DIGITAL BANKS How Can They Deepen Financial Inclusion?

AntonioAragon

Renuncio |PhotoCGAP Contest DIGITAL BANKS How can they deepen financial inclusion?

Ivo Jenik and Peter Zetterli February 2020 Is retail banking changing at its core?

The world is rapidly changing. New We focus on three broad technologies and business models are innovation spaces defined by upending long-established markets across different sets of actors. virtually every major sector. Financial services are no exception, as traditional • Digital banks from plain start- retail banks are joined by a growing up competitors to radically new number of digital partners and other business models like banking- competitors. as-a-service. • Fintech start-ups and funding What are the implications for incumbents, + innovation ecosystems that regulators, and investors? And what will enable them. this evolving landscape mean for financial inclusion and the many stakeholders • Platforms like big tech giants working to make universal access a in the United States and China reality? and local goods or services platforms in emerging markets.

In mid-2018, CGAP launched an effort to This initial slide deck focuses on understand this change and how it may digital banks. For content on the alter the very nature and structure of other innovation spaces, please banking. This presentation features our stay tuned to www.cgap.org/fintech early findings concerning digital banking as we publish more work across

models. this agenda. Photo Photo credit: Deo Surah, CGAPPhoto Contest 2

Executive Summary 4

I. Introduction 7

II. Emerging Business Models & Trends 13 How Can Digital Banking Advance Financial III. 40 Inclusion? IV. Next Steps 48

Source: 3

• In recent years, financial access has expanded • Digital banks are firms that adopt new significantly as 1.2 billion people gained access technologies to offer more effective banking to formal accounts. Yet those accounts have not services. They have the flexibility to serve new segments and create market dynamics that led to widespread uptake of the full range of promote market efficiencies. financial products and services: Financial inclusion advances have been broad, but • The three emerging business models presented here are novel, distinct, and potentially disruptive in shallow. ways that may advance financial inclusion: • This may be about to change. A new wave of • Fully digital retail banks technological innovation is transforming the • Marketplace banks banking industry in ways that may enable a • Banking-as-a-Service deepening of financial inclusion, thanks to several significant developments: • This presentation sheds light on the digitalization of • Lower cost structure and greater scalability banking, describes the three new business models, and hypothesizes about their potential impact on • Improved operational capabilities financial inclusion. • Better and customized experiences and offerings

• Our findings may be important not only for • In this presentation, “digital banking” is defined banks themselves, but for a range of providers: as an activity of licensed financial services providers that generates revenue from the • Mobile money operators and emerging intermediation of retail deposits and offers a platforms may consider adopting similar retail payments solution for storing and moving strategies to aggregate services and money. digitize customer journeys. • This definition does not cover fintechs that offer • Regulators and supervisors need to be purely payments or lending products. aware of these new business models and start thinking about how to enable, regulate, o A narrow definition helps us stay focused and supervise them. and as close as possible to the prevalent concept of banking found in regulation • Investors may consider supporting the around the world. development of these business models to o Where relevant, such models are further advance financial inclusion, or addressed. simply to build the future of banking.

This presentation features the following:

• Interviews with ~50 individuals (digital banks representatives, investors, experts, and other stakeholders around the world) • Desk research of annual reports, press releases, news articles, and other public resources • Application of the following frameworks to assess the information collected: o Business model canvas to compare different business models o Financial inclusion impact to estimate the potential of each business model to overcome inclusion barriers • Analysis of online customer reviews of digital banking applications • Analysis of funding rounds relevant to digital banking providers

• 1.2 billion adults gained access to formal financial accounts for the first time between 2011 and 2017. Many of 80% these are mobile money accounts. 60% • Progress on access to savings, credit, and insurance has been far 40% slower, barely rising at all even as accounts become more commonplace. 20% • Lack of financial depth limits the

usefulness of the accounts, resulting in population adult global of % 0% low use and high dormancy. 2011 2014 2017

Have a formal financial accountSource: 2017 Findex • 1.7 billion people remain excluded, Saved formally in the past year Borrowed from FI in the past year even from basic accounts. 8

