Discussing Technology’s Threat and Promise – and Financial Services for Refugees
There were two topics that dominated debate at last week’s European Microfinance Week (EMW) conference: the threats and opportunities brought about by the fintech revolution in inclusive finance, and the issue of financial inclusion for refugees and internally displaced persons. The event, organized by the European Microfinance Platform (e-MFP), provided the venue for a discussion of these issues that ranged from hopeful to surprisingly cautionary.
TECHNOLOGY’S DOUBLE-EDGED SWORD
EMW 2018 focused heavily on the spectre – or, depending on your perspective, the promise – of technology. The theme was approached from many angles, as panelists explored the opportunities and risks of digital financial services, Big Data and new fintech entrants into the sector. It was even the focus of the 2018 European Microfinance Award, Financial Inclusion through Technology. The opening plenary captured both sides of the issue, with a keynote speech from Graham Wright of MicroSave – who played the Cassandra role that suits him so well to implore the inclusive finance sector to pay attention to the risks that technology can pose to clients and institutions.
He opened on a positive note. “The digital revolution offers us the chance to deliver rapid, responsive and differentiated financial services to low-income people in a way the industry has never been able to do in the past,” he said. He cited Equity Bank’s staggering level of technology integration: More than 97 percent of Equity Bank transactions in Kenya are conducted outside their branches, and more than 70 percent are self-initiated by clients on their mobile phones. This has had an amazing impact on the cost structure of transactions; IFC calculates that digitization reduces the costs to customers by 80 percent.
There are powerful opportunities associated with this digital transformation in microfinance, Wright argued. It can significantly increase revenues and reduce costs; MFIs can leverage a long history of relationship banking to create real competitive advantage; it creates an opportunity for MFIs to provide a personalized user experiences; and it links microfinance services to the real-world economy.
But he then cautioned attendees about the three existential threats this transformation can pose to microfinance providers: 1) out-dated and inflexible microfinance models; 2) emerging digital credit models that offer immediacy and convenience but risk a contagion of blacklisting clients; and 3) an emerging “digital divide” caused by the demise of MFIs that are unable to adapt. This latter risk threatens to result in fintechs serving (peri-) urban, high-value customers while leaving MFIs with low-value, rural areas, preventing cross-subsidisation by MFIs, and keeping low-income groups excluded from the latest technology innovations.
To avoid this fate, he said, MFIs should not be complacent with the digital transformation in microfinance, and must implement actions which help them adapt to it, according to their structure and capacities, while remaining focused on what is best for their clients.
LOOKING BACKWARDS AND FORWARDS
The technology theme was also central to the new e-MFP publication, the Financial Inclusion Compass, launched during the conference. Derived from the mixed-methodology, inaugural e-MFP survey of financial inclusion trends conducted this summer, the Compass asked e-MFP members and other industry stakeholders to rate and speak to the importance (and direction) of various trends, to assess future “areas of focus,” and to provide open responses on the financial providers of the future, current challenges and opportunities, and their own forecasts and hopes in the medium-to-long term. The Compass is designed to look backwards as well as forwards, extrapolating from past experience, and providing an annual, longitudinal resource for comparison of how perceptions evolve.
EMW’s Friday morning plenary also looked back as well as ahead. Entitled “Where next for microfinance: a view from The Founders,” it was moderated by Bernd Balkenhol from the University of Geneva. It brought together two practitioners who were pioneers in microfinance in their respective countries: Essma Ben Hamida, co-founder of Enda Tamweel in Tunisia, and Carmen Velasco, founder of Promujer in Bolivia; as well as one of the giants of microfinance academia, Hans Dieter Seibel, co-founder of e-MFP and Professor Emeritus from the University of Cologne. They explored the major landmarks and disappointments over their 30+ year careers and agreed that regulation – and the related issue of political interference – remains something they wish they could overcome. Regulation has constrained MFIs’ original role as disruptors, stymied innovation and limited the benefit that institutions can give to clients – such as taking deposits. The panellists agreed that the sector must continue to link financial inclusion to wellbeing, and not just access to financial services – and that the biggest impact of microfinance over the decades has been how it has enabled women to change their families and communities for the better, giving girls in particular new opportunities that their mothers lacked.
