Joana Afonso

Daniel Rozas

Brief

<em>Past crises have taught the microfinance sector a lot about weathering storms, and microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to revisit tales of tough times and resiliency in five markets — <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a> — and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, </em>Weathering the Storm II<em>, a follow-up to the first edition published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

During the final months of 2008, as the world was entering what would be the worst economic crisis of the past half-century, Senad Sinanović, CEO of Partner Microcredit Foundation in Bosnia and Herzegovina, was contemplating the future.

A year earlier, he and his staff had celebrated Partner’s 20th anniversary. Partner was founded following the tragic war that marked the breakup of Yugoslavia, which had itself been assembled from the ashes of the Austro-Hungarian Empire 90 years earlier. It was in the country’s capital, Sarajevo, that WWI began, with the assassination of the Archduke Franz Ferdinand. On his frequent work visits to Sarajevo, Sinanović sometimes passed by the plaque marking the site of the “shot heard round the world,” along the way stepping on the Sarajevo Roses — red-painted shell marks on the pavement, remnants of the Bosnian war of the 1990s. In that corner of the world, history can seem omnipresent.

But it wasn’t history that was on Sinanović’s mind. He was worried about how the financial crisis would impact his clients, his institution, and the broader microfinance sector in the country. The path ahead concerned him greatly. The situation was unfolding against a backdrop of high liquidity in the sector. A strong period of growth of the main MFIs during the second half of the 2000s, as well as a new regulatory framework for microcredit, contributed to the high confidence of donors and funders, who responded by pouring large amounts of funding into the market.

In 2008, the tiny country of Bosnia and Herzegovina, with a population of 3.7 million, was the second biggest destination worldwide, behind Peru, for <a href="https://www.cgap.org/sites/default/files/CGAP-Focus-Note-Foreign-Capital-Investment-in-Microfinance-Reassessing-Financial-and-Social-Returns-May-2011.pdf" target="_blank" rel="noopener noreferrer">foreign capital investment</a> in the microfinance sector. In that market, Partner was (and still is) one of its leading MFIs, with the third largest by gross loan portfolio at about 181 million convertible marks (abbreviated KM), or about USD$106 million, and the second largest in number of active borrowers, at 63,500.

High liquidity may be a blessing during growth periods, but it quickly becomes a curse when loan demand contracts and all that cash sits in a bank, yielding no income. The deep recession in Bosnia brought about by the global financial crisis strongly affected the micro and small enterprises in the country, resulting in less appetite for investment, and thus for the business loans provided by the microcredit sector.
<blockquote>High liquidity may be a blessing during growth periods, but it quickly becomes a curse when loan demand contracts and cash sits in a bank, yielding no income.</blockquote>
Those same challenges also lowered clients’ ability to repay their existing loans. In a context of intense competition between MFIs and widespread multiple borrowing — which was difficult to trace since the use of credit bureau data was still incipient — this predictably resulted in severe loan delinquency problems and credit losses across all MFIs. The poor lending standards of several MFIs also undermined the sector’s reputation, further legitimizing non-repayment of loans even beyond what might have been expected from the economic downturn alone.
<h2>Dealing With High Liquidity</h2>
Partner had, by the end of 2008, a total debt of 156 million KM, broken down into 10 outstanding short-term loans with local banks and 23 long-term loans from foreign social and development investors. While the overwhelming majority of these were market-rate loans, Partner also had subsidized loans, including a 6 million euro loan from a bilateral public funder.

<img class="alignleft wp-image-41167" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Chart-debt-in-KM-4.png" alt="bar graph debt" width="700" height="389" />Some of the loans had just been disbursed when the crisis began to unfold, leading to a situation where Partner was that it could not lend out, and thus could not generate income, even as the interest due on the loans continued to accrue.

