This is our second response to the provocative post two weeks ago from Ignacio Mas. Ignacio asks why the “current innovation frenzy in digital financial services in the U.S.” does not translate into action in BoP markets across the world, and puts forth a number of hypotheses.

“In other words, why is there such an inherent innovation deficit within the very commercial ventures that we think are going to drive financial inclusion forward? Do market players really need this very granular level of handholding to get what academics, NGOs, and donors so clearly believe in? …Or is the problem, rather, that there isn´t enough of a competitive push to drive them to want to innovate as a key source of market advantage?”

What follows is a response from Gerhard Coetzee, who leads the CGAP Customers at the Centre Team.

In considering the question posed by Ignacio Mas, I am reminded of the work of business strategist C.C. Markides. He did not see it as “the great competition and innovation deficit” question, but rather, the challenge of how large institutions make two business models exist in the same organization. In fact, the question is how to serve two distinct market segments in the same institution. He notes that the large industry players that develop new radical business models are exceptions rather than the rule. Most innovations and market changing models are introduced by newcomers to that industry.

Why don’t we see the large financial service providers (FSPs), who have the ability to change things at scale, jump into this area of the market and deliver solutions to low-income and poor customers even where regulation may enable them to engage? In essence the argument focuses on product centricity, incomplete business cases, an over-emphasis on the supplier view of cost to serve, short-termism of incentive structures, and competition for resources in large organizations.

Product centricity. Large established players focus on products for customers they know. Most retail banks are focused on the middle class and the affluent, and their operations are focused on delivering products to customer segments where they are used to making money. Their revenue-enhancing activities focus on cross-selling products to the same customers, or product enhancements focused on the same customers—in essence, they use sales-driven approaches. In fact, most innovations are focused on the next big product, and the result is a plethora of products, with little differentiation (a phenomenon that Ignacio Mas calls “productitis”), creating confusion not only in the minds of customers, but quite often among the frontline staff that must sell these products.

The fallacy of the one-sided business case. Let us assume there is a notion (driven by competition, business opportunity, or political pressure) to expand our focus to the lower-income segment. The reality of a lot of small transactions and a high cost per transaction motivates providers to move away from brick and mortar as costly service points. As demonstrated by so many great examples of branchless banking, technology can drive down the costs of delivery, but what about the revenue side? Unless people use these services and accounts, there is no impact on the revenue side. Unless we offer customer-centric solutions—a customer experience that culminates in value to the customer—we will not see customers using their accounts and concomitant revenue results that will drive a good business case. Large banks have been burnt many times by opening accounts that are not used, a costly exercise that you do not want to happen on your watch as a senior manager.

Although FSPs, and especially banks, focus on the cost to serve the customer as it relates to specific channels, a more customer-centric view about cost is to ask: What costs do consumers incur when they are served by FSPs? Consider customers’ direct financial costs of getting to a point of service: opportunity costs of travel time and time away from important income-generation activities. Then add the regulatory and compliance costs of the mere act of proving who I am, and where I live, in a world lacking national identity systems and using address protocols linked to property rights. Now add the dearth of gender, age, and religion-specific solutions that heap social and cultural costs on customers. The psychological costs of the stress of debt and fear of the foreign world of banks complete the picture. We ask ourselves, why don’t customers use all the new innovations (except in a few great cases)? Well, larger financial institutions, which are not really focusing on customers, but on products, do not deliver a customer experience that entices customers into a good relationship with banks where they trust the provider. In fact, not using these products is a rational customer choice due to the high cost customers incur to be served.

Customer-centricity is a long-term investment. It means that you need senior role players with tenacity and the ability to convince stakeholders—ranging from employees, to middle management, and shareholders—that they should invest in something that will have long-term pay-off. Even though research shows that the long-term pay-off is much higher than that of some alternative models, most managers do not have the appetite to give up next year’s bonus and salary increments for something that will pay off only on their successor’s watch.

Internal competition. Another often-ignored challenge is the competition for resources that normally plays out in large established providers as internal lobbying processes that are decided by specific prioritization committees. The committee members are mostly from the finance and resource departments, in organizations that are still focused on products rather than customers. For a new idea to survive these filters, it needs to be big, well-positioned, and serve the decision makers. It should not pull too many resources away from the conventional profit areas. Consider a very small investment in a customer-centric innovation that competes with a large investment needed to serve the bread-and-butter platform of a bank. Many customer-centric innovations never see the light of day on the other side of these committees.

How do we turn all of this around in large going concerns? This is not an easy challenge to address, as leaders in large banks are facing tremendous challenges. Although most agree that there is a need to focus on customers, and understand that the long-term answer is to embed customer-centricity into these large organizations, it is a formidable task. A major component to addressing this issue is to understand the organization using thorough analysis: identifying where the biggest challenges reside and addressing these with a comprehensive strategy, implemented incrementally. This means that you need to identify which levers will have the biggest impact, and start working on those first. It could be having a committed leadership, with a longer term goal, or creating an insights unit that feeds essential customer information into the organization for the design, delivery, and maintenance of a positive customer experience. Solutions will differ due to contextual variety. The essence is that long-term survival and value to all the stakeholders (customers, employees, and investors) in large established organizations, such as big banks, lies in customer-centricity as a business model.

Have you read?

The Great Competition and Innovation Deficit

Accion Venture Lab Responds to ‘The Great Competition and Innovation Deficit’

Does Financial Inclusion Need to Be More Customer-Centric?