Banks could find that the bulk of their client base faces declining living standards and financial hardship. They should start preparing now, writes Brian Caplen.

Many banks are geared up to assist financial inclusion and that is a worthy aim. Smart banks can both fulfil a social goal and make money out of this segment by establishing low-cost systems and simple products. At the other end of the scale, banks will always be pushing to increase their share of the lucrative affluent client market. But for most retail banks the bulk of their client base will be those on middle incomes and serving this sector profitability is key to good returns. 

All over the world, middle earners are under pressure. Technology transformation creates well-paying jobs for the highly educated. The low skilled may survive this change because their jobs are not worth outsourcing, or they move into the service sector. But in the process, middle-income jobs are being squeezed out. 

This is happening as much in developing countries as in advanced countries. The latest concern is that the cheap labour route to economic development for emerging markets will soon no longer be available as manufacturing is entirely automated and located back into high-cost countries near the final market for products.

Banks need to study this trend and start thinking about the impact this hollowing out will have on their client base and returns if they do not react. 

Cost-cutting through digital transformation is part of the answer, as are savings and loans products that are easy to adjust when customers experience income cuts that are either temporary or permanent. The squeezed middle need a bank that caters to their requirements as much as the rich and the financially excluded do. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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