As the risks of a solvency crisis grow for smaller institutions in the microfinance sector (Tier 2 and 3 institutions), CGAP has been calling for coordination among policy makers, private funders, development finance institutions (DFIs) and donors to help mitigate the threat. As part of this call, CGAP has highlighted the need for a digitization approach that puts microfinance customers at the center. This is because digitization doesn’t just improve the odds of survival for individual microfinance providers and the microfinance sector more generally. When done right, with a focus on creating value for customers, it can also improve the resilience of the people microfinance providers serve.
A value-driven approach to digitization maximizes value for both customer and provider
A value-driven approach to digitization can improve the bottom line for microfinance providers by increasing their efficiency and scale. For customers, it can create value by making financial services more affordable, accessible and suitable to their needs. This type of digitization can also improve the experience of accessing and using technology-enabled products and services.
CGAP recently published a paper with a set of case studies that illustrate this value-based approach. For example, Bancamía in Colombia has taken a value-driven approach to digitization grounded in its focus on “relational banking,” or the idea that banking should be built on trust and accessible to mass market customers. Traditionally, Bancamía had operated through a series of expensive branches staffed by around 20 people. By creating an app that enables staff to open accounts, process loan applications, accept payments, and access customer information on a tablet, the company has boosted the productivity of its commercial officers by 27% and cut loan processing time in half. This has allowed Bancamía to expand into rural areas with leaner branches that can be operated by just four or five staff.
But the value creation doesn’t end with the business. At a time when many are dealing with the challenges of COVID-19, customers have enjoyed easier and faster access to financial services, along with in-person customer service in more places and a new customer app. During 2020, the number of women using Bancamía’s digital channels grew 176%, and transactions by women grew 227%.
Another MFI highlighted in the paper, Amret Microfinance in Cambodia, has grown a US$22 million savings program on the back of its mobile savings program, enabling officers to collect and consolidate small saving amounts during customer visits. FINCA Impact Finance has reduced its costs and improved customer access by automating and streamlining the loan approval process for 30-50% of follow-up loans. Microfund for Women in Jordan saw a 17% reduction in administrative and teller staff in 2020 through increased use of its express branch and because of its distribution channel initiatives.
Microfinance providers need to increase value quickly
As they seek to deal with the consequences of the pandemic, microfinance providers should be prioritizing efforts that create the most value as quickly as possible. This involves identifying low-hanging fruit and finding ways to make incremental improvements to what they are already doing. As brick-and-mortar ways of doing business limit their horizons, digitizing could be one way to make those improvements.
To digitize in a manner that brings value quickly and effectively, providers also have to abandon their traditional sequential approach to project implementation, which often leads to an inability to adapt and make changes on the go. Instead, providers should adopt an agile, iterative methodology in which they are continually soliciting and integrating customer feedback. Starting with a minimum viable product (MVP) approach enables providers to focus on speed and usability while controlling development costs. It also makes it easier to incorporate customer feedback on early product features.
Funders can help accelerate this shift by focusing solvency support on microfinance providers that can commit to an MVP approach to digitization.
Microfinance providers need to measure the value created
CGAP’s call for coordination outlines the difficult choices that investors may need to make about which microfinance providers they support in the future. Providers can help facilitate these decisions by measuring the value digitization creates for their businesses and customers. Visibility into the value of digital solutions will not only increase investor confidence; it will also help microfinance providers clarify their options for future development. CGAP is working to help providers identify appropriate metrics and adopt the measurement tools to quantify their digital solutions’ impact on customer behavior.
CGAP’s efforts in this area are focused on helping to define successful digitization by showcasing cases of success and redirecting microfinance providers from making the mistakes that have haunted their predecessors. CGAP also seeks to engage directly with microfinance providers by helping them to measure value and create the transparency necessary to boost funder confidence, identify low-hanging fruit (such as automated credit renewal) and pursue incremental value creation (MVPs) instead of overelaborate solutions.
This post is part of the CGAP blog series, "Microfinance Solvency and COVID-19," which looks at key issues related to microfinance providers' solvency amid COVID-19 and explores ways forward for the sector.