Digital Financial Services: Challenges and Opportunities for Emerging Market Banks

25 Sep 2017

The digital transformation that has upended industries from retail and media to transport and business-to-business commerce is now sweeping the financial services industry, through the wide dissemination of digital financial services. This was inevitable, as ubiquitous computing power, pervasive connectivity, mass data storage, and advanced analytical tools can easily and efficiently be applied to financial services. After all, money was already extensively (though not exclusively) created, used, stored, processed, and delivered electronically.

Immediacy and personalization have become the norm for consumer goods and services. Consumers have rapidly become accustomed to making purchases with a touch of their finger wherever they may be, receiving tailored recommendations, choosing customized products, and enjoying delivery of almost any item directly to their front door. Businesses failing to adapt quickly to these technological developments can fail dramatically, and many have already done so, including Tower Records, Borders Books, Blockbuster Video, and countless travel agents and brick-and-mortar retailers. Consumers’ new
expectations apply to digital financial services as well.

Technology has transformed business-to-business and within business interactions, too, enabling reconfiguration of design, production, marketing, delivery, and service functions through distributed supply chains, freelance design, outsourced manufacturing, and contract warehousing and delivery. These reconfigurations are mediated by online marketplaces and distributors, and assisted by back-end support operations and data analysis that together drive better risk assessment, faster fulfillment and more efficient customer service.

The same types of disruptive market innovations and reconstituted value chains are now emerging in the form of digital financial services. This poses distinct challenges for incumbent providers such as banks, finance companies, microfinance institutions, and insurance companies, as financial technology—or FinTech—innovators enter their markets. Incumbents, too, can benefit from these developments, which will enable them to broaden financial access, introduce new products and services, and serve customers more efficiently by deploying new technologies internally or in partnership with external innovators.

Building a Secure and Inclusive Global Financial Ecosystem

08 Sep 2017

The 2017 Brookings Financial and Digital Inclusion Project (FDIP) report evaluates access to and usage of affordable financial services by underserved people across 26 geographically, politically, and economically diverse countries. The report assesses these countries’ financial inclusion ecosystems based on four dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of selected traditional and digital financial services.  The report further examines key developments in the global financial inclusion landscape, highlights selected financial inclusion initiatives within the 26 FDIP countries over the previous year, and provides targeted recommendations aimed at advancing financial inclusion.

Voice of the Client: An Analysis of Client Satisfaction and Consumer Protection Across Four MFIs in Peru

26 Feb 2016

This report presents the findings of the Voice of the Client project in Peru, the second phase of a joint initiative developed by Hivos and MIX with the objective to strengthen the application of Client Protection Principles in the microfinance sector and ensure that financial services are tailored to meet client needs.  This initiative leverages mobile technology for microfinance institutions (MFIs) to proactively reach out to clients to uncover potential issues affecting their level of satisfaction with the suite of products and services offered. The analysis is based on data collected via interactive voice responses, call centers and face-to-face interviews from 3,767 clients across four MFIs in Peru. The participating MFIs were Caja Municipal de Ahorro y Crédito (CMAC) Arequipa, Financiera Compartamos, Financiera ProEmpresa, and Fondesurco. Whenever data are available, the report also provides client-level analysis that is primarily focused on gender.

The analysis represents a novel attempt to create benchmarks based on client-level data in the Peruvian market with the aim of providing MFIs and funders with actionable data sourced directly from clients that can be leveraged to address areas of weakness and improve operations accordingly. By regularly tracking how clients perceive the customer service they receive, microfinance stakeholders can design programs that better meet client needs and preferences and, more broadly, improve their impact on the population they aim to serve.

My Turn to Speak: Voices of Microfinance Clients in Benin, Pakistan, Peru and Georgia

26 Feb 2016

The Smart Campaign, a global organization working to promote a set of Client Protection Principles in the financial inclusion sector, has long recognized that client perspectives were underrepresented in consumer protection discussions. With the Client Voices project, the Campaign questioned whether assumptions made about what constitutes problematic treatment rightly reflected what clients themselves worry about.

To address this gap, the Campaign launched the Client Voices project, an ambitious research endeavor involving quantitative and qualitative research in Benin, Pakistan, Peru, and Georgia. The dual objectives of the project Executive Summary were (1) to solicit input from clients about what they consider good and bad treatment in their interactions with microfinance service providers; and (2) to assess the prevalence of consumer protection problems among microfinance clients using national quantitative surveys. The project is designed to act as a catalyst for local actors including regulators, microfinance associations, consumer advocacy groups, and others in each of the four markets to make improvements to client protection that is grounded in client feedback.

Factors Influencing Poverty Outreach Among Microfinance Institutions in Latin America

17 Sep 2015

This report investigates the poverty outreach of 14 microfinance institutions (MFI) across six Latin American countries: Peru, Colombia, Bolivia, Ecuador, Guatemala, and Nicaragua. It uses information that these MFIs have collected in terms of poverty likelihood using the Progress Out of Poverty® Index (a.k.a. Simple Poverty Scorecard) supplemented by in-depth interviews with industry experts. The following is a summary of the report findings.

Those who reach the highest percentage of poorer clients are the ones that focus on clients in regions with higher percentages of poor people. At the time data was collected, only a couple of MFIs had quantitative poverty-outreach targets. MFIs do not generally embed poverty targets into their loan officer-incentive structure. When the MFIs have quantitative poverty-outreach targets, they are either part of their commercial strategy (e.g., MFI C in Bolivia, MFI G in Guatemala), or a requirement from external stakeholders (e.g., MFI A of Bolivia, MFI R in Ecuador–both with World Vision). Moreover, a number of MFIs mentioned that product design (e.g., loan size and compulsory monthly educational training) leads to self-selection by poorer clients. The switch of the industry from MFIs being typically NGOs to for-profit institutions seems to lead to more emphasis on measuring success in terms of profitability (rather than poverty outreach).

The report also surfaced two interlinked factors driving poverty outreach across some Latin American markets: competition and over-indebtedness. MFIs seem to be reaching more poor clients in regions with higher banking saturation, even though their mission statements are not about reaching the poor. Indeed, in regions where wealthier clients are already served by commercial banks, MFIs service poorer clients (e.g., urban areas). However, they service relatively wealthier clients in regions where they are unbanked (e.g., rural areas). This was often cited as a factor driving the higher percentage of poorer MFI clients in urban areas relative to rural areas.

Increased banking competition is also leading MFIs to shift their operations into more suburban and rural areas in search for the unbanked. Thus, impact investors and development institutions could look into ways to foster greater competition amongst banking institutions as a path to serving more of the less wealthy clients1 and the unbanked. Increased banking saturation is changing the landscape of microfinance, pushing MFIs who do not explicitly target the poor to provide loans to poorer individuals. In their in-depth interviews, industry experts and MFIs discussed the implications of high banking saturation on their outreach. The change has come about because MFIs generally cannot compete with the interest rates offered by commercial banks, in addition the MFIs’ social missions discourage aggressive lending. Thus, they are moving operations to suburban and rural areas in search of the unbanked. Most of the MFIs included in this study cited banking saturation as a factor when deciding which regions to enter. Some MFIs focus on regions with higher percentages of poorer households, and the report finds that these tend to have a higher percentage of poorer clients in their portfolio.