The founders concluded with a discussion of technology – including a caution against the cheerleaders who advocate the full digitization of all microfinance services. Technological innovation is a great way to reach out to people where MFIs cannot go, they said, but the future will not be technology only – the human touch is crucial in serving low-income and vulnerable segments. Microfinance must find a way to integrate technology to reduce costs, improve efficiencies and provide opportunities for customers, while keeping client protection at the forefront. The panel agreed that client protection is more important than ever – indeed, this year the customary EMW stream on the topic involved a new focus on client protection and technology. Alongside this stream and the other 20+ sessions, the conference also focused, for at least the third straight year, on advancing access to financial services for refugees.
MICROFINANCE FOR REFUGEES
A two-part session stream presented the latest field research in servicing refugees and internally displaced persons. These communities face bottlenecks when accessing financial services, which extend to many fronts, including: bureaucratic and legal issues, often closely related to language; scepticism as to whether they are bankable and whether entrepreneurship is a suitable route to self-sufficiency for them; and a lack of a business models for MFIs, related to refugees’ lack of credit history or collateral and a fear they will move on. Moreover, refugee opportunities for entrepreneurship can be limited due to the economic situation in the host country. Yet research shows that refugees and wider migrant populations are bankable – they’re willing to pay for the financial services offered to them.
A financial access eco-system for refugees has emerged in the last decade, but implementation in the field is limited to a few countries with large refugee populations, a favourable legal environment for service delivery and strong donor attention. From the financial service provider (FSP) perspective, serving refugees is complicated because of three constrains: reputation, legal and economic issues (e.g. in terms of public data), and a clear business case. Best practices to overcome these issues include: working with regulators and authorities on the business enabling environment, providing technical assistance to break through prejudices, getting buy-in at all levels of the FSP, offering de-risking products to FSPs initially, arranging meetings between FSPs and refugees, and compiling peer examples and data on refugee populations to demonstrate the business case.
A FINAL DEBATE
The conference ended with a new and unusual format, an “Oxford-style” plenary debate on the future relevance of smaller Tier 2 and 3 MFIs, which was streamed live and can be watched here. With Maria-Teresa Zappia from BlueOrchard Finance and Alex Silva from OMTRIX taking the Affirmative side, and Kaspar Wansleben from Luxembourg Microfinance Development Fund and consultant Maude Massu on the Negative, the teams debated the motion “This House Believes There’s No Room Left for the Little Guy.” In a lively, fun and unusually rule-based and competitive format, moderated by e-MFP’s Sam Mendelson and scored by a panel of judges, the two sides addressed issues such as the commercial viability of smaller institutions, the key elements of economies of scale and cheaper cost of capital that Tier 1 MFIs can offer and access, the key role smaller MFIs can play in offering non-financial services and supporting the lower-income segments, and their unique role in preparing clients for access to the mainstream financial services via Tier 1 MFIs and commercial banks. As “Team Negative” argued, the most important advantage of smaller MFIs is the fact that their social mission makes them ideally suited to ensure the inclusion of otherwise excluded populations, be they rural or remote, handicapped, migrants/refugees – or facing other impediments in accessing the financial products of larger institutions. In the end, the judges decided that the motion was rejected and the Negative team won – in other words, they agreed that there’s still room for smaller MFIs in the sector.
Laura Hemrika, e-MFP’s chairwoman, closed the conference with a return to the central theme of technology, imploring MFIs to not be afraid of incoming fintechs, to partner and share knowledge, and to see technology as more than just a way to increase the efficiency of existing processes, but as an opportunity to re-make the financial experience for low-income clients.