Wednesday, September 26, 2007

The real cost of banking

How do you get banking to become cheaper? By making it less expensive of course. It is only possible to offer affordable banking to the bottom of the pyramid if the real cost of banking is understood and changed. It does not make sense to reduce the price of banking when the underlying cost remains the same.

So where are the fundamental cost of banking?

This would probably take a comprehensive study to understand and clarify, but if we look at well known facts applicable on any other industry that sell something on a recurring basis, it must be the cost of distribution and indirectly the effect of churning. In order to translate this into banking terms, this is the cost of opening a bank account and then get people to keep on using it. To keep the account on the books (even if it is been used heavily) does not take much cost nowadays. With the cost of equipment and systems as low as they are (compared to the past), it does not cost much to run a bank account. Costs associated with disputes and complaints (I think) will also add to the real expense.

So how to reduce the cost of banking? ... by reducing the cost of opening a bank account. We have demonstrated how to achieve this by enabling clients to open a fully functional (and legal) bank account on a mobile phone. This has been deployed successfully in South Africa and we can now show metrics that indicate savings of more than 95% on the cost of opening a bank account.

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