MFIs might prove to be ideal partners for many e/m-banking service providers. However, in the absence of a clear cut value proposition, chances are that they just might not be interested. In this video, Denny George examines the potential value propositions for MFIs to have a stake in the evolving digital financial services ecosystem.
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Responsible digital finance
Digital Financial Services (DFS) offers the potential to bring billions of previously financially excluded customers into the ambit of formal financial services.
It has the power to transcend the barriers of financial exclusion as it reduces the costs associated with the small value transactions; reaches out to larger numbers of people with innovative, low cost technology (mobile phones, card based systems, POS machines etc) and delivery channels (airtime sellers, grocery shop owners etc.); overcomes the issue of lack of physical infrastructure needed to distribute the financial products.
While there is a huge opportunity to leverage digital technology, there are challenges that can potentially hamper the potential.
Some of the challenges are:
- Increasing frauds, whether they are consumer driven, agent driven or system driven;
- Low consumer awareness (both about technology and financial services);
- Low agent awareness and inadequate investments in agent training; and
- Emergence of new and varied types of risks, pertaining to processes, technology, marketing / communication, liquidity management etc.
These challenges have implications for:
- The financial inclusion agenda as the frauds/poor client protection affects trust (of clients in the solution and on the system) and thus of the product uptake.
- Uptake of the products and service as low trust in service can impede the service take-up.
- The business case for agents and for the sector as a whole as the low take up not only from the customers, but also from the agents as it reduced the business case.
- The costs – both financial and non-financial. There are high costs – for business, customers and agents – due to increased transaction costs due to frauds, risks, increased charges for customers, etc.
The players in the digital finance space should bring in lessons on ‘responsible services’ from the financial sector so as to prevent negative consequences of frauds and risks.
Responsible Finance by definition means offering financial services in an accountable, transparent and ethical manner.
In traditional finance, it meant to be a guiding principle for the financial service providers to incorporate transparency, full disclosure, privacy of data, high quality standards in products and services, fairness in pricing, dignified treatment of clients, provision of complaints redressal mechanism in their practices. This typically resulted into activities around customer protection, targeted financial education training, building staff capacities, governance among other things.
In the digital finance space too, the elements of what makes the services ‘responsible’ remains the same, but with the complexities introduced by the technology, eco system and scale.
- Several types of technology – mobile, POS, card based, internet etc – each of which comes with its own risks and challenges.
- Complex and overlapping processes at almost each level of the players.
- For an industry still struggling to prove and become sustainable, the “responsible” elements of advocacy should act as ‘enablers’ and not as ‘disablers’.
- Grey area of regulation or even self regulating standards.
- Double jeopardy of not only the consumer awareness, but also of the agent awareness.
- Distances between the key players of the ecosystem. For instance, an agent might be hundreds of miles away from the agent network manager (ANM), thus making monitoring and capacity building difficult.
- Multiplicity of players and the complex web of roles. This makes fixing responsibility and bringing accountability that challenging.
Though regulators, support organisations and donors / funders are near the perimeter of the eco system, they play a critical role in risk management and fraud prevention.
- Regulators – by setting enabling guidelines for all the players to manages risks better and prevent fraud;
- Support organisations (consulting firms, training institutes, advocacy groups) – by building the capacities and capabilities of various stakeholders and sharing the best practices across geographies; and
- Donors / funders – by creating the right incentives for the players to adopt the right practices considering the customer protection and long term sustainability.
Listen In Order To Protect Clients
How can a microfinance institution put client protection into practice? Start the process by listening to clients and staff. The experience of ASKI from the Philippines showcases a culture of listening that is helping the organisation deepen staff members’ understanding of, and increasing responsibility to clients’ welfare. With the use of a simple Servqual tool developed by MicroSave, ASKI has not only strengthened its capacity to listen. It has also increased its ability to process and feed relevant information to management for decision making and action to benefit its clients.
Design Considerations for Credit Scorecard for MSME Financing
Globally, Micro, Small and Medium enterprises (MSMEs) have been playing a crucial role in promoting economic development. MSMEs contribute to the local economy by creation of employment opportunities for millions and in the process inject much-needed capital and liquidity in the local economy. However, one of the major challenges faced by MSMEs is the lack of access to finance. As per a recent McKinsey1 study, 15-40% of SMEs cite finance as the most important obstacle to growth. On the other hand, financial institutions are wary of financing MSMEs and cite a variety of reasons including lack of reliable financial information, poor financial record keeping and absence of credit history. High transaction costs in servicing MSMEs as well as a perceived high-risk profile further add to the distrust. Through this paper, we suggest a fresh approach to MSME finance by introducing a simple but effective credit scorecard. We base our approach on practical examples from MicroSave’s work in expanding access to finance for MSMEs and hope that this approach will help financial institutions to look at MSMEs as a strategic segment.
White Labelled Mobile Financial Services
White labelling is quite common in the financial services sector. Smaller banks sometimes outsource their credit card operations to larger banks. The larger bank issues and processes the credit cards as white label cards, typically for a fee, allowing the smaller bank to brand the cards as their own without having to invest in the necessary infrastructure. There are also white labelled ATMs where a third party sets up an independent ATM network which can facilitate cash withdrawals on behalf of multiple partner banks. Taking a leaf out of African countries, Canada and Europe, Reserve Bank of India recently permitted non-banking companies to set up and run ATMs for commercial banks. In mobile financial services sector, white labelling is becoming increasingly popular. In this video, MSC’s Senior Analyst, Shivshankar V., outlines the benefits of white labelling mobile financial services and provides quick reminder to financial service providers on things to remember while white labelling mobile financial services.
Pitfalls of SME Lending
Microfinance banks and MFIs generally venture in to SME financing without understanding the model and common pitfalls, which might result in losing the portfolio. In this episode, MSC’s Specialist, Venkata N. A., discusses the common pitfalls of SME financing. In his words “SME financing is completely different from Joint Liability Group model of lending. It has different HR requirements, different organisational structure, different MIS requirements etc.” The common pitfalls are lack of financial statements, lack of industry benchmarks, lack of credit history, lack of skilled appraisers and one size fits all dilemmas. It is very important for any institution to understand the pitfalls of SME financing and also to conduct institutional assessment before venturing in to it.