Source: Findex (World Bank, 2017)

Banks in developing markets often are shackled Mobile money operators (MMOs) often are by legacy operational models. constrained by their business model and risk • Distribution is a major challenge for banks that appetite. depend on costly branches. Some banks have • The revenue model for successful e-money accounts developed agent networks, but few have been successful or have achieved significant scale. Thin centers on transaction fees. This limits the options margins on transactional accounts limit how much MMOs have for creating broader offerings where providers can invest in agent networks. Hence, transaction fees stand in the way of user uptake. agents often offer convenience for existing customers instead of reaching out to new ones. • Regulation typically limits the ability of MMOs to offer services beyond basic payments. Almost none has • IT systems often are outdated and expensive, acquired a full banking license, and strategic which limit banks’ ability and flexibility to improve partnerships with banks often are slow and difficult. products or develop new ones, while tying up significant resources.

• Product management practices have been slow Banks and MMOs tend to adopt zero-sum, to adopt agile approaches, human-centered competitive approaches where the priority is to “own” design methods, etc. They are less nimble when rolling out services and less responsive to the market and the focus is on selling products rather customer needs. than on partnering to solve customer problems.

• Most e-money accounts focus on payments, with limited savings, credit, or insurance offerings associated with them. o The value proposition is narrow for low-income consumers and leads to low use. o This is despite evidence that activity rates double when providers offer additional services. • Direct and indirect costs of accessing services tend to be high. o Transaction fees often are major barriers to other products, e.g., savings and merchant payments. o Where credit is available, it often costs around 7– 10% for a 30-day loan. • Products often are not designed to meet the needs and circumstances of low-income customers, who tend to have low and irregular income, a frequent need for cash, limited literacy and numeracy, etc.

Source: GSMA, 2019 10

• Cost-efficiency & scalability of complex tasks from automated processes • Lower origination and distribution costs through new partnerships and Lower cost channels & greater • Reduced minimum viable scale plus rapid & flexible scaling up from agile scalability operational structures • Increased access and convenience (24/7) for customers using digital channels • Improved customer engagement through better user interface/user Improved capabilities & user experience (UI/UX) experience • Data-driven business models (e.g., open banking, risk-based pricing) • Contextualization through sophisticated & complex real-time analytics (e.g., credit scoring, financial advice, real-time interpretation and analysis of photo and video) Increased customization

35+ digital banks in 20+ emerging markets

• Digital banking has a variety of “names,” including neo banks, challenger banks, digital banks, greenfield banks, fintech banks, and many others. • There is a lack of commonly accepted definitions. Terms can mean different things to different stakeholders. They often apply broadly across companies that may have significant differences in their core business model. • A common definition of terms would help advance the discussion around these new business models. We are adopting a new set of categories that define them unambiguously. • The categories are based on the core business model—the primary value proposition, revenue drivers, target customer segments, etc. • The digital banking space is in flux and rapidly evolving—these categories will likely evolve as well.

Fully digital A traditional banking business model improved with latest digital technologies to offer a better banking retail bank experience for lower cost. Examples: Brubank (Argentina), NuBank (Brazil)

A banking response to e-commerce and fintech Marketplace competitors in the form of a one-stop shop for bank financial services run by a bank, offering easy access to a variety of products/services. Example: Starling Bank (UK)

Banking- Tech companies with a banking license that as-a- represent the vision of banks as market utilities. Improves access to cutting-edge technology and Service brings economies of scope and scale. Example: Banxy-Fidor (Algeria)

We’ll look at each model VALUE REVENUE using a business model PROPOSITION MODEL canvas—an analytical What is offered How provider framework. and in what way earns revenue, is it valuable to who is paying, the target and why they are customer. willing to do so. BUSINESS LOGIC

How the business creates value for the provider. TARGET DEPENDENCIES CUSTOMERS Key relationships/ Primary customer dependencies segment(s) crucial for the targeted by model to work. business, if any.

Who? What? How?

