Digital Finance Successes, Failures Provide Lessons for Microfinance
If issues of trust, affordability, and reliability are addressed, digital financial services can help extend financial services to all.
Microfinance institutions (MFIs) are starting to see the benefits of new digital technologies, including greater efficiency, lower transaction costs for institutions and clients, and extension into new markets. These benefits can be tremendous and the experiences with both successful and unsuccessful digital financial solutions reveal how these 'disruptive' innovations can enable the unbanked and underserved to participate more fully in financial systems.
Complex digital financial services and new technologies create new processes and other challenges for institutions and their clients. In addition, as the following examples illustrate, partnerships and realistic timeframes are key to successfully apply these technologies.
Rural banks like Cantilan Bank in the Philippines are well-placed to utilize digital technologies to make disbursements more efficient and to increase client convenience and security. But when Cantilan Bank first offered mobile phone banking services (in partnership with GCash), it found that many of its customers were not ready for the service, and usage did not meet expectations. The bank therefore took a step back and offered a new ATM/debit card instead.
Since then, the bank has identified other opportunities to innovate using mobile and e-wallet services and by facilitating digital payments (remittances, government-to-person, person-to-government) which it will roll out incrementally. Cantilan Bank learned the importance of not making assumptions about target-market needs. Convenience may not be a priority for clients. Understanding the full costs of new products and services is also important.
In another case, Basix Social Enterprise Group of India helped clients and the clients of partner banks to utilize its network of more than 10,000 business correspondence outlets and common service centers serving over 2.5 million households in 28 states and 330 districts to provide banking services like opening accounts, mobile top-ups, bill payments, savings, credit, and receive pension insurance and remittances. Through a subsidiary, Sub-K, Basix manages another 5,000 business correspondence outlets and common service centers reaching an additional 1.5 million clients on behalf of banks. Basix does this by equipping business correspondence outlets with a mobile technology platform, micro-ATM, and staff training to market various financial and payment services.
Customers of the outlets become customers of the partner bank. Basix has found that the main prerequisites for success are willingness among key parties to build the network, existence of a large agent network, sufficient internet or mobile connectivity and information technology infrastructure, a credit bureau, and strong government regulation.
For FINTQnologies, a financial technology firm recently formed in the Philippines, a partnership with Landbank allowed it to launch a mobile loan-saver product through a digital consumer lending platform with added insurance and auto-savings features. The partnership will enable FINTQnologies to expand to a wider range of municipalities and lower-income populations not least because customers will be able to submit loan applications outside banking hours. Through its use of this technology, Landbank has been able to reduce lending rates by 4 percentage points. Working with the Central Bank of the Philippines, the company was able to use school enrolment data to meet the know-your-customer requirement for their special microinsurance and microsavings products for students and their parents, known as Personal Insurance and Savings Option (PISO) sa Kinabukasan.
MFIs and fintechs face common key challenges: the crucial importance of building trust around new digital financial services and appreciating that doing so takes time, and ensuring reliable and stable service delivery. The latter is often limited by poor telecommunications and energy infrastructure, especially in remote areas. Providers should establish communication channels and complaint resolution mechanisms and be able to address their customers’ risk perceptions and issues, including inability to transact in network downtime, complex and confusing user interfaces, poor customer recourse, opaque fees, and other issues.
Indeed, perhaps because of some of these issues, clients in many cases still prefer face-to-face transactions, as in Cantilan Bank’s experience. It is extremely important that providers engage the local community, allowing community members to help clients use the services (such as ATM withdrawals). For Basix, for example, assisted digitization (step-by-step demonstrations of processes, showing transactions in passbook or receipts) was critical to bringing digital financial services to new clients. While financial education is also critical, costs have to be considered and the real impact of the education must be weighed against these costs.
MFIs and fintech companies each bring unique strengths to the development and deployment of digital financial services. They can leverage each other’s strengths through partnerships to improve value for clients. The potential need for reliable and accessible financial services is vast. And if key issues are addressed, most importantly trust, affordability, and reliability, then digital financial services can help extend financial services to all.