Financial inclusion is a high-priority global challenge. Christine Lagarde, managing director of the International Monetary Fund, recently vowed to support programs that will push 1 billion low-income people into the middle class by 2020. Yet despite these efforts, the fight for true financial inclusion is just beginning.
And as I wrote in a previous blog, technological innovation is helping us provide more than 2 billion low-income people in emerging and developing countries with access to basic financial services. New initiatives that focus on banking for the unbanked – using mobile technology and debit cards or mobile wallet (mWallet) offerings – are a great first step. But it’s time to do more.
After working on the World Economic Forum’s Financial Inclusion initiative for the last few years, I realize that we must adopt a more holistic approach that involves all parties in the world’s consumer and retail ecosystem. We need to build a connected, synchronized financial supply chain that stretches from the world’s largest consumer goods companies, their distributors, and smaller mom and pop stores to the low-income shoppers they serve. With cyberphysical systems, the Internet of Things (IoT), and cloud computing – what people refer to as Industry 4.0 – this reality is closer than ever before.
A synchronized financial supply chain would be a springboard for financial inclusion. But it would also provide tremendous bottom-line benefit to every player in the ecosystem. Here’s how.
Beyond the tip of the iceberg
You’ve probably read about initiatives that offer banking, insurance, and savings tools to low-income people. By building financial competence and replacing cash-only transactions with more sophisticated financial tools, these tools can help the unbanked on the path to prosperity.
But this emphasis on the payment interactions between low-income people and vendors – whether they are fast-moving consumer goods (FMCG) companies, micro and small retailers (MSRs), or distributors – represents only the tip of the financial iceberg. We need to focus on the more extensive, often overlooked processes, such as wholesale operations, inventory processing, distribution and logistics, and goods transfer.
What if we could track every product acquired in each transaction conducted at the MSR level? It may not be easy, but it can be done. In the digital economy, each non-cash transaction creates data that companies can gather and analyze, creating a coherent view of operations throughout the financial supply chain.
As low-income people move away from cash-only transactions and embrace financial services tools, they will also generate data. Every member of the financial supply chain can use this data to learn about the preferences and purchase behavior of consumers around the world. With this insight, each party can improve forecasting and decision making, increase process efficiency, better manage the channel, and more effectively use their working capital. All of these benefits boost profitability for supply chain partners – and who doesn’t want that?
Let’s take a look at how a synchronized, cashless financial supply chain can benefit each participant.
Large consumer products companies and distributors
Receiving most of their payments in cash is costly for FMCG companies and distributors. One SAP customer estimated that the cost of receiving, counting, insuring, and depositing cash represents between 2% and 4% of its fixed costs of operation. Add the inherent crime risks to truck drivers carrying cash while servicing their routes, bad checks, and counterfeit bills, and it’s clear that cash is expensive.
By collecting and analyzing data about the cashless transactions of low-income consumers, companies could create a detailed map of goods consumption – by time, geography, and product – down to the MSR. Enterprises could learn about trends in key areas such as customer behavior, seasonality, and product distribution.
Careful data analysis could help large companies better forecast demand, schedule production, design marketing campaigns, and streamline distribution. They could forecast events and predict likely outcomes, such as the increased demand for beer during the Olympic Games, the World Cup championship, or the Super Bowl.
What’s more, larger companies could use MSR purchase history to anticipate when their partners may need to increase working capital. Working alone or with financial institutions, FMCGs might want to offer microloans, increasing their own sales in the process.
Micro and small retailers
Cash is often a necessary evil for smaller retailers. Not only are they paid in cash by low-income customers, but they often use cash to procure goods from small and medium distributors and even some FMCG enterprises.
Increasingly, however, MSRs are required to pay electronically, using debit card transfers, or by check. In these cases, merchants must spend time away from the business to deposit cash at the bank. For smaller retailers located on the outskirts of cities or in small towns, traveling to the bank while carrying currency makes them easy prey for robbers and counterfeiters.
In exchange for sharing transaction data with large companies and distributors, MSRs would gain new insight that can help them understand demand and inventory management trends, improve marketing campaigns, and gain discounts from larger supply chain partners. MSRs could automatically trigger purchasing orders by defining minimum thresholds for premium products, saving procurement time and effort. Those working with FMCG companies could even receive loans that would boost their purchasing power and insurance to protect their inventory. All of these benefits could result in stable, increased revenue generation.
Some smaller retailers may initially balk at data sharing, since it will effectively formalize their business and make them more visible to government and taxation entities. Yet, if they fully embrace the financial supply chain, I believe the potential value far exceeds the cost of this change. According to a new study from the World Bank Group and the World Economic Forum, micro, small, and medium retailers contribute US$34 trillion to the economy, with US$19 trillion of that in cash. By using data analytics and technology to make MSR operations more efficient, we can add new economies of scale that will enhance growth and prosperity for these retailers.
For low-income consumers, cash is king. Whether they receive a paycheck or a government subsidy, these consumers tend to exchange their assets for currency. Currently, they have little incentive to keep the money in their banking or mWallet accounts, since few local merchants accept electronic currency. Most markets offer few incentives to maintain these accounts, such as discounts for electronic purchases or loyalty points that can be exchanged for goods.
By doing business with savvy retailers who are active participants in a financial supply chain, low-income consumers increase their chances of getting the products they need, when they need them. Retailers who use data to gain insight into demand and inventory trends are better equipped to stock the right goods, so shoppers can meet all of their needs in one trip. These consumers can also benefit from marketing and loyalty campaigns that reward frequent purchases, which are reflected in purchase data. Finally, consumers that deposit their cash with a financial institution can increase the safety of assets and generate interest.
Financial institutions and government agencies
Even financial institutions and government agencies can benefit from a synchronized financial supply chain. If customers reduce their use of cash, banks will be able to lower their operational costs at branches and ATMs by decreasing the need for transportation, replenishment, and insurance. They will also have more low-cost funding available to serve their markets.
By formalizing MSRs, governments receive more tax revenue. They also can reduce the cost of producing, storing, distributing, and receiving cash. Because virtual currency is easier to track and more difficult to counterfeit, governments can reduce loss by implementing effective anti-laundering policies.
A unified financial supply chain will be not be easy to achieve, nor will it yield dramatic results right away. Real obstacles – including government regulations, payment standardization, and the implementation of technology at the MSR level, to name a few – must be addressed and overcome.
However, it is a valuable goal that will deliver meaningful benefits to each part of the supply chain. By leveraging new innovations and building solutions on a powerful Big Data technology such as SAP HANA, companies and consumers alike can enjoy the benefits of data-driven efficiency. All parties can improve their financial standing as they move toward prosperity. In short, everyone wins.
But financial inclusion catalyzed by a synchronized financial supply chain can’t wait. If we don’t begin tackling the obstacles now, 2020 will arrive without us having made significant progress. By beginning now with incremental, small projects, we can increase our chances of achieving financial inclusion on a global scale.
If you’re interested in learning more about financial inclusion, please visit us at Sibos on September 26–29 and visit us at www.sap.com/sibos.