The air of negativity that had hovered around the World Economic Forum over the past couple of years, following the economic crisis, was replaced this year with a feeling of positivity. Executives were looking forward, not backward, and those in the financial services sector in particular felt that the worst was over, with many financial institutions having now achieved profitability, while better managing costs and reducing their risk.
With global collaboration on the rise, executives attending the event firmly believed that the economy in the West would grow and unemployment would decline. The banking and political heavyweights debated the stability of the euro zone and the benefits and hindrances of greater regulation in the financial markets. How this will be achieved was not concluded. However, what was agreed was that there must be global unity, not only in supporting and maintaining the euro, but also during formulation of financial regulation policies.
One other aspect that was widely discussed was the fact that the center of gravity of global economic activity was shifting toward emerging markets. There was consensus that those are becoming the hubs of growth, innovation and talent. Western economies and companies have realized that there is a large market outside the middle-class segment in tier 1 cities. This large untapped segment at the bottom of the pyramid is almost a $5 trillion market in purchasing power parity terms. However, this underserved segment of close to 3 billion people lack access to mainstream financial services and this has to be overcome first.
Coincidentally, my conversations with financial executives at the forum made it clear that they see the digital consumer and technology driving the financial future. This sentiment was apparent because today's consumers are connected, aware and they expect personalization. More important, they use technology to manage their lifestyle. Enterprises of tomorrow need to understand this new segment in order to leverage the opportunities that they bring with them. When it comes to emerging markets, technology plays a much larger role in enabling financial, health care and educational inclusiveness.
For instance, let's look at how technology can enable financial inclusion in an emerging-market country like India. In that country, 50% of the population still does not have bank accounts; 90% have no access to credit or life insurance coverage; 95% no general insurance; and 98% no participation in the capital market. These underserved sections of society end up getting loans from loan sharks and paying over the odds in interest rates.
The mainstream financial industry, with the aid of technology, can help these financially excluded households with solutions like microfinance, mobile banking and contactless micropayments. These facilitate inclusion as they act as an enabler for saving money, transferring funds and accessing credit. In other words, they permit these households to engage in basic commerce and no longer opt for unsecured loans with high interest rates. This will create a new economy with the subsequent rise of disposable incomes.
Likewise, mobile banking can also help create a banking community in developing rural areas. India has 64,000 bank branches, or one for every 16,000 people and 80,000 ATMs. Only 13% of Indians have debit cards. At present it's impossible and impractical to place automated teller machines in every village, but mobile technology will enable people to connect and have access to a banking community regardless of location or wealth.
Finally, there was consensus at the forum that the greatest challenge for banks would be the regulation of these services with mobile operators to make it a profitable exercise for all. This is a critical focus area because this demographic will contribute little in monetary terms versus the cost of processing their transactions. Governments must step in to make policy changes and help manage the risk. Financial technology is proven to reduce transaction costs and cut cycle times. However governments, banks and mobile operators in emerging markets must collaborate to make the service work for this demographic.