To limit interest losses, especially on its more recent and expensive loans, Sinanović tried to give the money back, asking to prepay the loans ahead of schedule. However, this was not welcomed by all investors, and some needed to be persuaded to accept the money and terminate the contracts without penalties. This process included a meeting in April 2009 with lenders at the Microfinance Centre (MFC) conference in Belgrade, organized by a group of Bosnian MFIs, including Partner. Facing the reluctance of some investors to accept early loan prepayment, one of the Bosnian CEOs questioned if their behavior was consistent with social investing, which helped change investors’ minds. During the period of crisis, and in the following years, Partner’s short- and long-term debt fell significantly. By the end of 2011, its total debt was down 61 percent from its peak in 2008.
<h2>Getting Ahead of Events</h2>
While reducing excess liquidity solved a part of Partner’s problems, the MFI was still facing strong, serious challenges in its loan portfolio and the consequences of escalating credit and market risks.

<img class="alignright size-full wp-image-41142" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Chart-glp-delinquency-partner.png" alt="graph" width="600" height="320" />During 2009 and 2010, Partner’s portfolio contracted by nearly 50 percent off its 2008 peak, and while it has been recovering steadily since then, as of 2019, its portfolio remains 25 percent smaller than it was over a decade ago, at 137 million KM ($78 million).

<img class="alignright size-full wp-image-41191" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Chart-write-offs-partner-V2.png" alt="chart" width="600" height="266" />Beginning in 2008, delinquency levels grew rapidly, peaking at 11.5 percent in 2010. Partner also took an aggressive approach to writing off loans it saw as non-recoverable. Between 2009 and 2011, the MFI wrote off 11.4 percent of its 2008 gross loan portfolio (GLP). While high, these credit losses were modest in the context of the Bosnian microfinance crisis. Three of Partner’s major competitors experienced cumulative write-offs of 25 percent or more of their peak 2008 portfolio (according to the authors' calculation using <a href="https://databank.worldbank.org/source/mix-market" target="_blank" rel="noopener noreferrer">MIX Market</a> data).

Nonetheless, Partner’s portfolio quality was worrying, and during the early months of the crisis, Sinanović knew already that Partner would breach many of its debt covenants with its lenders. Together with Partner’s board of directors, Sinanović decided to get ahead of events and provide lenders all the information available on the context of the crisis, the reputation issues affecting the sector, and the exact situation of the MFI. For this, Sinanović and his staff prepared a detailed, 13-page memorandum outlining the impact of the crisis on Partner, its clients, and the Bosnian microfinance market, as well as Partner’s response up to that point and planned next steps. The memo also included extensive monthly data and ratios pertaining to Partner’s portfolio and financial situation. This document was sent to all 17 creditors in April 2009, when the crisis was still in its early phase.
<blockquote class="pullquote--left">Sinanović and his staff prepared a detailed, 13-page memorandum outlining the impact of the crisis.</blockquote>
In this way, Partner’s transparency helped gain lenders’ confidence and, at the same time, effectively created the reporting template for all individual creditors. This early transparency helped Partner avoid being flooded with multiple and diverse requests for information by lenders and gave Sinanović and his team the space to focus on containing repayment problems in its portfolio.

Midway through the crisis, after extensive conversations with like-minded MFIs in the country and with support of outside stakeholders, Partner went further. In 2010, together with two other MFIs, EKI and Mi-Bospo, Partner created U-Plusu. This non-profit financial management advisory center aimed to tackle client over-indebtedness and improve the public image of the institution and the sector by providing financial education and mediation services between clients and financial institutions, especially in cases of multiple borrowing.

Despite the serious impact from the crisis, with credit losses accompanied by steep drops in lending and profitability (ROE decreased from 24 percent in 2008 to -5 percent in 2009), Partner managed to keep the situation under control throughout, and its solvency was never at risk. In fact, despite the large provisions and eventual write-offs, Partner’s equity only slightly decreased during the crisis period (from 43 million KM to 41 million KM).
<blockquote>Partner's solvency was never at risk and its equity only decreased slightly.</blockquote>
Partner’s ability to weather the storm was closely linked to a process of foresight and preparation led by Sinanović and the MFI’s directors. It started with swift adaptation to a significant decrease in loan demand, both in terms of credit offer and operational structure, and an aggressive strategy regarding write-offs, while getting rid of excessive liquidity and being proactive and transparent in its communications with creditors. All this helped Partner ready itself for what would be a sustainable — albeit smaller — future.

