From Response to Recovery: How the COVID-19 Crisis Will Accelerate Digitization in Microfinance
FINCA Forward is an innovation and investment advisory platform that facilitates commercial partnerships between early-stage fintechs and microfinance institutions (MFIs). We deploy our hypothesis-driven matching service to allow MFIs to evaluate technology solutions designed to address strategic and critical operational challenges and early-stage fintechs to iterate on their product or service with MFI customer feedback. The startups we work with also receive tailored business advisory assistance from our platform partners and are eligible for investment from FINCA Ventures.
Microfinance institutions (MFIs) are increasingly embracing new technologies to transform traditional brick-and-mortar business models to provide financial products to low-income customers affordably. Yet, the path to banking digitization remains challenging. Some MFIs pursue a path of full-scale banking system transformation while others take a more gradual approach, adding new products or replacing processes over time. In both cases, understanding the implications of new technologies, including the impact on customers, employees, internal processes and infrastructure, can be difficult. According to studies, while the rise of digital banking has forced the financial sector to evolve, nearly 84 percent of digital transformations fail without adequate support.
Yet, digitization is needed now more than ever. The onset of COVID-19 has created an urgency for digitization born out of operational necessity. Movement restrictions, social distancing and the other methods governments have utilized to slow the pandemic have resulted in an acute operational crisis for MFIs that exposed several specific and immediate digitization needs as the sector aims to continue effectively serving its vulnerable low-income customers. To overcome this crisis, MFIs will need to rely on digital solutions and processes to perform critical back, middle and front-office functions.
Over one year ago, in partnership with USAID, we launched FINCA Forward, an innovation and investment advisory platform that gives MFIs a systematic approach to define actionable problem statements, engage with financial technology companies (fintechs) and test potential solutions before embarking on full-scale implementation. At FINCA Forward, we see several immediate digitization needs among MFIs that are crucial for ensuring operational continuity in the COVID-19 emergency as well as positioning for the new normal in the recovery phase. We are deploying our rapid solution testing approach to support our MFI partners to explore solutions in areas such as the following:
- Strengthening call center operations – call center infrastructure needs to be upgraded to address the substantial increase in customers contacting, and being contacted, by MFIs through the channel in the face of branch closures. Additionally, work-from-home policies and government-enforced movement restrictions require MFIs to have the flexibility to operate their contact centers with remote agents.
- Digitizing customer interactions – the MFI business model is based on extensive in-person interactions with customers, primarily through loan officers deployed in the field. Maintaining robust customer relationships during COVID-19 movement restrictions will require a rapid shift to digital communication channels, such as SMS and over-the-top messaging.
- Delivering customer education on digital financial services – as MFIs build out digital products and channels out of operational necessity, how will the most vulnerable customers adapt? MFIs need to complement digitization with corresponding digital education solutions to ensure that all customers can benefit from available products and services.
- Digitizing core banking processes – management efforts to reduce in-person interactions between staff and customers will require MFIs to identify core banking processes that can be effectively digitized. Electronic know your customer (eKYC), digital signature capture, and online document upload solutions are among those that could create immediate and future value.
- Addressing the agent network liquidity challenge – with widespread branch closures, agent networks will be more essential as customers increasingly rely on them to access cash-in/cash-out services. Agents will need digitally delivered liquidity products to remain operational.
The crisis-driven necessity for digital solutions will lead to an acceleration of MFI digitization more broadly that will persist beyond the immediate operational crisis. Even before the COVID-19 crisis, MFIs have known that business models needed to change given an increasingly digitized financial services market. The crisis provides an unexpected opportunity for MFIs to challenge accepted practices, rapidly embrace emerging technologies and reshape legacy business models.
FINCA Forward is working closely with its MFI partners to evaluate and onboard solutions with the appropriate level of tech and touch for low-income customers. Our hypothesis-driven approach to innovation will allow MFIs to increase digital transformation wins, reduce digital transformation costs and build the digital capabilities that will deliver greater financial inclusion post-crisis. Digital transformation is no longer just a desirable cost reduction or customer growth tool. MFIs need to digitize and modernize immediately to survive COVID-19 and meaningfully contribute to post-crisis economic recovery.
If you are an MFI or technology innovator, please reach out. We look forward to new partnerships.