Microfinance and financial technology
THE Microfinance Council of the Philippines reports that its members are serving five million active clients, with four million borrowers taking average loans ofP10,000. A typical loan is given face-to-face by the account officer to the borrower, whose optimum case load is 500 clients. Traditional loan processing is labor-intensive, because banking services are brought to the doorsteps of the clients. It took decades for micro finance to reach its critical scale, with a remarkable collection rate of at least 99 percent. On the other side of the spectrum is financial technology (fintech) innovations, which is gaining traction for its cost- effectiveness and faster service delivery in terms of scaling up.
These developments in fintech amaze a traditional microfinance practitioner like me for the reason that through the use of data analytics, micro loan processing can be completed within minutes even without meeting the client. This deviates from the usual procedure wherein a first-time microfinance borrower is interviewed first by the account officer and unit manager prior to loan disbursement. Thus, fintech can solve issues of labor intensiveness and can effect tremendous scale faster.
In my internship in Boston for a start-up company doing credit analytics using call data records, my regular research work brought to my attention a successful case in Kenya where a bank and a telecommunication company partnership was able to reach five million clients in just one year with impressive borrower ratio and these are manned by less than 50 personnel. So, if this is the case, why don’t microfinance institutions jump into embracing fintech? Actually, there were similar attempts made here in the Philippines but they need further improvements. So, what did I learn and observe from these developments?
- In Kenya, almost everybody is accustomed to using e-wallet/cellphone in paying for almost everything while here in the Philippines, we like using cash. So, familiarity in e-commerce/mobile money is still lacking among the majority of Filipinos.
- In our situation, a properly designed system wherein there is a proper blend of human touch and technology must come into play. We can argue that in terms of loan origination, data analytics will support client assessment, making the process faster while mobile banking tapping sari-sari stores will ease out manual collection. However, it would be too early to conclude for now that it will replace account officers. Becoming purely automated and technology-reliant will cause operational problems simply because majority of microfinance clients are above 40 years old, who in general value relationship and face-to- face transactions. Hence, the key challenge is the proper blend and design of products and services, focusing on what can be aided by technology and which one should be done face-to-face.
- A centralized credit bureau, which is underway via Credit Information Corp. (CIC), will strengthen data analysis but will require integration with MiDAS (Microfinance Information Data Sharing System), a credit bureau formed by the seven biggest microfinance players in the country in 2012. MiDAS collects clients’ information that are not present in the regular credit bureau.
- Microfinance should look at fintech as a long-term investment and wait patiently for financial returns. A robust technology for mobile banking and e-commerce requires hundreds of millions of pesos to establish, which can be boxed out easily by finance directors arguing its uncertain return on investment.
- Huge investment issues can be addressed by a microfinance institution through partnership with a fintech provider but it must be ready for the dynamics in partnerships. Fintech providers are commonly bound by aggressive targets which a microfinance institution with a development mandate may find unsuitable to its organizational culture.
- Reaching critical scale, whether it is for the purpose of profiting or social impact, is a must in this kind of business. Otherwise, the cost of technology cannot be sustained. Training non-millennial clients and designing the right kind of product and service take time and resources, hence choosing the right partner which is willing to wait for its investment to bear fruit is also critical.
- Business development services for microfinance clients will add value to a fintech partnership. Other than bills payment, loan collection, remittance and micro insurance cross-selling, non-financial services such as financial literacy, e-commerce trading, and supplemental apps for training, which I will further discuss in my next write-up, will be a key component to success and service differentiator.
I would like to thank my friends—Raymund Serios of Negros Women for Tomorrow Foundation(NWTF); Marivic Austria of CARD Bank; and Allan Sicat of Microfinance Council of the Philippines (MCPI)— for sharing their opinion on the subject. Nonetheless, views expressed in this article are solely the author’s.