Business Logic Dependencies Services • Automation & limited • Regulated and licensed Transactional physical infrastructure Other services as a conventional bank account with reduce operational • Credit Target Customers payments instrument costs and enable rapid • Savings • Does not own and app-based + scaling • Insurance distribution interface • Free account infrastructure. Uses incentivizes use of those of other players Individuals sometimes Value Proposition digital payments MSMEs complemented by own • Access to broad range of banking services • Transactional data help light physical access • Efficient, advanced & nimble customer- tailor and cross-sell infrastructure (kiosks) facing processes and services products • Customized experience • Sometimes operates • Make money from under a nonbank Revenue Model margins on other license and/or relies on regulated partners • Intermediation margin financial products • Fees and charges

Digitally Native Digital Brand Digitized Incumbents Competitor • Greenfield banks launched as a • Greenfield banks launched as an • Incumbent banks that pursue a new competitor in a market offshoot of an incumbent bank. total digital transformation.

• Typically funded by venture capital • Funded and often significantly • Near-term goals: reduce operating and run as a tech start-up staffed by the parent bank. costs and increase revenue. Medium-term goals: compete with • Typically proud to be unlike banks in • Some deploy in the same market as digital challengers by acquiring their terms of strategy, operations, and the parent to pursue new segments capabilities. culture. and/or explore the potential of a digitally native offering • Segment digital and traditional • Some may benefit from specific customers; seek to move customers licensing regimes (e.g., virtual • Some deploy in new markets as a from the latter to the former. banks in Singapore and Hong low-cost way to expand the parent Kong). bank’s geographic footprint.

Who? What? How?

Business Logic Dependencies Services • Mobilize deposits as a • Core system built on Free transactional cheap source of Amazon Web Target Customers account with Credit funding and low Services cloud personalized debit operating costs to offer card & compelling + Savings better interest rates on • Distribution via UI/UX savings and less supermarkets: 80% Mass-market banking fees than of distribution through individuals & Value Proposition incumbents kiosks in the 750 Pick MSMEs • Simple bank account with savings product n Pay stores, 20% (GoalSave) & unsecured personal loan (planned • Savings interest rates online expansion to credit cards) and transactional • Motto: “Design for the • Bank account is 50% cheaper than the next account services attract • Plug-and-play model underserved and attract cheapest competitor account many customers. provides flexibility the overserved” • Incentivize saving w/ increasing interest rates in Sustainability achieved and speed, but • Over 100k customers in the savings product over time (first 30 days 6%, by offering a variety of increases some February 2019 next 60 days 7%, 90+ days 9%) lending products that dependencies (e.g., • Attract customers away have higher margins the core banking from incumbents and • Access to credit based on alternative scoring offer the unbanked a Revenue Model system from an less intimidating form of • Transaction fees from merchant payments outsourced provider) banking • Commissions from customers who purchase top-up bundles from telcos • Interest income from lending products 20

Flyer emphasizes ease of opening Mobile app emphasizes Tyme Coach app allows account, low cost, and accessibility security and intuitive ease of customers to monitor and through digital kiosks in Pick n Pay use improve credit score. stores.

Who? What? How?

Target Customers Business Logic Dependencies Services • Focus on marketing, • 3rd party products, BroadBroad range range of of client acquisition, either integrated with Transactional Broadproductsproducts range of onboarding, and core products (e.g., products account, financial • • CreditCredit CRM rather than co-branding) or Retail/MSME advice, comparison • Credit + • • SavingsSavings competition across offered under another customers tools & app-based • Savings • • InsuranceInsurance variety of services brand (front end) interface • Insurance • A core product • Integrated Value Proposition combined with nonfinancial services services of others (e.g., accounting, e- + Front-end customers Back-end FSPs • One-stop shop for a • Access to new market commerce) variety of services segments • Increased customer rd 3 party FSPs • Contextual banking and • Low-cost delivery loyalty and stickiness (back end)— e-commerce integration channel for scaling up one FSP per • Value-added services • Potential access to product type or (e.g., financial advice, customer data hundreds of FSPs comparison tools)

