Lisa Kienzle

Microfinance Goes Digital: Opportunities and challenges in enabling pro-poor financial institutions to connect to the digital ecosystem

The ability to provide financial services via digital channels is opening up new opportunities to reach populations that previously were unserved. Mobile money services are available in 60 percent of developing countries, and 16 countries now have more mobile money accounts than bank accounts.

But though mobile money access has grown, product usage is still narrow – in most cases (87 percent of global transactions), customers use digital finance to send money or buy airtime exclusively.

For years the financial services industry has talked about riding the mobile money rails to deliver services beyond payments. And more organizations are starting to do so: According to GSMA, 26 mobile savings and 37 mobile credit services are now live. Inspired by the success of Safaricom’s M-Shwari in Kenya, several operators have partnered with banks to offer mass-market short-term loans. In Tanzania, Tigo went a step further to allow customers to earn interest on mobile wallets. And in West Africa, MTN has been offering basic life insurance to mobile money users for years.

There is no question that these innovations are exciting and are pushing mobile financial inclusion forward. But in many cases, these innovations address niche segments (e.g., energy payments, merchant cash advances), are led by larger bank-MNO partnerships and address short-term working capital (e.g., CBA and Safaricom and Vodacom). In contrast, poor customers need access to a variety of financial tools – not just a stand-alone savings account or a niche credit product. They also need access to more capital than a short-term low-value loan provides.

Though operators have the distribution network, as non-financial institutions there is only so much product innovation that they alone can offer. And while licensed financial institutions have the expertise and client knowledge to develop appropriate products, they often don’t have the access offered by an agency network. Linking financial institutions to mobile network operators for wallet-to-account interoperability enables formal financial institutions to offer their full range of products and services through the mobile money agency network.

Using mobile money as a channel for financial institutions provides clear benefits to each party. Operators see increased transaction revenue due to greater activity rates from current customers or engagement with new customer segments, and financial institutions are able to reach customers more efficiently and conveniently at a lower cost.

As more and more financial institutions and operators have begun engaging in partnerships, two challenges have emerged. The first involves the difficulty of forging partnerships that span different industries, regulatory spheres, business and service models, and technology systems. Early attempts to integrate formal institutions and mobile network operators (MNOs) ran into several technical and integration challenges; financial institution systems are often incompatible with operators, making reconciliation a challenge. Over the years, some institutions have addressed this problem by investing in their own platforms, while others have partnered with third-party technical providers. Most recently, Equity Bank is trying a new route by acquiring their own MVNO (mobile virtual network operator) license. But in spite of progress on this front, a second challenge has persisted: Often smaller microfinance institutions (MFIs) and institutions focused on the poor, which typically lack the resources for such approaches, have been forced to watch from the sidelines.

Working to address both of these issues, three years ago Grameen Foundation (a NextBillion content partner) launched the Mobile Financial Services Accelerator program, with funding help from the Bill & Melinda Gates Foundation. This project focused on helping financial institutions with an emphasis on services for the poor to offer current and new products via mobile money agency networks. As part of this program, Grameen Foundation partnered with Centenary Bank and Pride MDI, two financial institutions in Uganda. Both institutions are focused on reaching the rural poor, and they were committed to doing so using technology.

Throughout the process of connecting these parties to the digital ecosystem, we identified several considerations:

  • “Going digital” is not a technology exercise – it requires full buy-in from management and must be seen as a strategic priority
  • Leveraging a digital channel creates a new model of engaging with customers – and requires the entire organization to change the way it markets to, services and engages with customers
  • Just making the channel available is insufficient – to drive uptake and usage, face-to-face interactions are critical to teach poor customers how to use the product and to provide support for the first transactions

In upcoming posts we’ll share lessons on what it takes for an MFI to go digital. These include technology considerations for financial institution and MNO connections; go-to-market strategies for a mobile agent partnership; aligning human resources to deliver services to the poor; creating new products for the digital channel; and measuring the poverty outreach of these services. In our next post we will discuss the technology platform that enables the delivery of digital financial services.

Lisa Kienzle manages global operations and strategy for Grameen Foundation’s financial services initiatives.

microfinance, mobile finance