A Heretic in Our Midst
Last month, the Silicon Valley Microfinance Network cosponsored “Microfinance West: The Investment Opportunity Conference.” This event, which brought together some of the leading commercial players in the microfinance field, was heavily geared towards institutional and retail investors in the financial community. The topics ran the gamut from attracting capital to mitigating risk to benchmarking against other asset classes.
Though the focus was clearly financial, heavyweights from the development side also presented, including Elizabeth Funk, Chairman of the Board of Unitus, and Mary Ellen Iskenderian, President of Women’s World Banking. The most provocative comment, however, came from Janine Firpo of Sevak Solutions as she described the evolution of financial services in the US and how technology has continued to lower the costs of transactions.Warning the audience in advance, Janine shared her thoughts on an area that many might consider to be heretical. She challenged the attendees to question whether default rates on microfinance loans were really the right place to focus, or if in fact the emphasis on achieving 99% repayment rates might be somewhat misguided. Most microfinance institutions today follow a high-touch model, relying on a loan officer that makes frequent visits to his or her clients to collect loan payments and continually reinforce their need to repay. While this has been extremely effective it is also inherently unscalable; as the client base increases, the number of loan officers needed to serve them must also increase.
The high-touch model also limits the role that technology, and its associated economies of scale, can play. Technology is often most effective when it enables new ways of doing business. When credit cards first came to the market, they were a very different way of doing business, but today are just one of the many low-touch models used by the mainstream financial industry. And while credit cards have higher default rates than microfinance loans–possibly influenced by the relative anonymity of borrower and lender, they also provide access to credit (and convenience)in ways that were previously unimaginable.
For the industry as a whole, a certain level of default may be just fine. I can hear the counter arguments already, especially from anyone who reads the paper (er, the web) and thinks that this anonymity is one of the drivers of the current mortgage crisis. Certainly for those who are just accessing financial services, with little room for making a mistake, a low-touch model may get them into trouble. Like it or not, technology is coming, likely brought to you by the same types of banks that issued your credit card and perhaps your home mortgage. Whether this bites the hand that fed us, eats our children, or becomes one of the greatest advances in lending to the poor is yet to be seen.