Exploring digital transformation in microfinance

Co-founder Julian Oehrlein reflects on some of the lessons that came out of a fascinating discussion on digital transformation in microfinance.

In 2021, Oradian co-founder Julian Oehrlein was one of a panel of experts invited to take part in a fascinating discussion on digital transformation in microfinance. Here he reflects on some of the lessons that came out of that webinar…  

These are challenging and exciting times for microfinance institutions (MFIs), writes Julian Oehrlein. The emergence of fintechs such as pure-play digital lenders has massively altered their world. But thankfully the technologies that have made it possible for new players to enter the field are also readily available to MFIs enabling them to compete on an almost level playing field. For many MFIs, digital transformation is now the priority – a need accelerated by the pandemic.

For MFIs looking to take a leap forward in terms of efficiency and growth, what part does digital transformation play? How can MFIs make a success of it and what are the pitfalls to watch out for? These were some of the questions posed at the recent webinar: Digital Transformation in Microfinance. 

The event was organised by SANAD, a fund which provides debt and equity finance to partner institutions in the Middle East and Africa to support growth and employment in the region’s micro, small, and medium enterprise (MSME) sector. I was delighted to be invited to join a very distinguished panel: 

  • Margarete O. Biallas is Digital Financial Services Specialist at the International Finance Corporation (IFC) in Washington DC. A member of the World Bank Group, the IFC is the largest global development institution focusing exclusively on the private sector in developing countries. 
  • Nordyn Yacine is Chief Digital Officer at Vitas Group which for 20 years has been lending to MSMEs in the Middle East via a network of financial services companies. 
  • Keeping us all on track and moderating the event was Ian Jenkins, fintech lead at Base 115, a boutique firm of financial services technology executives.

The invaluable work done by MFIs was encapsulated in a beautiful opening video about a cheesemaker in El Minya, Egypt called Ahmed. His father began the business with just one cow but today they sell 1,000 tins of cheese a day accessing working capital via SANAD to overcome short-term cash flow problems when they arise. 

The digital transformation journey 

Margarete set the scene by talking about some of the trends currently affecting MFIs – not least the avalanche of fintechs which sometimes seems to be crowding MFIs out of the market. Other influential trends include cloud-based core banking, open banking, artificial intelligence, and machine learning. In response, large numbers of MFIs are investing in digital projects, she said.

She stressed that the first step on any digital transformation journey is to think through the what, why, and how: 

  • What you want to achieve 
  • Why you are doing it 
  • How you’ll do it. 

These building blocks for the digital transformation journey in turn require a thorough understanding of two areas:

  • Customer vision: a coherent grasp of customer pain points, the importance of personalization, speed, convenience, and CX. 
  • Market knowledge: understanding the changes caused by new competitors, demographic changes, new technologies etc. 

From here it’s important to understand the core capabilities necessary to develop and implement a strategy.  What are the performance metrics which will demonstrate the project’s success or otherwise – e.g. revenue, operating efficiency, distribution? Delivering these requires an organisation to have critical capabilities in a broad range of areas:

  • Strategy and governance 
  • Organisation and collaboration 
  • Customer experience and interaction 
  • Technology and platforms 
  • Information and insights 
  • Growth and innovation 
  • Security and privacy 
  • Operations and ecosystems.

But Margarete had another strong key message for any MFI embarking on a digital transformation: “You need to understand it’s a huge change management programme. It’s culture change. Digitisation affects and disrupts people. Managing the change process itself is critical,” she said.

The benefits of digital transformation 

 “The full digital transformation is not an easy journey but it’s a worthwhile one,” she reassured them. “Most grow their customer base and achieve new operational efficiencies.” 

 Asked about MFIs in more volatile markets, Nordyn pointed to the power of digital transformation to help reduce security costs. “It is costly for MFIs to maintain security measures in places such as Iran,” he said. Replacing physical money movements with digital ones greatly reduces the attractiveness to criminals. “Digital wallets can be used for loan disbursement and repayments,” he said. In the longer term this can diminish the need to maintain actual physical branches.

Challenges to digitalisation 

Nordyn mentioned that in some territories it’s just not possible to digitise certain stages of the process – for example, digitising Know Your Customer (KYC) relies on access to databases which may not exist or scanning IDs which are not available. “All of these problems make an end-to-end process impossible,” he pointed out. “At some stage human contact is required.” 