<em>What are some dos and don’ts and key success factors that the microfinance sector can learn from the Partner case? CFI’s forthcoming report, </em>Weathering the Storm II<em>, will draw on lessons from Partner and cases from microfinance institutions in four other markets: </em><a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer"><em>Azerbaijan</em></a><em>, </em><a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer"><em>India</em></a><em>, </em><a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer"><em>Palestine</em></a><em> and Nicaragua. See also the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/">original Weathering the Storm</a> report from 2011. </em>

Weathering the Storm II: A Case Study of Partner

Loretta Michaels

CFI conducted this work as part of our partnerships with the Mastercard Center for Inclusive
Growth and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.

Institutional Partners

As countries around the world grapple with the economic impact of the COVID-19 pandemic, governments have turned to supplemental cash transfers as a key policy instrument to offset the loss of income of their citizens.

This policy brief explores what national governments are doing to enable rapid payments to those without existing accounts. The swift measures governments took to speed up payments to citizens during the pandemic include:
<ul>
 	<li>Quick identification of eligible recipients</li>
 	<li>Simplification of customer due diligence for rapid account opening</li>
 	<li>Greater use of alternative channels such as mobile apps, post offices, and non-bank financial institutions (NBFIs) such as microfinance providers.</li>
</ul>
Each section of this brief includes country-specific examples and key takeaways. Efforts by 19 countries to facilitate cash transfers, both digital and non-digital, are discussed.

This publication is the second in a <a href="https://www.centerforfinancialinclusion.org/series/policy-responses-to-covid-19-their-impacts-on-low-income-customers">series</a> of policy briefs on COVID-19 economic policy responses and their impact on low-income customers.

Rapid Response for Social Payments During COVID-19

Madeleine Longwell

Alexandra Rizzi

Report

This report, the third in a <a href="https://www.centerforfinancialinclusion.org/series/municipal-cash-transfer-programs-design-ids-and-data-protection">series</a> on municipal cash transfers in the U.S., focuses on data protection for undocumented or mixed-status beneficiary households. In the context of cash-based assistance (CBA) programs, poor data protection practices could add additional risks for low-risk individuals by providing data trails that could pave the way for unauthorized access to applicant or beneficiary data or leakage of personally identifiable information. These could leave a digital footprint that can make it easier for law enforcement to target undocumented individuals.

Considering these risks, we have identified and detailed approaches and strategies used to protect applicant and beneficiary data through four programmatic phases: targeting beneficiaries, outreach and onboarding, disbursement and distribution, and ongoing monitoring and data storage/retention. Insights in this report are gleaned from CFI interviews with cities, community-based organizations (CBOs), debit card providers, and privacy advocates.

This report and the others in this series are intended to guide municipal officials and CBOs considering or developing programs to support undocumented or mixed-status households. The insights may also be of interest to organizations advocating for and supporting the rights of undocumented populations, students and academics, and anyone <span data-contrast="auto">interested in </span><span data-contrast="auto">access to financial and</span> <span data-contrast="auto">public</span> <span data-contrast="auto">services</span><span data-contrast="auto"> for all members of U.S. communities. </span>

Protecting Beneficiary Data: Guidance for Municipal Cash Transfer Programs Responding to COVID-19

Eric Noggle

Tess Johnson

Though U.S. citizens and residents received economic support following passage of the CARES Act in spring of 2020, undocumented and mixed-status households were left behind. To bridge this assistance gap, state and local governments across the U.S. have partnered with community-based organizations (CBOs) to establish cash transfer programs to support these populations during the pandemic.

This report, part of a three-part <a href="https://www.centerforfinancialinclusion.org/series/municipal-cash-transfer-programs-design-ids-and-data-protection">series</a>, provides practical guidance to municipalities considering or currently operating direct cash assistance programs. It is based on insights from in-depth, semi-structured interviews conducted by CFI with 12 program administrators representing seven cash assistance programs.

We identify and detail practices for defining target beneficiaries, establishing eligibility criteria, conducting outreach, onboarding recipients, and disbursing funds. This report also highlights the relative advantages and disadvantages of different approaches at each step of the process.

