NB Financial Innovation
Fintech or Die: Five Ways Microfinance Can (and Must) Respond to the Digital Age
MicroSave founder and managing director Graham Wright seemed to enjoy playing the provocateur at the 2016 European Microfinance Week, aiming some pointed (and well-justified) barbs at the ways fintech is being leveraged in loan products for low-income clients. He used terms like “rapacious consumer lending” and “automated loan sharking” to describe many popular digital credit products in emerging markets, and decried interest rates that, in Kenya, average at least 49 to 641 percent per year, and often damage the credit-worthiness of poor borrowers. (Check out this video to hear him make his case in a live debate.)
But though his critique drove a lot of the discussion around fintech at the event, Wright’s views on its potential in microfinance are far more bullish than his criticism of its current uses might suggest. We spoke on the sidelines of the conference, and he was unequivocal about fintech’s vital importance to the microfinance sector and broader financial inclusion space. “Very soon, if MFIs don’t develop a strategy and implement fintech behind that strategy, I think they will simply become irrelevant and slowly but surely shrink and die,” he said. “There’s a great range of fintech that is being adopted by MFIs, and that is useful.”
But how can microfinance institutions go about leveraging fintech in their products and practices? Wright laid out five basic options:
- The first way MFIs could potentially use fintech is to set up their own e-money system, he said, like Equity Bank in Kenya. “If you look at Equity Bank now, the vast majority of their transactions are conducted at agents. The vast majority of their loans, 85 percent, are pushed out automatically from the system, and then cashed out and repaid through agents – so there’s a bank that is really leveraging fintech to its full potential.”
- Another option for MFIs is to use their outreach to create a cash-in/cash-out agent network. “We’ve seen this with World Vision in Cambodia, with Finca in DRC, and so on,” he said. “It’s expensive to do, but is an important and high-potential role for MFIs in areas where there are inadequate agent networks.”
- A third option is simply to “ride the rails,” he said, using the payments systems that a fintech or mobile money system provide in order to make loan disbursements or repayments. “You’ve got a very large range of MFIs doing that, a lot of them using the Musoni system that allows them to have the back-end integrated with those payments systems.”
- The fourth option is to use fintech’s data capability to facilitate communication, loan decision-making, and other essential banking functions. “We see a lot of Indian MFIs using this – there’s an organization called Artoo that provides an excellent tablet-based system for loan officers to screen SMEs and facilitate loan decision-making. And of course you’ve also got a growing number of cloud-based core banking systems that tailor to the needs of MFIs specifically – Oradian is an example of that.”
- “The fifth option that we always put on the table for MFIs is to wait and watch,” he said, “because everything is moving so quickly, it’s terribly difficult to figure out what to do, and we’re not really sure which of these fintech companies will survive and blossom into the future. But that period for being able to wait and watch is rapidly disappearing. … Fintech offers opportunities to reduce cost structures, improve loan decision-making, improve communication with clients, and so on, that MFIs really do need to leverage into the future.”
Wright also gave a run-down of how fintech is transforming financial service delivery in India, a country that has become the global hotbed of digital financial inclusion. He described how MicroSave is helping the Indian government with the gargantuan task of digitizing government-to-person payments: These amount to about $35 billion, he said, and the objective is to digitize almost all of them. The organization is also working with some of India’s new payments and small finance banks, to help them deliver products over the country’s emerging digital infrastructure. “Ultimately what we’re all working toward is a full digital ecosystem, serviced by 200,000 agents providing cash-in/cash-out, and leveraging the Unified Payments Interface, which will create a digital footprint for each and every Indian citizen.” According to Wright, this work will eventually allow India to “democratize credit,” by turning the lending process on its head: “In the future … we believe and hope that, as an Indian citizen, I’ll be able to open up my digital locker to a variety of banks, saying ‘I need 10,000 rupees, repayable in a year. What rates of interest and what package can you offer me?’ So we invert the relationship and make the banks bid for the customers, instead of the customers being supplicant to the banks.” And he added that these innovations aren’t just relevant to India, because more and more countries are looking to emulate its model. “We’re receiving increasing numbers of calls from governments across the globe, saying ‘Can you help us understand what’s going on in India, and tailor it for our country?'”
In a characteristically frank and insightful discussion, Wright also shared his views on whether microfinance has turned a corner, after years of controversy and disappointing impact studies. (Money quote: “The industry lived this lie for way too long, that we are funding microenterprises.”) Check out the full Q&A below.
James Militzer is the senior editor of NextBillion.