Revenue Model B2C B2B • Revenue from core • Commissions on referrals services (e.g., • Fee per API call checking account) • Product revenue share • Subscription model 22

Marketplace banks are platforms, and as such, they create value by Own products: Unlike platforms facilitating exchanges between two or more participants. that only match buyers with suppliers, market-place banks attract customers by offering their own products Services Retail/MSME customers (front end) Broad range of Broad rangerd of Core and Rangeproducts of 3 party productsproducts additional services • • CreditCredit & app-based • •CreditSavings + • • SavingsSavings 3rd party FSPs interface • • InsuranceInsurance (back end)— • Insurance integrating one FSP per product type and/or hundreds of FSPs 3rd party products Marketplace of financial Core banking services Additional services complement products and services manufactured, delivered, the core product and marketplace offered by other FSPs— and controlled by the offering. These may relate to expands customer choice marketplace bank (e.g., finance (e.g., financial advice, checking account, product comparison, personal savings, credit) finance management tools) or may not (e.g., accounting, e-commerce). 23

# of providers FARMERS MARKET SHOPPING MALL Marketplace banks differ in the breadth & depth of their Limited variety of services Large variety of services product offering and in the offered by many providers offered by many competing level of integration of 3rd many competing with each other. providers. Customers can E.g., consumer credit offered compare multiple services and party services into the core by several lenders. choose based on individual product line. preferences.

BAKERY CONVENIENCE STORE

Limited number of services Large variety of services from a few, carefully from a few, carefully few selected providers. Services selected, strategic partners. may be white labelled for or co- Services may be white labelled designed by the marketplace for or co-designed by the bank bank and integrated with its and integrated with its core core product line. product line.

few many # of services

Who? What? How?

Business Logic Dependencies Target customers Services (focus on front end) • A licensed bank with • Choice of partners 3rd party products a marketplace that based on technology Transactional • Credit complements the and values Individuals & • Insurance account, personal main suite of basic MSME • Investment finance • Accounting banking products and • Services offered by customers management tools, + • Tax presents growth 3rd party providers (front end) app-based interface • Legal potential as the are integrated with • Project Management product offering bank’s product expands offering • Individuals (460K current accounts in Feb. 2019): Value Proposition • Marketplace helps • Goal: create an open urban, adult men in 30s • Fast, convenient, UI/UX-friendly, range of PFM tools • Additional functionalities for MSMEs (e.g., Starling grow marketplace where • MSMEs (30K accounts in any provider that February 2019): single accounting, automated tax form filing, HR directed companies, sole management tools) • Wants to combine passes the due traders • Marketplace includes insurance (Nimbla), credit breadth and depth of diligence process can (Growth Street), accounting (Xero) operations (B2B, offer products to bank • 3rd party providers offering B2C, marketplace) customers using a services via Starling Revenue Model Marketplace two-way data flow • Traditional revenue (interest, fees, commissions) rd • Developers and 3 party • Commission: customer acquisition fee or revenue providers using Starling share from partner connected via the marketplace Open APIs to develop their • Fee: B2B services to other financial providers own products 25

“The Starling Marketplace will become our customers’ go-to place for financial products. As a Marketplace partner, your app will be showcased in our curated Marketplace as an option for our customers to integrate with.”—Starling Bank, November 2019

Source: https://www.starlingbank.com/marketplace/ 26

Who? What? How?

Business Logic Dependencies Services Target Customers

Cloud-based core banking system + • Specializes in Banking license + technology and FSPs, Balance sheet regulation • Holds full banking fintechs, e- • Builds a tech stack license commerce rather than becomes • Integrates tech a B2C bank Value Proposition solutions by 3rd • Offers combination technology and banking • Achieves economies parties (a middle • Digital consumer license of scope & scale by layer between B2B companies (e- • Lowers barriers to entry for customers (e.g., commoditizing parts and B2C fintechs) commerce) makes compliance more affordable) of the banking value chain • Fintechs without • Integrates with e-commerce banking license Revenue Model • Pay-per-use fees on API calls • Licensed FSPs • Monthly subscriptions (fully digital retail • Product-level revenue share banks, payments • Risk underwriting services providers) Solaris Bank 27

