Crossing the chasm

The release this past April of the World Bank's 2014 Findex report was a major wake-up call for Pakistan. Less than 10 percent of Pakistani adults have an account at a financial institution, and Findex finds that the percentage of "unbanked" Pakistanis has actually grown in the past three years. This has serious adverse consequences both for the unbanked families themselves and for the nation's future. Our four-part series (the newspaper carried its third part on September 9, 2015), by the chief executive officer of Pakistan's fastest-growing microfinance bank, discussed the origins of this market failure from the perspective of both the customers and the financial institutions. It described possible courses of action, based both on the new National Financial Inclusion Strategy and the author's own experience. The author is grateful to the officials at the State Bank of Pakistan for their leadership, historically and more recently in connection with the new National Financial Inclusion Strategy. Thanks also to Simon Sinek for permission to use the Law of Diffusion of Innovation graphic and for his powerful, inspiring work. Special thanks to Anne Folan & Associates for creative partnership and writing support.
Even if you have never heard of the theory of innovation diffusion, you know the terminology: "early adopter," "tipping point," and so on. The theory, whose origins date back to at least the 19th century, seeks to explain how new ideas and technologies spread (or fail to spread) through societies. It's highly relevant as Pakistan considers how to disrupt the conditions that keep us trapped at less than 10 percent market penetration for financial services.
In past instalments of this series, we looked at the reasons why both customers and bankers behave in ways that on the surface seem to defy rational explanation. We looked at why low-income families who would be the most devastated by any robbery are also the most likely to hide their cash at home, where it is so vulnerable to theft, rather than putting it safely in the bank. We looked at why Pakistan's bankers ignore a staggering 90 percent of their potential addressable market. And we discovered that a common driver for both of these perverse outcomes is the cost of doing business under the current dominant service-delivery models. Essentially, it just costs bankers too much to service the kind of low-balance, high-activity accounts that the low-income majority needs, and it costs the low-income majority too much to make a trip to a bank branch every time they need to conduct a transaction.
In May, State Bank of Pakistan released the National Financial Inclusion Strategy (NFIS), the first comprehensive blueprint Pakistan has ever produced for the financial services sector. Developed in consultation with members of the Pakistani banking sector, (including the author of this series) and with leading international experts, the NFIS succinctly lays out, in just 43 clear and readable pages, what it's going to take to build a financial sector to support Pakistan's growth in the 21st century. One key is to dissolve those prohibitive transaction costs by shifting more business from cash to digital platforms.
The theory of innovation diffusion tells us that if you want mass-market acceptance of an idea or an innovation, you cannot have it until you achieve a "tipping point" of between 15 and 18 percent market penetration. That's the point at which the "early majority"-people who are open to trying new things provided someone else has tried them first-will start to get on board. After that, the system will be carried forward of its own momentum. But before you can get to that tipping point, you have to enlist the "early adopters." These people, typically a little more than 13 percent of the population, are the ones who are comfortable making gut decisions and who like to be (and to be seen as) trend-setters.
Reaching that final slice of the early adopters, what Geoffrey Moore called "crossing the chasm," is the last and hardest mile of the journey to the tipping point. The Pakistan Microfinance Network puts our nation's financial inclusion tipping point at 10 million. Given current outreach of 3.3 million, that leaves us with 6.7 million new customers to add.
So how do we cross the chasm? How do we reach those 6.7 million additional "early adopter" personalities whose buy-in will tips the system? Simon Sinek, author of the classic Start With Why, offered the profound insight that early adopters don't buy what you do, they buy why you do it. So you have to talk about why you do what you do, and you have to say what you believe.
A "what" message might sound like this: "Having a bank account is better and safer than hiding cash at home. Now you can transact right from your cell phone, you don't need to worry about going to a bank. This is going to save you time and money." A "why" message might sound like: "We believe that every Pakistani has the right to go as far as their energy and talents will take them. We believe in removing all the man-made barriers to that potential. Our own specific way of doing this is by making sure that all the financial tools you need are as close as the phone in your pocket. Whether it's a secure place to save your money, or a loan for your children's school fees, or a line of credit for your business, or insurance for your family, the future is now. The barriers are gone."
One of the cornerstones of the NFIS is a sustained nationwide awareness campaign. To the extent that the campaign can effectively communicate why we believe what we believe about financial inclusion, it could enlist the all-important final cohort of early adopters and get us across the chasm. Digital technology itself long ago passed the tipping point; Pakistan has almost 150 million mobile subscribers and a growing share use smart phones. It's not the technology that needs public-awareness raising. It's the technology's connection to financial inclusion, and financial inclusion's connection to the nation's dreams.
As key as it will be to shift transaction streams from cash to digital platforms, the NFIS stresses other important steps Pakistan must take. These include building the technical skills of financial institutions' staffs, balancing the needs of KYC/AML (know your customer/anti-money laundering) provisions against the goal of expanding outreach, addressing a serious gender gap, fostering Islamic-compliant as well as conventional finance, promoting consumer protection and financial literacy, and expanding credit for small-holder farmers and for micro, small, and medium enterprises. NFIS also acknowledges important factors that lie beyond the scope of financial-sector policy but which nevertheless affect financial inclusion. The energy crisis, especially, has had a devastating impact on small and medium enterprises, and there are various legal and judicial reforms and key pieces of legislation that need to be expedited.
But the NFIS keeps the focus where it needs to be: on the success factors. There are enough of them in place now. We have more than sufficient penetration of mobile digital technology. We have functioning credit bureaus and a national identity system. We have access to a global community of experts who bring deep knowledge and sustained commitment to this issue. We have philanthropists who have been willing to underwrite much of the research and development. We have visionary policymakers who for years have crafted a series of progressive reforms that have set an example for the rest of the world. And now we have a complete roadmap-a plan premised not on threats or mandates but on thoughtful development of the right incentives for customers and financial services providers alike.
Best of all, we have a nation of hard-working, resourceful people. Now what we need is to reach the next 6.7 million of them with the message that will resonate: a message about why we believe financial inclusion is so profoundly important, and why we're determined to work together as long as it takes to make it a reality. When that message hits its mark, when the next 6.7 million early adopters respond, then we'll cross the chasm. Then from that solid ground on the other side the real work can begin, the work of building a world-class financial services sector to serve a self-reliant, peaceful, and prosperous Pakistan. And from there, there will be no turning back.
(The writer is chief executive officer of FINCA Microfinance Bank Ltd. The views expressed in this article are necessarily those of the newspaper)