The insights here may also be of interest to organizations advocating for and supporting the rights of undocumented populations, students and academics, and anyone <span data-contrast="auto">interested in </span><span data-contrast="auto">access to financial and</span> <span data-contrast="auto">public</span> <span data-contrast="auto">services</span><span data-contrast="auto"> for all members of U.S. communities. </span>

Designing Municipal Cash Transfer Programs to Mitigate the Economic Impact of COVID-19

Shradha Modi

<h2>Client (and Lender) Centricity</h2>
<p><img class="wp-image-40562 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-237x300.png" alt="" width="237" height="300" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-237x300.png 237w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-768x973.png 768w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-809x1024.png 809w" sizes="(max-width: 237px) 100vw, 237px" />Prior to the crisis, Vitas Palestine had the lowest PAR 30 in the Palestinian microfinance sector, partly because of its attention to preventing client over-indebtedness. Vitas provided loans for housing, businesses, and consumption. For all the product offerings, the company&#8217;s credit analysis process ensured that the borrower had a margin to make a loan payment, even if their income or sales declined temporarily. After disruptive violence in the territory, loan officers and supervisors would contact each client, find out if they needed any additional support, and referred them to NGOs or other local programs, if required. The staff avoided asking about payments in the first call but assessed their situation during their conversations and segmented the clients based on the ability to pay. In some cases, Vitas would enter short-term informal arrangements that resolved loan delinquency without having to take their clients through the court system. Sisalem and his team relied on the same client-centric approach while dealing with non-payments during the salary crisis.</p>
<p>In addition to client centricity, Vitas had built strong relationships with its lenders over the years. Sisalem and his management team prioritized communicating early and often with the investors to keep them updated on the situation. Many of Vitas&#8217; existing lenders had been with the company through many crises over the years, and the company&#8217;s proactive communication gave them the confidence to agree to waivers in the event of breaches of covenants. Vitas took a long-term view and continued to forge lender relationships during the crisis, anticipating the demand for loans once the economic conditions improved.</p>
<p>When the board met again in September 2018, they reviewed the measures implemented since the last meeting. As predicted, the portfolio quality had deteriorated, with PAR 30 at 9.3 percent in July. The PAR 30 for the portfolio in Gaza had risen to 27.3 percent (see graph below). There was a significant drop in loan disbursements in Gaza, but the higher demand in West Bank in 2018 had offset the lower disbursements in Gaza (see table below). After reviewing the results, the board asked the management to continue its focus on portfolio quality, especially in Gaza.</p>
<h2><img class="size-full wp-image-40563 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/vitas-palestine-par30portfolio.png" alt="vitas palestine par 30 portfolio table" width="766" height="493" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/vitas-palestine-par30portfolio.png 766w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/vitas-palestine-par30portfolio-300x193.png 300w" sizes="(max-width: 766px) 100vw, 766px" /></h2>
<h2>Digital Readiness</h2>
<p>The board also recognized that the company needed to refocus its digital transformation efforts to effectively serve its clients after the crisis. The Vitas Group began digital transformation efforts in 2018, and as part of the network-wide initiative, Vitas Palestine underwent a digital transformation readiness exercise. The exercise highlighted the opportunity to improve the utilization of its assets and increase market share by leveraging data and technology. Vitas Palestine&#8217;s operations had traditionally been high touch, but consumer behavior was changing, and about <a href="https://databank.worldbank.org/Palestine---Internet-Access/id/9bb3ec63" target="_blank" rel="noopener">65 percent</a> of Palestinians used the internet in 2018. The company had a strong social media presence, with over 250,000 followers on Facebook, but the data was being analyzed manually for lead generation. Sisalem and his team bought into the digital strategy vision and saw it as an opportunity to rejuvenate the growth of its portfolio. A report published in 2017 estimated the microfinance market in Palestine to have between 245,000 and 345,000 unserved clients with a potential market between $630 million and $900 million. <img class="alignright wp-image-40564" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-1024x611.png" alt="line graph" width="499" height="298" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-1024x611.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-300x179.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-768x458.png 768w" sizes="(max-width: 499px) 100vw, 499px" />The company&#8217;s digital readiness assessment, and subsequent strategic plan, would provide a path to reaching the underserved market while lowering cost.</p>
