FinTechs, neobanks, blockchain, super platforms, artificial intelligence – with all the exciting changes in technology creating new business models for financial inclusion, it is easy to think that older models like microfinance have been eclipsed. But have they? There is no doubt that microfinance institutions (MFIs) are highly motivated to serve the poor. But to continue playing that role in the long run, they need to enter the digital age by embracing new technologies and rethinking their business models.

Access digital infrastructure through partnerships

MFIs are never going to be systemically important payments players like banks, but that does not mean they cannot leverage this digital infrastructure through partnerships.Most MFIs are ill-equipped to handle these negotiations, so it is important to stay educated about the larger ecosystem and the technological and business trends driving it. Microfinance has a relatively good track record of serving the poor in a socially responsible way. But it must adapt to continue serving those customers in the face of new and very different competition. To be successful, MFIs will need to tackle this challenge head on. NanoBNK Mission is to partner with Banks [whether they are Tier 2/ Tier 3 Banks as well as Regional or Global Banks], becoming their technology partner and helping them reduce their cost-to-serve ratio through the use of Financial Inclusion Applications such as Digital Banking  [AI/RPA]; Micro-Finance [Big Data Scoring] and Remittance [Based on Blockchain].

Microfinance in the digital age

  • Reducing operational risk

For microfinance institutions, the use of digital channels can mitigate cash risk and increase operational efficiency. Current microfinance lending models are cash-intensive, and this exposes the institution and customer to cash risk, such as during storage and transit, which incurs additional costs. As such, time that could have been used more productively is spent managing this risk. Through digital technology, clients have the flexibility to repay loans through their mobile phones, avoiding the risks of cash-in-transit.

  • Customer centricity                                                                                       

Digital technology and data allow financial service providers to more effectively serve the financially excluded with a “customer-centric” approach. Using specialized algorithms, providers can analyse information on a customer’s mobile telephone and non-traditional data to develop the credit profile of a client when they make lending decisions. These digital footprints help financial service providers interact better with customers, and provides a range of financial products and services based on a deeper understanding of their financial needs.

  • New business models

Mobile banking supports new business models through mobile technology and data analytics in credit scoring, decision and underwriting processes. However, implementation has been led by mobile network operators, and to some extent large commercial banks and a small number of new cashless microfinance institutions. While traditional institutes are known for their expertise in clients’ needs, they must adapt and develop more capacity to stay competitive and relevant to take advantage of mobile banking services or those that are soon to become available in their countries.

Additionally, crowdfunding can improve access to finance for unserved and underserved borrowers which creates cheaper, community-based financial products, and facilitates access to digital investments for people with limited options to receive financial returns on their savings.

  • Partnerships and collaboration

There is a need for a range of different financial service providers, be it banks and non-banks (telecommunications companies or fintechs). Just like Uber and Airbnb, which transformed the transportation and hotel industries, innovation in algorithm-based credit risk assessment, psychometrics testing and crowdfunding platforms are bound to change the financial services industry.

  • Building trust

Microfinance institutions and fintechs face similar challenges in building trust around new digital financial services, and ensuring reliable and stable service delivery takes time. The latter is often limited by poor telecommunications and energy infrastructure, especially in remote areas. Providers should establish communication channels and complaint resolution mechanisms which can address customers’ risk perceptions. Using approaches like assisted digitization (step-by-step demonstrations of processes that show transactions in passbooks or receipts) to help the client transition to digital financial services should also be considered.

  • Consumer protection

Clients of new digital technologies may face new risks ranging from poor customer recourse mechanisms, fraud, data privacy and security breach, service unavailability, hidden fees, discrimination, insolvency to unauthorized ads. It will be critical for financial service providers to meet user expectations in order to achieve financial inclusion.

Digital technology has emerged as an important driver of innovation, competitiveness and growth in microfinance. By leveraging the nearly ubiquitous growth of mobile phones, digitization can reduce cost, increase efficiency and allow financial service providers to reach new clients. By developing an inclusive and sustainable digital financial ecosystem through substantial investment, skilled resources, adequate infrastructure, agile processes, and a conducive regulatory environment, it can foster more widespread adoption and usage.