Diego’s optimism to the test. FSG co-founders Professor Michael Porter and Mark Kramer write in “Creating Shared Value” that private sector legitimacy has plummeted because companies are perceived to be prospering at the expense of the broader community. The banks are a striking example. Gallup reports that trust in banks has reached an all-time low: 36 percent of Americans have little or no confidence in US banks. With uncertain legitimacy and a challenging economic environment, US banks should be exploring opportunities to Create Shared Value.

Many banks have impressive CSR and Philanthropy: Goldman Sachs is providing 10,000 underserved women a business education; Citigroup gave away $70 million last year, focused on education and entrepreneurship. But while we can cite many examples of pharmaceutical, consumer products, technology, and other companies finding innovative ways to address social needs and strengthen their competitiveness, few examples of CSV exist among leading banks. Bank of America works with inner city businesses in conjunction with ICIC. Barclays’ Banking on Change partnership in conjunction with CARE and PLAN has set ambitious targets in the developing world. The vast majority of banks, however, are doing nothing of significance.

While banks undermine my optimism, organizations like the Center for Financial Services Innovation (CFSI) restore it. CFSI’s mission is to transform financial services to help underbanked consumers achieve prosperity. Per CFSI, 26% of US households are underbanked – a huge market opportunity. CFSI works to create transformation, not through government regulation, but by helping banks recognize the long-term financial opportunities.

Making the business case to US banks is complicated. They are deeply wed to traditional business models. They struggle to find ways to apply their strengths – the ability to understand risk, create new products, and identify consumer segments – to deliver solutions for the underbanked.

CFSI advocates principles for financial services companies: three of them represent CSV opportunities:

Inclusion: Financial services providers should promote accessibility for all consumers
Financial Capability: Providers should empower customers to make wise money choices
Mobility: Providers should help consumers move to a more prosperous future

To make a profit by promoting Inclusion, Financial Capability, and Mobility for the underbanked, banks must change their approach. Below are four things they must do differently.
 

1. Distinguish between competitive and pre-competitive parts of the underbanked opportunity

Banks must collaborate in areas that are “pre-competitive,” confronting complex challenges such as: improving risk assessment and management, creating the market infrastructure, partnering with government and NGOs. Banks can chart independent courses in the competitive elements of the market, such as building a compelling customer experience.

2. Integrate the CSV opportunity with the rest of the bank operations

Banks will only succeed if they use their best talent. This requires integrating the underbanked opportunity with the rest of operations so that the most creative personnel in product development, market research, and credit focus on finding new solutions.

3. Do it at scale

To build a successful model, banks must experiment. They must test many potential solutions simultaneously. Most ideas will fail. In order to find the few that succeed, banks must pursue the opportunity at scale and not just a few pilot initiatives.

4. Identify gaps in the business model and find partners to help fill them

The challenges of the underbanked are manifold. Even if banks work pre-competitively, integrate CSV, and do it all at scale, there will still be gaps in the business model. Gaps may lie in market knowledge, customer education infrastructure, or even in getting credits and debits to line up. Banks must explore new partnerships to fill the gaps. Partners might be educational institutions, community organizations, government, or others trying to meet the needs of the underbanked.

Large US banks do not have an impressive track record in CSV. Considering their lack of creativity in working with the underbanked, there may be little reason for optimism. But I choose to adopt Diego’s attitude. Not confined by logical constraints, nor a long history of undistinguished bank strategy, I choose to be inspired by the work of CFSI. Banks can take a new approach. Executed in the right way, CSV initiatives in Inclusion, Financial Capability, and Mobility can create tremendous wealth for banks and start restoring their legitimacy with the American people.

Dane Smith

Managing Director