<p>Following the digital readiness assessment, the first set of initiatives aimed to modernize Vitas Palestine&#8217;s existing processes to increase efficiency and improve customer experience. The Vitas Group leveraged partnerships to reposition its technology architecture. The Vitas Group also planned to establish Vitas Lab to manage innovative digital projects at all its subsidiaries and encourage internal knowledge sharing. Vitas Palestine relied on these digital transformation efforts to emerge stronger after the crisis.</p>
<blockquote class="pullquote--left"><p>Sisalem and his team bought into the digital strategy vision and saw it as an opportunity to rejuvenate growth.</p></blockquote>
<p>In March 2019, in order to take a stand against the deductions carried out by Israel, the PA refused to accept the transfer of tax revenues. The absence of the tax revenue caused severe strain on the economy until September 2019, when the PA started accepting the revenues again. During that period, the local banks in Palestine had to lend to the government, prompting Vitas Palestine to look at international lenders. Vitas leveraged its long-standing history of working in the region to cultivate new relationships with international lenders. In 2019, Vitas Palestine faced a temporary decline in collections. Still, its early focus on portfolio quality and client relationships and a conservative approach to loan loss provisioning, helped the company maintain a strong position in the microfinance sector.</p>
<p>Vitas made numerous strides in its digitalization journey that allowed the company to improve operations in 2019. In April 2019, Vitas Palestine introduced simple digital loans through the Facebook interface for faster lending decisions and a better customer experience. Although it was not an end-to-end digital lending product, because Palestine does not allow electronic signatures, Vitas had taken a significant step towards integrating digital channels into its product offering. Vitas Group hired a chief digital officer to accelerate the implementation of its digital strategy in November 2019. Later in December 2019, Vitas Palestine introduced an app for clients to apply for loans, and track their loan status and payments. By the end of 2019, Vitas Palestine had completed the digital transformation road map by digitizing internal processes and offering digital products.</p>
<blockquote class="pullquote--left"><p>By the end of 2019, Vitas Palestine had completed the digital transformation road map by digitizing internal processes and offering digital products.</p></blockquote>
<p>By the end of 2018, Vitas managed to improve the PAR 30 to 3.1 percent (9.5 percent in Gaza), with 9.3 percent rescheduled and 0.71 percent of the portfolio written off (see graph below). The improvement in portfolio quality was encouraging, but Sisalem and his management team remained wary of the possibility of the economic crisis seeping into the West Bank following the deductions in tax revenues transferred from Israel to the PA. The loan portfolio growth slowed down in 2018 and 2019, while Vitas invested in building strong internal structures. The company&#8217;s outstanding loan portfolio shrunk slightly in 2019 to $51.8 million from the $53.5 million at the end of 2018 due to the economic crisis. Even though the outstanding portfolio shrunk in 2019, the number of active clients grew by 6 percent due to the shift of the disbursement strategy towards micro businesses. With its continued efforts to manage delinquency, Vitas Palestine ended 2019 with a strong PAR 30 of 3.1 percent.</p>
<p><img class="aligncenter wp-image-40566" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-1024x410.png" alt="bar graph" width="800" height="320" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-1024x410.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-300x120.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-768x307.png 768w" sizes="(max-width: 800px) 100vw, 800px" /></p>
<p>In 2020, Palestine&#8217;s economic crisis was far from over, but Vitas Palestine has managed to take control of its portfolio and has built a robust digital infrastructure. Vitas Palestine&#8217;s resiliency, digital strategy, and improved portfolio quality have allowed the company to secure new lending relationships with development financial institutions, FMO and Proparco. Sisalem and Vitas remain committed to serving their clients in Palestine, even when the future remains uncertain.</p>
<p><em>What are some of the dos and don’ts and key success factors that the microfinance sector can learn from the Vitas case? CFI’s forthcoming report, </em>Weathering the Storm II<em>, will draw on lessons from Vitas and cases from microfinance institutions in four other markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener">India</a> and Nicaragua. See the original Weathering the Storm report from 2011 <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">here</a>.</em></p>


