The problem of financial exclusion—individuals’ limited access to or use of formal banking services—looms large around the world. It both reflects and contributes to the stark socioeconomic divide that pervades many emerging markets. In China and India, for example, only about one-third of the population participates in the formal banking sector. Among the excluded are a distinct and huge group of consumers—the next billion—whose potential to become viable banking customers has been greatly underestimated. Categorized by income, this group sits just above the poorest of the poor and just below those who are currently targeted by most banks.
Governments and microfinance institutions have made some headway in alleviating financial exclusion, but banks have lacked a clear commercial impetus to do so, stifling the development of business models that have the reach required to confront this problem. By embracing innovative business models, however, banks can upend the economics of reaching consumers long considered impossible or unattractive to serve. This approach would open up unparalleled opportunities for profitable expansion in some of the world’s most rapidly growing economies.