The digital revolution is profoundly transforming the world of finance and forcing financial service providers to adapt. In this interview, Graham Wright, Executive Director of Microsave, discusses the challenges and risks of this necessary transition for microfinance.
For many experts, the digitalisation of microfinance is essential to the survival of the sector. According to you, what are the benefits of digitalisation to microfinance?
There are at least 4 main benefits to digitalisation.
First, it allows MFIs to increase revenues and reduce costs. McKinsey estimate that financial institutions’ digital transformation could add 45% to their annual net revenues: 15% from enhanced product uptake and 30% from reduced operational costs. The International Finance Corporation calculates that it reduces the annual cost to serve a customer by 80%, and an 18% reduction in the cost-to-income ratio (a classic efficiency measure).
Second, it brings the opportunity to leverage relationship banking. Traditional MFIs and banks have important competitive advantages over fintech. They have valued, historical relationships with millions of customers, they have data on those customers’ financial behaviour, they have the infrastructure to provide the human touch that low-income customers crave. Furthermore, traditional financial institutions have the right regulatory clearances and compliance to offer financial services – something that fintechs often lack.
Third, it allows MFIs to provide personalized customer experience. Traditional financial institutions need to be cognizant of the changing demographic and cultural context, namely the rise of millennials and mobile-first generation, to develop and deliver first-class personalized user-experience. A great user experience involves solutions adapted to the customers’ behaviours and attitudes.
Finally, it provides the opportunity to deliver services with a stronger social purpose. Looking into the medium term, the tech revolution allows us to answer the “elephant in the room”: financial inclusion, but to what end? Tech allows us to link pure financial services to the real-world economy.
For example, MSC is working to develop “precision agriculture” in India. Under this project, data is collected on a farmer’s land holding and soil quality, as well as the seeds, fertilizers and pesticides he or she has purchased. This allows AI-powered chat bots to provide tailored coaching to optimize both yields and the prices the farmer gets in the market.
… And what are the main risks?
I would first like to dispel some of the myth around digital transformation. It does not solve all organisational problems and does not suit all organisations. It is crucial for ab organisation to truly assess its needs and how technology can best respond to those.
Then there are obviously many risks associated with digital transformation, the main one being that in the transformation process, MFIs loose focus on the social reason for such transformation: improving the social role of microfinance (by reducing borrowing costs, improving user experience etc.).
Other risks include the unnecessary proliferation of products and services, as well as the total digitalisation of borrowing services without maintaining some human interactions.
Given the importance of digitalisation, is there a strategy to adopt to integrate more digital tools in a relevant and effective way in the microfinance sector?
Ultimately, a financial institution needs a comprehensive, integrated strategy for digitalisation – and then to break it down into manageable pieces – so that digital transformation is a journey. Just focusing on processes or channels will not be enough.
Once the overall strategy has been defined, there are many sub-strategies. The first might be to digitalise processes – after all digital processes are quicker, more efficient and cheaper than manual ones. A digital transformation of processes reduces the cost and friction points of delivering services. It provides the data needed to supply a better service offering to end-users and increasingly to businesses.
A second sub-strategy lies in the digitisation of the products and services themselves. The rise (and flexibility) of mobile banking for instance necessarily requires that MFIs adapt their product to meet this new demand. That being said, new digital products should be developed in a flexible manner so as to respond to client’s preferences.
A third sub-strategy consists of digitalizing channels which involves using technology platforms to improve customer acquisition and user experience. The emergence of digital platforms and alternative channels has profoundly changed the way customers do their banking. Customers now prefer self-service technology platforms that give them freedom, choice, and control. In 2018, the Equity Bank Kenya customers carried out 97% of their transactions outside the bank branches.
In your opinion, do MFIs necessarily have to digitalize in order not to disappear?
MFIs face an existential threat from digital technology. This is because fintechs are disrupting traditional financial services markets by creating new financial services that are more efficient and able to reach populations generally served by MFIs.
So MFIs must embrace digital transformation. They must harness the potential of their legacy of experience and relationships. They must work with fintechs to deliver personalised, digitally-enabled services. And MFIs must work through staff and agents to provide the human touch and assistance that so many still seek.
The digital revolution offers the chance to deliver rapid, responsive and differentiated financial and social services to low-income people in a way that we have never been able to do in the past. In this context, MFIs really have an added-value, since they know very well their clients and the regions where they operate. Their future will now depend on their ability to bank on their expertise, so that the digital revolution is both high tech and high touch.
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