<em>Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and Palestine – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

In the spring of 2018, Alaa Sisalem, the general manager of Vitas Palestine, was reviewing the materials prepared for an upcoming board meeting. In the first quarter of 2018, Vitas Palestine – part of <a href="https://www.vitasgroup.com/" target="_blank" rel="noopener noreferrer">Vitas Group</a>, a holding company that operates non-bank financial services companies in the Middle East and Eastern Europe – achieved 95 percent of projected portfolio growth while maintaining a PAR 30 (loans in arrears for over 30 days) of 2.1 percent. As Sisalem looked through the growth projections for the year, he glanced outside his window at the bustling streets of Ramallah. He thought about Vitas Palestine's clients and their ability to pay in the current economic conditions, and he realized that while the financials didn't show it yet, a major storm was coming.

A few weeks earlier, in April 2018, the salaries for about 38,000 civil servants in the Gaza Strip were delayed. The following month, the Palestinian Authority (PA) <a href="https://www.reuters.com/article/us-palestinians-gaza-salaries/anger-as-palestinian-authority-cuts-gaza-salaries-and-pays-late-idUSKBN1I41LM" target="_blank" rel="noopener noreferrer">cut staff salaries</a> by 20 percent. This marked the beginning of a crisis for Vitas Palestine. The civil servant salaries were unpaid or delayed multiple times, especially in Gaza, which took a toll on the local economy. Gaza's economy was already under severe stress because of movement restrictions brought about by the conflict between Hamas and Israel. Hamas gained control of Gaza in the 2006 elections, but the PA continued to administer payroll in the region, causing tensions between Hamas and the PA.<img class="alignright wp-image-40560" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-1-4-1024x678.png" alt="chart " width="400" height="265" />

Civil servant salaries significantly impact the Palestinian economy because of the low rates of private investment and a low labor force participation rate of <a href="https://databank.worldbank.org/Palestine---Labor-Force/id/ecae3350" target="_blank" rel="noopener noreferrer">44 percent</a>. The territory has one of the highest unemployment rates in the world, with a quarter of the working-age population unemployed. The situation is even more dire in Gaza, which accounted for 29 percent of Vitas' 2018 gross loan portfolio and has an unemployment rate close to <a href="https://databank.worldbank.org/Unemployment/id/2a6c0966" target="_blank" rel="noopener noreferrer">45 percent</a>. In Gaza, 37 percent of the employed individuals worked in the public sector, and therefore, interruptions to civil servant salaries tend to have a cascading effect on consumer spending and the local economy.

The West Bank economy is more diversified than Gaza, with <a href="http://www.pcbs.gov.ps/pcbs_2012/Publications.aspx" target="_blank" rel="noopener noreferrer">16 percent</a> of all employed individuals working in the public sector. Yet, there were concerns that the crisis would seep into the West Bank after the Israeli government passed a law in 2018 that allowed unilateral deductions from the tax revenues it transfers to the PA. The deductions are equivalent to the amount paid by the PA to families of Palestinians killed or put in jail due to the conflict with Israel (about $12 million per month). The tax revenues transferred from Israel represent more than 60 percent of PA's total revenues, and the deductions would further strain PA's budget.
<h2>The Board Moves to Head Off Crisis</h2>
Vitas Palestine began in the early years of the microfinance sector as a USAID project. The incorporation of Vitas Palestine as a for-profit company in 2014 made it easier for the company to borrow from local and international lenders. This ease of access to funding contributed to the rapid growth of Vitas' loan portfolio (see graph below).

<img class="wp-image-40561 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-2-2-1024x487.png" alt="bar graph" width="600" height="285" />

But when the Vitas Palestine's board met in May 2018, the region's worsening economic conditions dominated their discussion. Following the salary interruptions in early 2018, Vitas Palestine began to experience declining portfolio quality, with a 10 percent drop in the collection rate, resulting in a PAR 30 of 6 percent for the total portfolio in May, and a PAR 30 of 16 percent in Gaza. This was a significant increase from the December 2017 PAR 30 of 1.32 percent. Vitas Palestine had a strong debt to equity ratio of 1.81 at the end of 2017, but in 2018, the declining portfolio quality led to a breach of delinquency covenants.

