Financial Services for the Poor (FSP) Strategy Presentation

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OVERVIEW: THE PROBLEMThe poor need to use financial products to meet their basic daily needs, but only have access to financial products or services that are high in cost and offer a low value proposition

Basic Needs of the Poor The poor need to be able to store and access money to meet their daily needs,

cope with risk, and lead healthy and productive lives

Challenge Financial services help the poor perform these tasks to meet basic needs.

However, the array of financial services and instruments currently used by the poor are high in cost and offer a low value proposition

Banks, which could improve safety through regulation and convenience by offering multiple instruments in one place, are ill-equipped to meet the needs of the poor

» Serving the poor is a high cost proposition for banks, leading to low profitability and a conscious decision not to serve this population

The Result The poor, who have little money to begin with, are “bleeding” enormous

amounts of cash by using the risky and expensive financial products available to them today

Without access to appropriate financial products, the poor forego opportunities to improve their families’ lives because they do not have the means to do so (e.g., doctor visits, schooling, crop investments, etc.)

3

370

300

180100

1640

800

200

2640

40 40

610

0

500

1,000

1,500

2,000

2,500

3,000

Small HolderFarmers

CasualLaborers

Lows WageSalariedWorkers

Micro-Entreprenur

UnemployedPoor

ArtisinalFisherman

Pastoralists All WorkingAge Poor

Youth Elderly Total Poor

SERVING ALL OF THE WORLD’S POORHowever, microfinance has predominantly targeted credit for “microentrepreneurs.”1

The insights gleaned from microfinance about the poor and their money must now be used to generate new models that expand the suite of services available

Primary Livelihood Segmentation of World’s 2.6 Billion Poor Living on < $2/day2

1 Note: We recognize that microfinance organizations reach many others outside of this target population and above $2 / day, particularly small holder farmers in Asia, and that, while we have segmented the poor by their primary livelihood, most have diverse income sources. 2 Oliver Wyman.

Stated target of microcredit movement

Moreover, it took 30 years to accomplish this feat in microcredit as business models are largely human resource dependent, and therefore costly and difficult to scale

A19-A20See Appendix #

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GEOGRAPHIC BREAKDOWN OF BANK ACCESSDue to these barriers, approximately 3.4 billion people – 55% of the world’s population – do not have access to banks. It is believed that the situation is worse for the poor living below $2/day, with 80-90% not having access to a bank

Eastern Europe & Central Asia

188M196M

Middle East & Northern Africa

139M

258M

Population with access to banks

Population without access to banks

USA, Canada, Western Europe

62M

652M

124 M Poor

404 M Poor

52 M Poor

88 M Poor

1,886 M Poor

Sources: World Bank: “Finance for All”; Oliver Wyman.

A12-A14See Appendix #

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THE ROLE OF FINANCIAL SERVICESFinancial services allow the poor to store and access money to meet their basic needs

Since many of the world’s poor have irregular and unpredictable income streams, they arguably need financial services more than we do

Go without

Sell assets

Draw on past or future income

1

2

3

The poor have few assets to begin with Some of the assets contribute to income and are hard to replace Selling an asset to free up cash for consumption in the present can lead to

more financial insecurity in the future

In the absence of money, the poor have to make trade-offs between consumption choices

» Maybe only some of the children will be able to attend school

» Maybe only some medical treatments will be pursued

» Maybe the home will not be repaired

This is the role that financial services play The poor rely heavily on financial services:

» A study in Bangladesh found that the poor push or pull 60% of their annual income through financial products1

In order to access money, the poor have three options:

1 Source: Money Talks: Conversations with Poor Households in Bangladesh about Managing Money. Stuart Rutherford. Journal of Microfinance, Volume 5, Number 2, Winter 2003.

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FINANCIAL SERVICE NEEDS OF THE POOR Because of the unique situation of day-to-day life in poverty, financial services will only be useful if they are low-cost (safe, nearby, and affordable) and high value (convenient, flexible, and user friendly)

Demanded Product / Service Attributes Rationale

Nearby The poor cannot afford to travel long distances to reach a financial

service provider

Safe The poor want to avoid losing money through theft, spoilage, institutional

failure

Affordable The poor cannot afford high fees, high minimum balances, etc.

Frequent opportunity to transact

The poor often wish to deposit and/or access their money on a daily or weekly basis

User friendly The poor, many of whom are illiterate, need a financial solution that they

can manage easily

Variety of values, terms, and schedules

The irregular, seasonal, or unreliable income of the poor means they need variable terms and schedules for loans and deposits

Multiple, connected products Being able to conduct all transactions in a few places (deposit savings,

receive and make transfers, etc.) saves time

Adapted to the unique needs of the poor

The poor need money for everything (from buying clothes to running a business, and all of life’s events in between) and often don’t have collateral

Source: Stuart Rutherford, “Reaching the Poorest.”

