Across the globe, an eager market of 1.7 billion people, roughly 980 million of them women, are looking for convenient, reliable financial services they can afford. At the same time, legacy financial service providers are under competitive pressures and scrambling to reinvent their business models. Even before COVID-19, banks everywhere were facing the earnings impact of a low interest rate environment that now seems likely to continue into the foreseeable future. Loan loss provisions by the industry as it emerges from the pandemic are projected to exceed those taken at the time of the global financial crisis. COVID-19 is also driving banks to shift more of their business to digital platforms, both in response to customer preference and as a way to lower costs and increase productivity. In recent years, faced with increased competition from fintech companies, many banks forged partnerships with them and benefited from innovative financial solutions and new ways of working with clients. However, the next wave of competition promises to be more of a tsunami as “big tech” companies like Google and Facebook enter the financial services sector. Not only are these companies more agile than most banks in their operations, but they have better, more extensive data on the same customers that banks are struggling to hold on to. And they know how to use that data to tailor products and messages to customer needs and preferences.
McKinsey’s Global Banking Annual Review for 2020 forecasts that it will be two to four years before the banking sector gets back to pre-COVID-19 revenue levels. The report observes that the banking industry as a whole is well capitalized and will be able to ride out anticipated loan losses resulting from the crisis. Nevertheless, the industry will sustain an estimated $3.7 trillion drop in revenues. The report notes that these losses, combined with the existential threat to their customer base from big tech, will require banks to overhaul their traditional business models. The McKinsey review concludes with recommendations to banks to rethink their approach to risk in lending operations, invest in a range of changes to the customer experience, and bring “purpose to the fore” by engaging more deeply with environmental, social, and governance issues.
By interesting coincidence, in its May 2020 COVID-19 update, the Edelman Trust Barometer 2020 recorded trust in the financial services industry at “all-time highs” in the developed and developing country markets surveyed. This surprising reversal—financial services were listed as the least trusted of all industries in the 2020 Barometer results released just four months earlier—was a direct result of the actions financial service providers took at the outset of the pandemic. They were now hailed as “economic first responders” as they mobilized to provide immediate relief in partnership with governments.
In this moment of reinvention, when the future is very much up for grabs, there is a compelling argument for banks to capitalize on these new levels of trust and actively embrace financial inclusion. If “business as usual” will result in $3.7 trillion in lost revenue, what does the industry have to lose by becoming more inclusive? The commercial impact of full financial inclusion has never been reliably estimated, but if the industry were merely to serve women at the same level as men, the impact on revenues could be enormous. Closing the gender gap in retail banking alone could yield $40 billion in additional revenue. If banks did nothing more than level the playing field for women entrepreneurs by providing them with business loans at the same rate as it does men, that change alone could represent $30 billion in new net interest income.
The COVID-19 crisis has given this potential strategy a head start as more low-income families enter the formal financial system in order to receive government social protection payments. At Bank of Baroda, one of the largest distributors of the Indian government’s COVID benefits, 18 percent of low-income women were still able to make at least four deposits in the first six months of the pandemic despite severe reductions in income, and they did so motivated by guaranteed access to credit. Similarly, the Indonesian government was able to rapidly redirect its largest conditional cash transfer program (Program Keluarga Harapan, or PKH) to COVID-19 relief, since payments were digitally deposited into bank accounts that had already been opened for the 9.2 million beneficiaries when the program launched in 2017. To respond to the economic crisis that accompanied the health emergency, Indonesia expanded the PKH program to 10 million beneficiaries (opening additional bank accounts) and increased both the amount and the frequency of transfers. Many women responded by saving the enhanced benefits as a safety cushion. The crisis has accelerated the financial inclusion of millions; the challenge and the opportunity for the financial system is to keep them in the system and continue to serve them once the immediate crisis has passed. Governments and financial service providers concerned about postpandemic resilience can use the momentum from their successful, collaborative crisis response to build a more permanently inclusive financial system.
Part II presents the business case for financial service providers to invest in women’s financial inclusion. It explores the ways in which far-sighted companies are adapting their products and services to reach previously excluded customers—and making money while doing so. In keeping with McKinsey’s recommendation for financial service providers who seek to thrive in the post-COVID landscape, these financial service providers are “collaborating with the communities they serve to recast their contract with society.”