My own view here is that no MFI should feel that anything less than 100% digitalisation is a failure. There will always be connections to the real world.  The most important thing about digitalisation is to take as much friction out of the process as is possible. And although having no population-wide ID available makes the cost of processing an application more expensive, in one sense it doesn’t really matter because it applies to everyone in the market. Ultimately, digitalisation is about being better than the competition by either offering it at a lower price or by having a better product. It’s about automating what you can. 

The restrictive obstacles of regulators 

For Margarete, the security obstacles of working in the more difficult parts of the world are dwarfed by challenges put in the path of digital transformation by regulators. Talking about attitudes to opportunities such as cloud technology, she said, “We’ve seen most success where regulators allow for experimentation.” She praised the National Bank of Cambodia for its support when Wing Bank was set up in 2008. The NCB’s approach was ‘allow to test, try early, fail fast, then regulate accordingly’ but this is rare among regulators.

How can MFIs increase their chances of successful digital transformation?

It was interesting to explore how MFIs can achieve more by being realistic about their ambitions. Nordyn had some great advice about speeding up time-to-market by focusing on delivering a minimum viable product (MVP). “Test the product, test your market reach. The secret is to be able to react and adapt very quickly based on how the MVP performs,” he said. Adding to that, I would say this: take the opportunity to trial your new products on a small scale – at a single branch, for example – rather than roll out your MVP everywhere all at once.

Something that chimed closely with me was Nordyn’s advice to MFIs: “You don’t have to do everything yourself. Partner with a fintech which has expertise in one part of the value chain to get you started.”

I agree. Why try to build your own digital wallet? A fintech which does that (and only that) is going to be better at it than you ever can be. And no partnership decision is forever. Depending on how things go, you can choose later to continue the arrangement, take over yourself, or find a better partner. One of the great advantages of a modern core banking system (CBS) such as Oradian is that its open API architecture makes plugging and unplugging partners a cinch.

It reminded me of the problems we sometimes encounter with MFIs who try to imitate their competitors. Understanding what the competition is up to is important, of course, but you also need to understand your own strengths and USPs and define your own niche. 

It’s vital that MFIs have realistic expectations of what’s involved in a digital transformation project. Achieving a cloud-based real-time system is always going to be a big project. It’s one reason why it’s important that your CBS partner is properly invested in your success. At Oradian our motivation to see our customers grow is built into our pricing model. The annual subscription fee is based on the MFI’s size at the beginning of each year. So, once they’ve grown – and not until – we get to grow with them. One of the many benefits of this approach is that we are incentivised to help them find the best product to meet their needs. We are so invested in the long-term relationship that we don’t even charge an implementation fee.

What issues do MFIs face when it comes to digital transformation?

Nordyn talked about the cultural challenge MFIs often face, their target customers being underserved by the banks, the segment having less access to technology, and social media use being lower. A lot of the processes rest on interaction and social binding between loan officer and client, he argued. Margarete pointed out that in many MFI segments this was not preventing fintechs from swooping in and taking MFI business with services which are fully automated end-to-end.

I think both these observations are true. At Oradian, we have MFI customers and fintech customers and have seen a degree of convergence. Well-run and forward-thinking MFIs have succeeded in automating every part of the process.  and making best use of the relationship their brand has with its customers. But we’ve also come across instances of fintechs realising they also need an offline component to their business. Some have started using agents to improve their collection rates. Both can learn very well from each other, I believe.

It was pointed out that in some countries one of the major challenges is a shortage of people with the right technical skills but I think we all agreed that this in itself is not a significant barrier to digitalisation. Adopting a cloud-based core banking platform takes away the need for an MFI to be hosting, developing, fixing, patching, updating, or otherwise concerned with software. 

The most important thing for an MFI is having people with the talent to run the process. 

For Nordyn, the most important talent to have in place is the ability to specify and translate business needs. “If you don’t know what you want as a business, you will never get it,” he pointed out.

Margerite agreed. “The most critical point is understanding the what why and how, and your customer’s needs. These are things you can never outsource,” she said.

For me it was a thought-provoking hour. My thanks to SANAD for organising it and for inviting me to take part. You can watch a recording of the seminar here on the SANAD YouTube channel.

If you’re interested in discovering how Oradian’s cloud-based core banking system can unlock growth for your business, get in touch with one of our business intelligence experts for a free overview of the Oradian system.

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