Lo

w C

os

tH

igh

Va

lue

See Appendix #

7

8%

47%

10%

14%

6%

40%

26%

21%

0% 10% 20% 30% 40% 50%

Use a money guard

Engage in non-reciprocal lending

Save with a supplier

Use other informal funds

Participate in ROSCAs

Engage in reciprocal lending

Hide cash at home

Save in kind

EXAMPLE: LOSSES INCURRED IN UGANDAA study from Uganda shows that these financial instruments are risky and costly

Average Savings Loss Per Yearby Savings Method2

% of Households using Method

82%

68%

41%

23%

12%

10%

10%

9%

1 Wright, G and Mutesasira, L. “Relative Risks to the Savings of Poor People” (2001). 2 Saving in Kind refers to livestock, commodities, grain, and equipment; reciprocal lending refers to lending to others with the expectation of being able to borrow from them in the future; ROSCA=Rotating Savings and Credit Association, or groups of individuals who regularly contribute money to a common “pot” that is distributed to one member of the group each period.

Methods and Risks for Savings Among the Poor

(Study of 1,500 Poor Ugandans1)

In this study, 99% of households saved through such methods, and 99% of these people lost money, on average, 22% of the amount saved in these ways

Livestock illness /deaths

Theft

High default rates

High fees

Reasons for loss

A6See Appendix #

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THE LIMITATIONS OF BANKSIn theory, a bank could help Sultana and the villagers in Uganda by providing them a lower-risk place to access and store money. However, in practice, bricks and mortar banking models are ill-suited for the majority of the poor

Low Value of Products for the Poor

High Cost of Products for the Poor

High Cost for Providers to Serve the Poor

Banks are not convenient, flexible, or user friendly

Banks are not nearby or affordable

Transacting with the poor is very expensive for brick and mortar banks, so they avoid it

Products are inappropriately designed or sized and cumbersome to obtain

Barriers of Banks in Serving the Poor

Restrictive regulatory environments discourage access for the poor by raising the

cost for providers

Branches are isolated, disconnected to the broader financial system

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STRATEGY SUMMARYWith a $1.4 billion investment over five years, FSP will catalyze savings accounts and other financial products for over 150 million poor households1

We will focus on putting a range of low cost, high value products in the hands of the

poor, with a special emphasis on savings…

…by ensuring that 2nd Generation Banking models

work for the poor…

…enabled by country level interventions in policy and regulatory environments

We will invest $1.4 billion over five years in four initiative areas

Design & Development

Product Delivery at

Scale

Financial Systems

Policy & Advocacy

Our Approach

We believe that the access to finance problem can be solved for the poor within a single generation The architecture for 2nd Generation Banking models that work for the poor can be built and made accessible for the poor in the

next 10 years, followed by another 10 years of taking high quality financial products for the poor to scale

If successful, local capital sources will be generated by savings deposits and donors can concentrate on reaching the poorest1 Half of these households will be reached through supporting direct financial service providers and the other half will be impacted by strengthening financial infrastructure, instruments and regulatory environments that work for the poor. We expect it to take longer than 5 years to reach 150 million households due to the time lag between when funds are committed, payout, and outreach.

New or improved savings accounts or other financial products for over 75 million poor households leading to

improvements in health, wealth, education, and quality of life

Strengthening financial instruments, infrastructure, and regulatory

environments to enable a variety of players to offer financial services to an additional 75 million poor households

Demonstration models of country-level solutions leads to replication in

other countries

Our Goals

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MOBILE BANKINGMobile banking can lower costs by leveraging low-cost technology and reducing the need for traveling to financial service providers

1 Lirneasia “Poverty reduction through telecom access at the ‘Bottom of the Pyramid’.” 2 This is a thought experiment that McKinsey conducted based on a model built to estimate costs of reaching 17 million poor customers by 2013 with mobile banking services. Costs include operating and capital expenditures. SMART currently offers mobile payments, but does not offer banking services.

Mobile banking will not reach the poor automatically; outside voices may be needed to build bridges between key stakeholders to ensure that products are appropriate for the poor

High mobile phone penetration can pave the way for mobile banking…

… which can dramatically reduce the costs of financial transactions for

providers2

Projected Annual Net Revenue per Client to be Profitable(Bank vs. Mobile Operator)

A study of 5 Asian developing countries shows1: Over 90% of the poor used a phone in the past 3 months Nearly 60% could reach a mobile phone in under 5 minutes

$20

$1$0

$10

$20

… and users through lower fees and reduced transaction processing time2

$84

$14

$0$25$50$75

$100

Projected Annual Cost of Savings Account for Clients

Filipino Bank Filipino Mobile Operator

Filipino Bank Filipino Mobile Operator

SMART Money is a mobile-based payments platform in the Philippines launched in 2000 by mobile operator SMART in partnership with Banco de Oro, a leading commercial bank

Customers transfer real cash to and from e-cash through a network of SMART outlets, bank branches, and other retailers

Smart Money allows them to make payments, buy airtime, and transfer funds over the air

7 million SMART subscribers have activated SMART Money accounts, and 1.8 million use the service regularly

Mobile Payments Example

Thought experiment: Mobile Banking

See Appendix #

A28-A33See Appendix #