A three-fold approach to successfully digitising a microfinance business
Christian Ruehmer, Bamboo Capital Partners: how MFIs are supposed to react amid the digital disruption?
Digital innovation is all the rage in the financial inclusion sector these days. Show up at a conference related to financial inclusion or microfinance, and you are almost guaranteed to hear the words digital credit, mobile wallets and big data.
However, the question that goes unanswered at such conferences is how microfinance institutions (MFIs) are supposed to react amid this digital disruption. While there is a strong consensus that MFIs must “go digital” to thrive, the steps they have to take to achieve this are not entirely clear.
MFIs are under pressure to adjust and fear “missing the boat” when it comes to digital innovation, but reacting too quickly and aggressively is equally threatening. The business model of most MFIs revolves around a “brick and mortar” approach, which has worked reasonably well for the last 40 years. Such a profitable model does not have to be given up without reason.
The pressure on MFIs can lead to short sighted reactions when it comes to digitisation. Many institutions either invest in expensive full-scale overhauls that take years to implement, or patch together a variety of partial solutions with uncoordinated vendors, which requires launching entirely new products and instituting ad-hoc process changes.
It is not necessary to revolutionise the business process and product portfolio all at once. As with any change management initiative, a step-by-step approach toward a clear vision of the target outcome is still recommended. With such a plan, the MFI stays agile enough to adjust along the way.
Based on my experience of working with MFIs struggling to navigate to an increasingly digitised business model, I’ve developed a three-fold approach to help MFIs approach the challenges of digitisation. It is cost efficient, minimally disruptive to ongoing revenue generation and easy for staff to adjust to.
The need for data – digitising current loan products
Initially, MFIs should replace the paper-based loan application process with a digital data collection platform. This platform needs to be flexible, enabling staff at MFIs to digitise information – whether they’re sitting behind a computer in the branch or collecting data via a mobile device during a borrower visit.
Putting the right data collection tools in the hands of staff is the critical first step towards building a more data-driven microfinance business. Instilling a data culture among staff is an often-overlooked aspect of digital transformation projects. It is important to select a digital solution that allows for digitising existing processes first in order to not significantly disrupt day-to-day operations and help staff adjust quickly to using familiar forms and processes in a digital format.
During this first phase, MFIs will begin to build a digital history of borrower attributes and staff performance and start to gain insights from portfolio reporting. While not necessary, institutions also have the option to link the platform with their core banking system (CBS). The functionality of the digital data collection platform is limited but it is an essential and cost-effective first step to digital transformation. Most importantly, it does not require a huge overhaul of operations, and can be setup within a few weeks.
Learning from data to drive new insights
After building a core data library, MFIs can then turn their attention to the complete digitisation of the loan cycle on one platform. The lending and deposit processes are digitised. In addition, functions the MFI is conducting, based on a combination of paper, spreadsheets and data from the CBS, are also transferred to the platform.
The standardisation of data collection, analysis and reporting minimises the risk that the digitisation efforts result in a patchwork of tools and systems. By transferring these functions to one platform, the MFI improves on the functionality already offered by CBS, which primarily collect data with a focus on financial accounting and regulatory reporting.
The digital platform is independent from the CBS, but integrates and communicates with it. It stores historical data and offers more sophisticated reporting on efficiency, performance, and risk, to help leadership make better informed decisions. For example, data on declined clients becomes available and models, such as scoring, can rely on better data quality.
As a result, knowledge about clients, sectors and markets, which previously was only collected by relationship managers and stored primarily in their heads is now institutionalised. This provides decision makers with easy access to this data to inform strategy and mitigate the costs of knowledge loss if an individual loan officer leaves the institution.
Launching new digital products
Once an institution has embedded digitisation in its operations, the process of launching new products digitally becomes much easier. Any successful digital platform should replicate traditional financial products offered by MFIs. Lending products can be split in three main products: term loans, credit lines and contingent credit. Deposits are split into two main products, either with fixed or with infinite maturity.
Full digitisation through the platform now opens the door to variations of those products. For example, invoice discounting is easier to offer if clients can provide the invoices in a digital form. New and alternative products can be added by connecting to an open API, including products managed through a mobile wallet, and even peer-to-peer (P2P) platforms.
All those products are channeled through the same platform, offering a smooth integration and even greater opportunities for analytics, risk mitigation and performance enhancement. The efficiencies gained reduce operating costs, savings which could be used to expand access to products, and even lower interest rates for borrowers.
Taking MFIs – and their benefits – to the next level
MFIs are fortunate as they already have a successful and operational business model to build digital capability on, which makes the transition easier as financing resources can be generated from operations. By following this three-fold approach, MFIs can master the challenges of digitisation and navigate this new world of financial technology from a position of strength.
Ultimately, if harnessed effectively, digitisation can pave the way for greater funding of the individuals and businesses in most need the world over. The upside potential, through positive economic and social impact, is what makes getting the transition from bricks and mortar to digital so important.
By Christian Ruehmer, head of risk and compliance at Bamboo Capital Partners, and executive chairman of First Access
Bamboo Capital Partners is a private equity (PE) firm delivering social and financial value.
First Access is a smart data platform for analytics and credit scoring in emerging markets.
