Should Microfinance Go Digital?
>> Authored by Nitish Narain and Sonal Agrawal (MicroSave)
“Nothing is as powerful as an idea whose time has come”- Victor Hugo
Recently, a new partnership has emerged between digital financial service providers and microfinance institutions to address the challenges of financial access among the un/under banked populations globally. The partnership can potentially offer benefits to not only the two partners but also other stakeholders including customers, MFI frontline staff and mobile money agents.
In this blog, we discuss the benefits that the partnership is likely to bring to the stakeholders.
Benefits for MFIs
The partnership can help MFIs reduce costs, increase outreach, mitigate risks, deliver customer-centric products, and improve customer experience through increased convenience.
We discuss below some of the benefits that the MFIs are set to achieve.
- With the use of digital finance, MFIs can mitigate cash risk as well as increase operational efficiency. The prevalent group lending microfinance model is highly cash intensive where both loan disbursement and repayment is made in cash, generally at customers’ doorsteps. The MFIs (and their customers) are thus exposed to cash risk (storage and transit) and incur cost to manage cash and related risks. This also eats into the MFI’s frontline staff time. They could have used this time more gainfully by sourcing new clients or perhaps providing more quality service to their existing customers. Carrying of cash to and from group meetings to the MFI’s branch and for deposit at the bank branch poses a threat to the lives of MFI’s frontline staff. As a result of all of these factors, the operational efficiency of MFIs is affected. With digital finance, customers can deposit cash into the MFI’s accounts at the nearest agent outlet. However, in such cases, the agent bears the cash handling risk.
- The MFIs can offer multiple products efficiently using digital finance. Traditionally MFIs have been providing a single credit product to their customers. Numerous research studies have shown that the clients require other financial products including, varied credit products, savings and other deposit products, insurance, pension, remittances etc. The need to diversify product offering for MFIs is more pronounced in India, especially after the Andhra crisis. (See Video: Going Beyond a Single Use of “No-Frills” Account: The Concept of Deferred Payments). Partnership with digital financial service providers gives MFIs the access to their partner network. Thus, the MFIs can offer complementary financial and non-financial products and services which they might not have been able to offer otherwise. In India, where MFIs are not allowed to accept savings, such partnerships have provided MFIs the opportunity to offer ‘saving deposit accounts’ serviced at the client doorstep. The product diversification helps the MFI to further strengthen their relationship with clients and at the same time gain insights on their financial behaviour. Since the customer transaction information is available in digital form, it can be used for detailed analytics to design and deliver customer-centric products.
- Digital finance, when deployed as an alternate delivery channel can help the MFI increase outreach in a cost-effective manner. The MFIs can leverage the digital finance distribution channel to design and deliver micro-credit products to non-MFI customers who regularly transact at such agent outlets. The prevalent microfinance models are resource intensive and sometime serving customers in remote geographies and difficult terrains becomes prohibitive. The large network of agents prove helpful to increase outreach to such remote locations.
|Source: Musoni: Next Generation Microfinance|
Benefits for digital finance service providers and agents
The digital finance service providers through partnership with MFIs not only get access to the customer base of the MFIs but can also leverage the relationship that the MFIs have with their clients. This ensures a permanent catchment of customers for the agents who carry out regular transactions on account of loan repayment and saving deposits, if applicable. It also generates the possibility for the agents to cross-sell other products and services such as mobile airtime recharge, utility bill payments.
Benefits for customers
The partnership of MFIs and digital financial service providers also benefit customers. Microfinance clients get the flexibility to repay loans through their mobile phones without even going to MFI branches and avoid cash in transit risk. Additionally, they get access to other financial products and services, including saving, insurance, pension and remittance – all serviced through their mobile phone.
Several MFIs have already started to get into partnerships with digital financial service providers to leverage these benefits. Faulu and KWFT in Kenya are now using mobile banking services to allow clients to make loan repayments and deposits using their mobile phones.
Though many MFIs have started using digital finance, there are obvious challenges that need to be overcome. Some of the challenges such as reluctance of clients to pay mobile money charges, impact on group cohesion, low penetration of mobile money agents and bringing change in customer’s existing behaviour to adopt mobile money still need to be carefully addressed.