© CGAP 2020 BaaS and the Layers of Banking Tech Stack Banking-as-a-Service (BaaS) offers a combination of banking tech stack and banking license (which requires compliance with local banking regulation and enables the BaaS player to intermediate funds and have a banking balance sheet). Many providers specialize only in the banking tech stack, a model typically known as Software-as-a-Service (SaaS). Front

End SaaS tech companies do not have a banking license. They Business partner with FSPs to provide Process Layer tech solutions, either via APIs SaaS or otherwise, that fulfill the Core Banking back-end function of the BaaS banking value chain for their System client. Software is sold on a subscription or a pay-per-use Banking License and basis. Balance Sheet

Who? What? How?

Target Customers Business Logic Dependencies Services

FSPs, Cloud-based core banking system + • Quick-fix solution • B2B2X and white- fintechs, e- Banking license + gets client labelling model relies commerce Balance sheet businesses off the on partnerships ground quickly • Has partnered with • Originally focused on • Likely market growth enabling fintechs to Value Proposition 50 companies since as new entities enter quickly acquire the • Fast and cheap go-to-market without 2016 banking capabilities significant up-front CapEx investment the market (partially driven by initiatives needed to go to market • Full suite of customizable products: white • Parts of the BaaS without heavy CapEx such as open label solutions for core banking, cards, stack are integrated • High demand among e- banking) and payments, consumer lending, SME lending, with B2B providers commerce providers, incumbents need to established banks know your customer, blockchain solutions, (e.g., IDnow) digitalize (digital brand offshoots), etc., via APIs; for some larger clients, and comparison customize white-label solutions aggregators • Low cost compliance • Popular among Chinese and other international Revenue Model providers seeking to enter the European • Monthly fee for use of the predefined Union market white-label solution • Higher charge for customization 29

Kontist offers bank accounts for freelancers and self-employed persons by leveraging solarisBank’s license and tech stack accessed through APIs

Capabilities APIs Capabilities available to client used by client (Kontist) (Kontist)

credit credit ID Digital Other tech E - signature scoring check check account check infrastructure

Tech stack includes services and capabilities developed by solarisBank or 3rd parties

Balance Sheet These four layers offer a high-level view of Provision of capital, risk management, and underwriting of products at the the main elements in manufacturing and retail or wholesale level, asset/liability distributing financial products and services. management. A traditional bank typically builds capabilities Product to cover all four layers in a vertically Design and manufacture of individual integrated business. financial products and services. New business models instead focus on certain layers and partner on others. They Customer Relationship Customer acquisition, sales, servicing, gain competitive advantages around certain and permanent primary interface. functions, while they optimize their costs in others.

Distribution Physical touch points for distributing products and serving customers.

Balance Sheet

Product

Customer Relationship

Distribution

Traditional banks are Fully digital banks Marketplace banks bring BaaS providers relinquish vertically integrated & eliminate or outsource in 3rd party product the customer layer, in rely on in-house solutions the physical distribution providers, to double order to double down on layer down on the customer products and underwriting relationship layer 33

They are blurring the line between banks and They fall outside the scope of our definition of nonbanks. banking, and hence we do not cover them in this work. • Sometimes they have a payments or other financial license; sometimes they rely on a fully licensed partner bank. • They tend to look a lot like banks, and consumers typically cannot easily tell the difference. • This trend illustrates how the financial sector is growing more modular and challenges our understanding of what is banking or a bank.

These nonbank models are similar to the new digital This raises important questions for regulators to consider, not banking models. FSPs share many elements and least since many of those providers focus on the customer consumers may think they are the same as digital relationship layer while heavily outsourcing or aggregating the banks, except that they do not have a banking license. financial product offering, underwriting, and compliance Since they are often easier to set up, they may elements. How should (banking) regulation be applied to outnumber digital banks in a given market. these models?

