Effective Business Models are Required to Optimally Deliver Services to the Larger Market
The Central Bank of Nigeria (CBN) has issued final approval to Payment Service Banks (PSBs).
It has pursued a bank-led financial inclusion strategy.
PSBs are supposedly an avenue to allow others, including telcos, play a more active role. Creating room for a diverse mix of players in the competitive space is a recognized principle and one of the fundamental building blocks for driving financial inclusion. Revised Guidelines preclude PSBs from advancing credit in any way possible, proscribe creation of virtual money and restrict the classes of investment open to PSBs.
However, PSBs can now handle forex from international money transfer services though they are restricted to (apparently, the sub-prime) rural markets. Some analysts are pessimistic about the commercial viability of PSBs and their potential to move the inclusion needle, particularly because of restrictions in permissible activities and to low yield investments. The larger issue really is that of viable business models.
Business models determine how a business makes money after clearing all costs and optimizes the opportunity cost of investment. Except returns exceed mere accounting profit and offer economic profit, the business will eventually collapse.
The boards of financial service providers (FSPs), especially the larger ones, have a fiduciary duty to the company and larger duties to the investing public, to carefully consider the opportunity cost of capital proposed to be deployed to “financial inclusion business”. Requiring them to accept an inferior rate of return from that business when the same capital can be more profitably invested in other legitimate activities can only make sense if treated as Corporate Social Responsibility (CSR). How much financial inclusion can FSPs’ CSR outreach drive?
Not much, not sustainably and not long term. Margins from “Financial Inclusion Operating Division” must contribute not less and probably even more than the average returns for main line business for it to move the needle and be main streamed as an organizational priority and in the financial system.
Therefore, financial inclusion is never going to happen by merely lowering the price of products and services or by value dilution.
Costs must be slashed and value must match mid-segment products for returns to exceed mere accounting profit. Don’t even talk about below accounting profit or below cost returns. For-profit businesses are not set up to provide subsidies to customers. Commensurately, productivity and efficiency in operations and service delivery must be increased. Therefore, financial inclusion business requires more ingenuity, the most capable human capital and the most intrepid leadership and strategic management, not less.
This level of capability requires a radical rethinking and reconfiguration of the business, continuous innovation — operations, channels, and products. They require stakeholder partnerships that make customers and trade partner’sintegral and truly valued parts of the value creation chain.
FSPs must begin the journey of business model reinvention with the customer in mind (reimagining customer value propositions).This requires transformative entrepreneurship. FSPs must find a way to increase Gross Margins, not by squeezing the customer with inferior value, or pauperizing the supply chain, or increasing negative externalities, but by squeezing costs and increasing productivity ingeniously, yet making the product affordable and top value. It will be well worth it, because there is unimaginable wealth at the bottom of the pyramid (the larger market segment). If through market creating innovations, products and services empower the poor that is a win-win: for FSPs, society and industry, giving unmatched competitive advantage over less visionary and lazier competitors.
Also, regulators should consider business models before issuing regulations and offer more incentives to operators to innovate customer value propositions. At the least, they should avoid making it more difficult for providers to do so. Financial inclusion requires value added services, including affordable credit. Are the regular banks really configured for financial inclusion? Are new types of main line banks/banking required for the poor, not just rural poor?
…………………………………………………….
Professor Olawale Ajai is the Policy Lead for Sustainable and Inclusive Digital Financial Services Initiative
