BloombergA roadside store advertises an M-Pesa mobile phone money transfer service operated by Standard Bank Group Ltd. in Tembisa, near Johannesburg, South Africa, on Tuesday, May 21, 2013. In the six years since Kenya's M-Pesa brought banking-by-phone to Africa, the service has grown from a novelty to a bona fide payment network. Photographer: Nadine Hutton/Bloomberg
THE WORLD Bank estimates that 2.5 billion adults do not have formal bank accounts and the majority of the world’s unbanked citizens reside in emerging markets.
A paper by the bank’s Development Research Group concludes that only 24 percent of adults in sub-Saharan Africa have formal bank accounts, with that falling to just 18 percent in the Middle East and North Africa. Researchers reported a strong correlation between income levels and financial product penetration.
There have been many attempts to explain the poor financial inclusion statistics of less-developed economies. In its 2014 Integrated Report, South Africa-based insurer Hollard Insurance notes that low-income communities are not uninsured because they face uninsurable risks; but rather because very few insurers truly understand their needs.
Low-income earners
Low-income earners are typically uninformed about the benefits of formal banking and insurance products – and those who understand the benefits cannot always be accommodated due to the use of traditional sales channels.
In addition, financial institutions would need to develop value-for-money financial products that balance small premium levels and sustainable profitability if they hope to improve penetration rates.
One of the obstacles to providing wider access to financial products is that financial services institutions are stuck in a paradigm that suggests that “banking the unbanked” is the solution. Could it be that a different framing of the problem may prompt financial service providers to change tack in delivering real solutions to the financial inclusion conundrum?
Accepting “unbanked” as a defining measure of financial inclusion, firms have been struggling to provide physical banking infrastructure and transactional bank accounts to lower-income groups. Hollard, which has a footprint in highly “unbanked” Africa and Asia, views the market in a slightly different way. At Hollard, we approach financial inclusion from two perspectives. First, we aspire to be a global leader in appropriate, market-based solutions that manage risks for emerging consumers – and, second, we aim to be a thought leader in developing sustainable financial solutions for the vulnerable poor.
To succeed in emerging markets one must focus on solutions that are financially sustainable for the insurer while also having a significant and enduring positive impact, directly or indirectly, on the lives of the poor. Hollard recently launched a micro-insurance funeral product to the Ghanaian market which relies on cover being sold and policy details accessed via mobile handsets.
The initial take-up of this product was relatively slow due to the scale of distribution; but since increasing capacity on the ground the insurer has achieved volumes that exceed its expectations. The insurer has had similar successes in Zambia where it launched an initiative to sell insurance through a mobile network partner.
The customer accesses the product through their mobile handset and pays the premium via mobile money deductions.
This experience demonstrates insurers can make money from small-value transactions provided volumes are high enough.
This has long been the case in the world of cellphone banking, where transactions via cellphones over cellular networks are growing exponentially.
Mobile money accounts
In its 2014 Financial Access Survey, described as the most comprehensive global source of data on access to, and use of, basic consumer financial services by households – the International Monetary Fund reported a dramatic increase in the number of active mobile money accounts in Kenya.
The number of mobile money transactions increased by more than 130 times, from 5.5 million in 2007 to more than 700 million in 2013.
This statistic is not surprising given the incredible uptake of M-Pesa, a cellphone-based money transfer and micro-financing service launched in Kenya by Vodafone in 2007. Upwards of 75 percent of Kenya’s adult population use M-Pesa to process payments for a range of goods and services.
The rapid uptake of mobile telephony, the introduction of smartphones and cloud-computing, and the availability of affordable data have forever changed the financial services landscape.
And this is why the cellphone and so-called mobile money solutions could form the backbone of many insurers’ African product initiatives.
While mobile-based solutions can service an emerging consumer market with more traditional insurance products, a different approach is needed for those whose financial circumstances do not allow for the payment of any regular premium, no matter how small – the vulnerable poor. HUGInsure Partners, an initiative aimed at developing solutions in this environment, is a platform that facilitates the flow of funds from well-intentioned, generous donor organisations to committed, fund-starved non-government organisation’s through the use of insurance and risk management techniques.
HUGInsure is already providing cover for an initiative by the City of Tshwane to provide free wi-fi in public spaces in low-income communities. It has also assisted Swiss Re to provide weather index insurance to emergent farmers in Nigeria and another 16 potential projects are in the pipeline. The key learnings are that the servicing of the emerging consumer and vulnerable poor must result in an environment whereby business value and social value are in equilibrium.
Insurance is a key enabler in creating and preserving wealth within vulnerable communities and the insurance industry has a responsibility to ensure that its products and services are accessible to this market segment.
Frans Prinsloo is the managing director of Hollard International.
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