Fully Digital Retail Bank Marketplace Bank BaaS A large and growing number A broad range of nonbank Several different models are of nonbanks offer mobile fintechs, e-commerce providers, analogous to BaaS. Some wallets, prepaid or debit and “super apps” aggregate providers offer a similar cards, other payments third-party financial services for service but rely on a bank services, and simple credit their customers to increase partner that has a license. products under a payments consumer value, stickiness, and Others offer a combination of license and/or through add a revenue stream. software and some sort of partnership with a bank. They license (e.g., a payments often refer to their services as license. Wirecard and Green “digital banking.” Dot started this way, but eventually developed a full banking offering.

New business models in banking do not exist or operate BaaS in isolation.

The space is dynamic—some business models depend on others, and some morph into others. Fully Digital Retail Bank While the market will likely remain in flux for some time, three aspects of the new digital banking models have emerged.

Marketplace Bank 37

• An important clientele of BaaS providers are fintech start- ups that have a clear idea of the client segment they want Reduce cost and accelerate to serve and the value proposition they want to offer, but pathway to becoming a full lack the capabilities (technical and/or regulatory) to do so banking provider without substantial investment. • Instead of burning investor money to build such capabilities in house, many choose to implement an off-the-shelf solution offered by a BaaS provider, thus limiting the amount of resources and time needed to launch a marketable product. Fin + tech • They may build their value proposition on the banking stack offered by BaaS providers, and then expedite their Fully Digital transformation into digitally native challengers. BaaS Retail Bank • Big tech companies interested in entering financial services without acquiring their own banking license also can benefit from BaaS.

• More and more providers are taking up marketplace models, because as a single provider, it is difficult for them to offer a variety of financial Aggregate financial services services and products. and increase revenue per account • In particular, challenger banks expand their offerings and create stickiness by building financial service “grocery stores” by integrating financial services and products offered by 3rd party providers.

• This creates new sources of B2B revenue for the bank while allowing smaller, product-focused fintechs to reach a large customer base through Fully Digital Marketplace the bigger player’s platform. Retail Bank Bank • Digital banks are able to offer contextual banking—hyper-individualized products and services offered at the right moment, often in the context of other financial or nonfinancial transactions. 39

1. Intentional inclusion

• Firms that pursue digitalization provide the infrastructure needed to service unbanked and underserved customers. • Providers see these segments as commercial opportunities and seek to make profits from serving them.

2. Unintentional inclusion

• Firms pursue digitalization as part of a broad mass-market strategy primarily aimed at better serving customers who are already served by the banking system. • Firms do not see financial inclusion as their objective; however, financial inclusion may be a byproduct of the low cost and large scale they reach.

Cost Access Fit Experience

Does the business model make Does the business model make Does the business model make Does the business model make financial products or services financial products or services financial products better suited financial products easier for more affordable for providers to more accessible to underserved to the needs and wants of underserved customers to use offer and for underserved customers? underserved customers? and understand? customers to use? • Expands range of products on • Addresses a customer need • Has product features that are • Lowers end-user fees offer to underserved segments not served by traditional easier to access, understand, products and compare • Offers more flexible payments • Expands eligibility through innovative CDD • Better aligns with the needs • Has an interface that most • Reduces the need for and wants of underserved customers find easy to expensive devices • Expands eligibility through customers understand and use innovative risk assessment • Requires less or cheaper • Allows greater customization • Delivers clear value to users connectivity • Requires less interaction at to different situations, user physical transaction points needs, and preferences • Helps users identify, • Reduces the need for understand, and resolve collateral • Expands or improves the • Is better suited for target problems distribution of physical customers transaction points • Gives users control over data • Has higher general trust and satisfaction from users • Provides stronger technical security

Cost Access Fit Experience

• Lower cost of physical • Digital channels & 3rd party • Technology stack provides • Convenient 24/7 availability of infrastructure distribution (including agents) flexibility to add products and services • Automation of back-end and bring services closer to tailor functionality (including • Behavioral nudging promotes front-end functions customers and make them catering to niche customer beneficial consumer behavior • RegTech lowers compliance available 24/7 segments) • Greater control and cost • Alternative data expand • Integrated personal finance transparency increases • Cloud-based, SaaS services eligibility (e.g., access to management tools help with customer trust shift costs CapEx to OpEx credit) personal finance • Integrates into the lifestyle of • Intuitive UI/UX makes the • Service-oriented architecture digitally native customers service easier to access and open APIs create flexibility and efficiency in designing suitable products