The board and the management agreed that Vitas needed to prepare for further challenges due to the political instability. After deliberations with management, the Vitas board advised against aggressive growth targets and counseled the management to prioritize three areas: managing liquidity, improving portfolio quality, and controlling operational costs.
<blockquote class="pullquote--right">Managing liquidity, improving portfolio quality, and controlling operational costs were three priorities for the board.</blockquote>
Sisalem had been through numerous crises at the company, ever since CHF Ryada, Vitas Palestine's predecessor, disbursed its first housing loan in 1995. As Sisalem was formulating the plan of action to tackle the salary crisis, he knew from experience that maintaining strong relationships with clients, investors, and staff would be crucial to Vitas' survival. The management team at Vitas ensured open communication with its staff and investors. The management also recognized that the front-line staff plays an essential role in deepening client relationships and continued its investment in client relationship officer training to prepare staff to handle difficult conversations with clients.

In order to control operational costs, the management team performed a detailed analysis of its expenses and identified ways to optimize operations. Their analysis showed that there was sufficient liquidity to tackle the next six to nine months without exploring drastic measures to reduce costs. Further, the loan officers' incentives were based in part on portfolio quality, and the increase in PAR 30 during the crisis led to lower incentives paid by the company. This variable component of the compensation structure led to lower staffing expenses and aided the management efforts to lower costs.

Weathering the Storm II: A Case Study of Vitas Palestine

The role of financial inclusion in the COVID-19 response

Rebuilding the post-COVID economy will mean more than preserving powerful players in global and national economies; it will mean saving the small businesses and ensuring employment for workers in the informal and formal sectors. The Global Microscope, which assesses the enabling environment for financial inclusion across five categories and 55 countries, explores the role that financial inclusion has played in policymakers’ crisis response, providing data on how the 55 countries have leveraged their financial infrastructures to support vulnerable individuals, small businesses, and the financial providers that serve poor households.

Below are some key takeaways from the 2020 edition:
<ul>
 	<li>The overall enabling environment for financial inclusion improved as a result of governments’ efforts to reach unbanked populations during the pandemic. Colombia, Peru, Uruguay, Argentina and Mexico lead the global ranking.</li>
 	<li>Investments in digital infrastructure have paid off, with 44 of the 55 countries in scope having used cash transfers to support vulnerable parts of the population</li>
 	<li>Digital IDs can facilitate verification for cash transfers, data integration is needed to target beneficiaries and ensure that marginalized segments of the population are not excluded</li>
 	<li>The pandemic necessitated changes in regulations around remote banking, with several countries relaxing e-KYC rules to facilitate remote account opening, paving the road to the development of a digital, inclusive financial system</li>
 	<li>Financial institutions that serve the poor face liquidity constraints impacting credit availability for the poor, as not all governments were able to address them while rolling out economic stimulus packages</li>
 	<li>Financial authorities should adapt to protect consumers from emerging risks, such as ones posed by the onset of the pandemic and the associated rise in cases of financial fraud</li>
</ul>
The Global Microscope is produced with support from EIU’s partnerships with CFI, the Bill &amp; Melinda Gates Foundation, IDB LAB and IDB Invest.

Global Microscope 2020

Narasimhan Srinivasan

<em>Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, India, Nicaragua and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a> – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

Spandana started in 1998 as a microcredit program of an NGO. It quickly became one of the bellwethers of the country’s microfinance industry, offering small group loans to predominately low-income women without the need for collateral. When Spandana was incorporated as a non-bank financial company/microfinance institution (NBFC-MFI) in 2003, it was the largest microfinance institution in India and the sixth largest in the world. In the early 2000s, Spandana was growing rapidly and began exploring a path to an initial public offering (IPO).

