Recent success in the Microfinance industry has influenced a new banking strategy termed Base of the Pyramid. The International Finance Corporation (IFC) has $600 million in funding for a facility called Base of the Pyramid facility. This facility is the provision for affordable financial services from small providers to start-ups, small businesses, private investment loans, informal endeavors, and income communities, households, and individuals. This facility further helps in supporting rapid economic growth, generating fresh jobs, and housing those in need. It also had a major impact on resilient recovery in affected patients during the COVID-19 pandemic
Additionally, IFC or the International Finance Corporation has dedicated more than $11 billion in pledges to over 400 inclusive and overall businesses while implementing and working with the Base of the Pyramid Strategy for the past ten years. So to answer your question yes commercial banks are ready to serve the Base of the Pyramid.
A few ways you can serve the Base of the Pyramid is by developing that ensure its need and customer preferences are met, creating cost-efficient and effortless distribution that ensure a smooth transaction and reach the customer effectively, and collaborating and building partnership with smaller and local organizations. BOP aims toward benchmarking progress towards the financial inclusion.
What is the Base of the Pyramid Business Strategy?
The Base of the Pyramid or BOP business strategy is a growing practice that is targeted toward low-income communities. BOP focuses on services including financial and social, products, and personal enterprises. This provision serves the population that represents the bottom of the food pyramid. This strategy has attracted many multinational companies to invest and implement the base of the pyramid into their business strategy. Naturally, these companies and organizations that serve the same or similar demographic aim to do so in an effective, profitable, and grown-oriented approach.
According to the World Bank, around 4 billion people constitute low-income consumers worldwide, having the base of the economic pyramid as the largest share of the world population. This explains the economic and financial position of the world population as a whole.
How Does this Business Strategy Correlate with Microfinance?
Microfinance is the practice of providing efficient and effortless banking services to low-income communities, unemployed or financially deprived individuals, small-scale businesses, and startups. This provision was started by keeping individuals at the bottom of the financial and social pyramid in mind who wouldn’t have access to commercial or traditional banking services otherwise.
The Base of the Pyramid(BOP) strategy is similar to microfinance in this aspect as it also aims to serve the demographic or population that microfinance serves. The base of the pyramid(BOP) strategy aims to serve this demographic by providing cost-efficient products, services, accessible healthcare, and education that help these people in meeting their needs.
According to Stratrix, numerous companies have reportedly been using microfinance as one of their business strategies to serve the low-income population like individuals or groups who do not have access to traditional banking services. The base of the pyramid (BOP) strategy is a banking or business model that holds the objective of serving the low-income population by supplying affordable and accessible services and products that suffice their needs.
How Does This Impact Us?
The base of the pyramid business strategy is a concept that is targeted toward low-income individuals to provide them with services that create a win-win situation for both parties. The BOP strategy helps create a market for low-income and poor communities. This strategy aims to create equal and simultaneous opportunities for social and financial benefits and pursue them by creating markets and generating fresh jobs for low-income communities and poor individuals.
This approach or concept has been criticized by the personnel involved as financial benefit dependent on social welfare is a complex concept that is new to the business. However, any emerging body of research looks into business and corporation-led efforts to generate social values by enhancing the social, economic, and cultural prosperity of low-income communities targeted by the base of the pyramid. According to research companies that pursue or implement strategies like the base of the pyramid face a unique set of challenges that requires highly skilled and distinct individuals.
Challenges of Base of the Pyramid Strategy
The challenges of the Base of the Pyramid (BoP) strategy often include higher interest rates, lack of streamlined transactions, and higher transaction costs in comparison to its industry counterparts, poor infrastructure which is not cost-efficient, longer marketing channels, road and transportation issues, healthcare and housing accessibility along with affordability.
Additionally, to these challenges, research has proved to have various unintentional consequences impacting society from these BoP strategies, this includes the promotion of stereotypes, a heavy loss of social capital, a worry yet anticipating an increase in e-waste under already biohazardous recycling conditions in India, and Africa–-fifty-eight percentage of Indian women report difficulty accessing credit savings or jobs because of their gender—worse than ever economic conditions mostly because these strategies often happen to be financial profit-oriented and are ignorant toward social sustainability in addition to economic sustainability.
Benefits of Base of the Pyramid Strategy
The base of the pyramid (BOP) strategy is a budding new practice that aims to serve the population that represents the lower or bottom half of society or the pyramid. This strategy focuses on services, healthcare, products, and personal enterprises.
Various kinds of organizations aim to serve this demographic, for example, multinational companies whose orientation is built upon aspects of growth and financial returns aim to serve this specific demographic which is made up of low-income individuals and poor communities.
However, in a very natural way, multinational companies implementing the base of the pyramid strategy are considered exploitative and manipulative. Yet people have been arguing against it by using the BOP strategy’s pros like reducing poverty and eventually aiming to eliminate it, improving the quality of life for the residents of this demographic.
With the introduction of microcredits with this strategy new credit scores will be generated and these new credit scores might help bridge China’s credit gap, for instance.
Benefits of Base of the Pyramid strategy
- The base of the pyramid strategy helps create a market and increase the existing one.
- Improvement in brand image is another excellent benefit that comes with the BOP strategy.
- BOP strategy helps with increasing creativity and creating innovative products.
- It also helps with the liberation of some financial extremities and better access.
- Your impact on society also increases positively.
Frequently Asked Questions (FAQs)
Q1. What is the bottom of the pyramid in banking?
The bottom of the pyramid is a strategy in banking that allows you to change your business model into something that impacts society positively. This strategy is focused on providing services, products, and investments to the bottom half of society or the bottom of the pyramid.
Q2. Are commercial banks the backbone of the economy?
Yes, commercial banks are considered the backbone of the economy. This is because commercial banks provide all sorts of banking services and provide people with money without having to actually make physical money.
Q3. What does commercial banking serve?
Commercial banks serve big corporations, organizations, and mid-size businesses. These banks aren’t known to provide banking services for poor or low-income communities. This has been recently recognized as a problem for our society, leading commercial banks to implement the base of the pyramid banking strategy.
The base of the banking strategy is an excellent way to have a rapid positive impact on society as this strategy focuses on providing services like banking and healthcare, products, and personal enterprises. These provisions are targeted toward low-income or poor individuals and communities. However, commercial banks implementing the BOP strategy into their business model is something that has been proven exploitative and manipulative with their banking services.
This makes the whole microfinance part of BOP that is meant to simultaneously provide societal and financial returns invalid. This criticism has led to applying behavioral insights inside Latin American financial institutions. However, regardless of the downsides the base of the pyramid banking strategy has numerous bright sides like making basic banking services accessible so low-income communities and local economies can make use of it effectively and aren’t devoid of these necessities.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.