Low operating costs and Getting banking closer Improved business Customer-centric lower CapEx may enable to wider customer intelligence approach improves a lower floor for pricing segments through supported by confidence through overall technology & technology leads to intuitive interfaces, alternative distribution greater individual approach, and

personalization responsiveness 43

Cost Access Fit Experience

• Shared features with fully • Better access to a variety of • A wider offering allows for • One-stop shop for a variety of digital retail bank services better choice financial needs • Cost savings from • Lower search and switching • Personalized offering, • Comparison shopping is specialization and efficiency at barriers for consumers recommendation, and advice easier product level • Easier comparison shopping • Pricing affected by increased and product discovery competition among product providers • Low cost of client acquisition and product delivery for partners Diverse offerings Diverse offerings Convenience of improve access to enable better supermarket is Economic efficiencies broader financial response to customer applied to financial create the potential services and their needs and individual services for downward price comparability circumstances adjustments For marketplace banks and BaaS, players such as mobile money providers (e.g., MTN, Safaricom, bKash) are likely to use a similar model to expand and deepen their product offering. 44

Cost Access Fit Experience

• Commoditized banking • Enables a wide range of • Indirectly—providers solutions bring economies of providers to offer banking specialized in UI/UX scale services customer-centric solutions • Lower cost of entry for 3rd may offer banking services party providers • Contextual banking—hyper- individualized products and services

Shared infrastructure Banking utility Enables seamless reduces costs for a enables wider reach integration of variety of providers by nonbank financial services in of banking services providers nonbank contexts

The BaaS model can streamline digitalization of FSPs who traditionally serve low-income customers such as MFIs and SACCOs. Providers such as Teknospire and FutureLink Technologies, which we would categorize as SaaS, currently serve these FSPs and over time may add a regulatory component to get closer to the BaaS model. 45

According to interviewees:

• Customer acquisition cost can fall to around 5–15% of that of a traditional retail bank

• Some digital banks were able to spend just 1–5% of the cost of operating a branch by using alternative distribution channels

• Cost-to-income can be more than 20% lower for banks serving customers through digital channels when compared to serving them through traditional channels

Interviews with ~50 individuals. For detailed methodology see Slide #6. 46

• Partnerships can enable incumbents to expand into new segments

• Aggregation of services and contextual financial services of providers who already serve lower income customers

Next Steps

• Quantitative and qualitative analysis of the impact of financial inclusion across business models. The sample will consider: • Geography • Relevance for financial inclusion • Data availability

• Documentation of case studies of specific digital banking providers that can inspire others.

Thanks go to Sean de Montfort (Financial Conduct Authority of the United Kingdom) who was substantially involved in this research and helped shape early iterations of this presentation. Schan Duff (CGAP) and Matt Homer (The New York State Department of Financial Services) contributed their insights on the taxonomy and business model framework, interviewed investors, and analyzed customer reviews of selected banking apps. Other contributors included Maria Fernandez Vidal and Gayatri Murthy of CGAP who helped develop the business model canvas and the financial inclusion assessment framework.

This deck benefited from review by Juan Carlos Izaguirre and Alexander Giorgios Sotiriou of CGAP and the overall guidance of Xavier Faz of CGAP.

We are grateful to the many people who kindly shared their views, experiences, and suggestions, including founders of digital banks, their employees, banking experts, and regulators.

Source: 50

API Application Programming Interface FSP Financial Services Provider B2B Business to Business KYC Know Your Customer B2C Business to Customer MMO Mobile Money Operator BaaS Banking-as-a-Service MSME Micro-, Small, and Medium Enterprise CAC Customer Acquisition Cost PFM Personal Finance Management tools CapEx Capital Expenses SaaS Software-as-a-Service CDD Customer Due Diligence UI/UX User Interface Design/User Experience