By Graunt Kruger
Last week FNB announced that it was transforming from being just a bank into a “diversified financial services company”. This did not come as surprise. It follows Discovery’s move into banking. Indeed, the health insurer had taken its first step towards banking through a partnership with FNB for the Discovery credit card. When Discovery launched its bank, it bought out FNB from the card joint venture. In return, FNB’s announcement positions it to go after more of Discovery’s turf, particularly in asset management and insurance.
These strategic moves are more than just competitive reactions, they also signal a major shift in how banks do business and, even more fundamentally perhaps, how they see their role in society. In particular, banks are having to demonstrate that they add value to their customers’ lives by showing how they can make their clients financially better off, a concept called financial wellness. This social dimension to the banks’ new strategies seems to align them with a new fad in investment called impact investment. My question is whether one can link socially-orientated banks and impact investment funds.
The financial wellness move has evolved rapidly worldwide. In 2015 I completed my PhD on financial inclusion. At the time it felt like a leap of faith to challenge the financial services sector (and banks in particular) to reconsider their approach to financial inclusion. In the study I marshalled a large variety of evidence from banks’ inclusive strategies, the Financial Sector Charter’s requirements to extend financial services to the previously excluded, a vast amount of academic literature and recorded data from local economies in townships. The evidence showed that financial inclusion would likely lead to an expanded distribution infrastructure through the application of technology and redesigned products. Yet proof that financial inclusion did not always result in positive outcomes for all new customers was already mounting. This means that some customers are effectively made worse off after they are “financially included”. The now well-worn figure that commentators cite as proof of adverse inclusion is the 50% of credit active South Africans who have an impaired credit record, suggesting that their credit products have left them worse off than when they were excluded from the financial system.
I now think it is better to aim for financial wellness rather than financial inclusion. I have previously argued (with co-author Grant Locke) that financial wellness has four pillars: positive cash flow, positive net worth, appropriate risk mitigation through insurance and improved creditworthiness. Credit should be seen less as a way to fund consumption and smooth income and more of a way to help families build assets.
The future of the financial wellness trend is being revealed in the US. An early mover, Key Bank, co-opted financial wellness as its overt value proposition to customers with the brand slogan, “financial wellness starts here”. Despite being a small regional bank in US terms, with $137.7bn in assets and $6.3bn in annual revenue (2017) it is only slightly smaller than the Standard Bank Group.
But America’s mammoth banks JP Morgan Chase, Citibank and Wells Fargo are also catching on to the trend. All three have also started their own journeys to customer financial wellness. JPMorgan Chase created Finn (an all-mobile bank that offers automated savings) and bought WePay (a payments startup that powers payments for crowdfunding platforms). Goldman Sachs launched Marcus (a bank for millennials) and bought Clarity Money (a financial wellness app). Wells Fargo has embedded financial planning and monitoring capability into their banking app. These banks are largely reacting to millennials – a growing slice of their customer base – who don’t buy that banks are working in their best interest. Millennials are heavily indebted with student loans (now the second-largest source of consumer debt after home loans in the US). These banks have recognised that their younger customers must know that financial wellness is at the core of the bank’s offerings.
Financial wellness is seen as a strategic market opportunity by many more US startups. Last year, a report by consultancy Oliver Wyman examined the business models of no fewer than 350 fintech startups in the US working on financial wellness.
The trend is clear in Africa too. In 2018, African fintech startups raised $284.6m from a mix of impact and traditional investors. Most notable are Lidya – a service that helps small businesses in Nigeria access finance through new credit scoring models that raised just under $7m – and South Africa’s Yoco, which has attracted upwards of $16m in funding from overseas investors. Lidya helps small business owners access credit and hence grow their businesses. Yoco works on the positive cash flow pillar of financial wellness by helping small business owners accept payments through low-cost hardware attached to mobile phones. Impact investors in these entities include Omidyar Network, Alitheia Capital, Bamboo Capital Partners, Tekton Ventures, Accion Venture Lab, Newid Capital, Dutch bank FMO and Quona Capital.
Commercial banks and fintech startups are working towards the financial wellness of customers. The question I now ponder is whether investment into these efforts amounts to a form of impact investing? One prominent definition of impact investing is “the intention to generate social and environmental impact alongside a financial return”. As my colleagues have argued, the measurement of social returns in impact investing is critical, but infinitely harder than measuring financial returns. Impact measurement frameworks offer a variety of metrics for measuring social returns, which are often numerous and vastly complex.
I propose a simple way to measure the social returns of impact investment in financial services. Recall the four dimensions of financial wellness: positive cash flow, positive net worth, appropriate risk management and improved creditworthiness. Suppose these were the criteria for an impact investment portfolio in financial services. Discovery Bank, with its new behavior-driven dynamic credit repricing strategies, might fit squarely into this portfolio. So would FNB’s new “diversified financial services” strategy that intends to enable customers to manage their personal finances better through financial planning tools and analysis of their spending behaviour. Both of these banks are putting the tools together to help customers build positive net worth and manage their risks. From what we can tell now, neither would completely deliver the full outcome of financial wellness but could nevertheless be worthy members of what we could call a “financial wellness impact investment fund”.
The portfolio could also include startups such as Wala from Cape Town, which started as a blockchain-based payments service and then added the ability to find work, offering global jobs through its app with earnings in Dala, the digital money that powers Wala.
Wala would qualify because it is working actively to improve the first lever: positive cash flow. Rather than wait for its customers to earn money to then be able to transact on the platform, Wala is helping them to find work, so helping customers to generate income. A second addition to this portfolio would be Jump Credit, a US-based startup that helps consumers improve their credit scores. This is the fourth pillar of financial wellness. For the net worth pillar there is a range of options such as international firms Betterment, Qapital, Robin Hood and Acorns, which are all examples of the wealth management strategy known as robo-advisory. All these startups work to build financial assets for customers. Lemonade and Ladder, two insurance startups, stand out as important new ways to buy insurance and sit in the risk mitigation dimension of financial wellness.
Impact investing in financial services can quite comfortably be seen as bringing about financial wellness as a social return. There may be a myriad additional social metrics that could be added to more fully measure the social returns of investments in financial services. However, without the four dimensions of financial wellness at the core of the social metrics, we would completely miss the social value that banks (and other financial services companies) can and do deliver today for an increasing number of their customers.
Social value aside, impact investment for financially focused investors must deliver financial returns. What remains to be proven is that the financial wellness strategies can deliver sustainable businesses and investment returns strong enough to satisfy investors.
- Dr Kruger is head of Intellidex’s strategy research