IQ, EQ and the Next Billion Banking Consumers
The Boston Consulting Group might house the world’s highest concentrations of brainpower per square foot. BCG is to consulting what Goldman Sachs and Cravath are to banking and law.
When it comes to intelligence, they are tops.
In terms of IQ, that is.
EQ? Well, that’s not so much what they’re aiming for.
Case in point—the most recent article from BCG’s Industry Insight series, The Next Billion Banking Consumers. (The piece shares two authors and whole paragraphs verbatim with a more general piece from BCG’s Perspectives article series, titled The Next Billion).
BCG’s article series—particularly Perspectives—have been the source of breakthrough thinking for several decades now, including the experience curve and the barnyard portfolio theory, and the general concept of strategy as the pursuit of sustainable competitive advantatage.
The article opens big:
The problem of financial exclusion—individuals’ limited access to or use of formal banking services—looms large around the world. It both reflects and contributes to the stark socioeconomic divide that pervades many emerging markets…
By embracing innovative business models, however, banks can upend the economics of reaching consumers long considered impossible or unattractive to serve.
Great—energizing the banking sector to help accomplish what microfinance suggested might be possible. Cutting-edge capitalism, bringing the next billion—“just above the poorest of the poor and just below those who are currently targeted by most banks”—into the mainstream of the global economy.
Indeed, much of the article addresses the need for changes in product development, distribution, marketing and organization structure, listing some exciting innovative practices.
Then there appears this paragraph:
Unfortunately, regulations sometimes make it difficult—if not impossible—to offer products that suit the financial means of the next billion consumers. Our analysis shows, for example, that Indian banks would need to charge a 32 percent interest rate just to break even on the kind of small, short-term personal loan that the next billion consumers would want. Yet national regulations prohibit banks from charging interest rates to priority sectors that exceed the prime lending rate, which currently stands at about 12 percent. This problem underscores the need for regulatory reform that complements initiatives to reach the next billion consumers. (italics mine)
The need for regulatory reform? Let me get this straight. A banking industry in a country with 5% inflation and 6% one-year t-bill rates needs 32% interest rates to break even in a new market, and the problem is—the presence of usury laws?
How about—oh, I don’t know—a banking industry that can make money on less-than-32% interest rates?
Unless I am seriously missing something—always a possibility—the inclusion of this paragraph, alongside discussion of radical product and distribution redesign, is socially and politically tone-deaf. Narrow. Myopic.
It feels like a hammer seeing an all-nail world. If your constant goal is the pursuit of corporate competitive strategic advantage, then of course regulatory “reform” is inconsequentially different from product innovation—it all adds to competitive advantage, right? (Except of course for the poor schmoe trying to make a buck with his feet in plus-32% debt cement shoes).
In an increasingly connected world, the view of competition as the be-all and end-all of business—even just of strategy—is antiquated. Out of sync. Competition without commerce just doesn’t add up to much.
The world is connecting more. And it isn’t about just the connections, or the connected. It’s about the synergy in the combination.
Kind of like IQ and EQ.
This is a frightening commentary. Thanks for exposing it.
The saddest truth is that the poor in this country already deal with this kind of thinking, with virtually no banking or credit options beyond horrible-interest credit cards, the robbery that is payday loans and title loans, and the like.
Think for instance of the Small Business Association, which has the potential at its core to lift people up by helping them start and grow… Small Businesses. Sounds like what they’re supposed to do, but their own regulations combined with those of the banks they work with keep them from helping these very people.
The joke goes that you can’t get a loan unless you don’t need one. And that’s right here in the good ol’ USA.
Banking, find a truly disruptive innovation and live up to – and profit from – the possibilities.
To encourage discussion, I’ll take up the opposite position:
It may be completely reasonable for these short term rates to be so high. Imagine a -month loan. At 32%, that’s less than 3% in actual interest. On a $300 loan, which is fairly high for a micro-finance loan, that’s less than $10. The overhead of a well-run financial institution is non-zero. Processing a loan for less than $10 is a STEAL!
A month loan is essentially a payroll loan. Such things are better set up as lines of credit.
In a place like India $10 to process a loan seems like a fair bit, actually, for poor people. 1/4 of India’s population earns less that 40 cents a day (that’s the poverty line); if your cost for a loan is $10, you must can’t serve that demographic – and they can’t afford your loans, frankly. It would swiftly lead to a position where they just /can’t/ get out of debt.
The answer, of course, is to hire the slightly not- poor and the poor to process the poor’s loans. If it takes all day for one person to process a loan at twice the poverty rate, you’re still way below $10.
The majors want to take their cost structures and just plop them down in places where they don’t make sense. You can’t serve these people with western cost structures.
And frankly I mostly don’t want these people to have payday loans and consumer loans. They can’t afford them and something you can’t afford is something you don’t need. (Business development loans a la micro lending circles is another matter.)
(Literacy rate is 64.8%, which implies you can get some fairly cheap people (even if not at .40 a day) to work for you who can do basic math and fill in forms.)
Thanks Carl for the counterpoint; Ian’s point strikes me as the right challenge, how to custom-design a business model. Which of course was BCG’s point in the first place. Before they wandered off into regulatory reform…