The state of Andhra Pradesh (AP) had become one of the most competitive microfinance markets in India during this time. As more commercial MFIs grew, they competed with the state government’s Self-Help Group-Bank Linkage (SHG) program. The SHGs had access to capital from the banking system and worked with millions of underserved women by helping them save small sums and take out loans.

The AP government started to become uneasy with the outsized impact and influence of commercial MFIs, however. Increased competition led to excessive lending, with many clients taking out multiple loans from both SHGs and commercial MFIs. Average household debt in AP rose to about INR 65,000 compared to a national average of about INR 70,001. The MFIs were accused of harassing customers for repayment. The suicide rate spiked, and the state government began attributing some of these suicides to excessive lending by the MFIs and coercive loan recovery practices.
<blockquote>The Andhra Pradesh government started to become uneasy with the outsized impact and influence of commercial MFIs.</blockquote>
In order to rein in the alleged coercive recovery practices of the commercial MFIs, the state government passed the AP Microfinance Institutions (Regulation of Money Lending) Act in October 2010. The ordinance barred MFIs from collecting payments at certain locations, such as a borrower's home or place of work. The regulatory authority also set interest rate caps and mandated stringent reporting guidelines.

<img class="alignright wp-image-40319" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Spandana-Portfolio-Distribution-Chart-V3-1024x639.png" alt="" width="450" height="281" />Clients misconstrued the ordinance to justify non-repayment of loans owed to the MFIs with no serious repercussions. Within a month, the loan repayment rate had dropped from 99.89 percent to 1 percent. An estimated INR 70 billion in loans in the state, from about 6.25 million accounts, had come under stress. This led to severe cash flow problems for the MFIs in the region. In the end, the ordinance caused some MFIs in the state to close and declare bankruptcy. For Spandana, even though it had sufficient capital adequacy (with equity of INR 4.85 billion), the unfolding crisis meant severe financial stress and cash flow problems.

At the onset of the crisis, loans in AP accounted for about half of Spandana's portfolio. In addition to its customers, the livelihoods of the firm’s employees were also at stake: Spandana employed 7000 in AP and had 850 branches operating there.

After the shock of the ordinance rippled through the microfinance ecosystem, Spandana felt it had no choice but to take the case to the court. While it was good news that their case eventually reached the Supreme Court, it meant a long wait, and Spandana’s management was forced to suspend operations in AP and scrap their IPO plans while the court heard their case. Knowing it couldn’t depend on the legal challenge alone, however, Spandana leadership triaged the most pressing challenges and made some difficult business decisions.
<h2>Hard Solutions for A Long Recovery</h2>
The senior management team quickly recognized that liquidity, crucial for ensuring the company could continue operations, was the top challenge. But for Spandana, additional liquidity in the form of financing was hard to come by as it had taken on debt from 48 lenders to fuel its growth.

<img class="alignleft wp-image-40320" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Lenders-Chart-V3-1024x711.png" alt="pie chart" width="450" height="312" />The team ultimately felt that a corporate debt restructuring (CDR) would be appropriate to get needed liquidity and avoid default. ICICI Bank and SIDBI, Spandana's largest lenders, agreed with the management team's assessment that Spandana needed a CDR. The team needed to convince the Reserve Bank of India (RBI), however, because it did not allow such a facility for NBFCs. Spandana's executive team, along with ICICI and SIDBI, began efforts to persuade the RBI to authorize debt of NBFCs as eligible for a CDR. At the same time, the management team held discussions with its investors to gather internal support for a CDR, pending RBI approval.

In 2011, after months of dialogue with the RBI, Spandana, along with other NBFCs in AP, finally got what they wanted: authorization to proceed with a CDR in accordance with guidelines established by the new policy. The RBI also established rules, which played an important role in stabilizing the regulatory environment on issues related to operational process, customer protection, and governance. It also created a separate class of institutions for NBFC-MFIs for regulatory purposes.

ICICI and SIDBI managed to persuade most lenders to sign on to the CDR package by emphasizing the increased chance of recovery over time with improved ground-level conditions, although some lenders did not agree to the CDR and were left out. In September 2011 (see timeline graphic below) Spandana’s investors signed the CDR, which would restructure their INR 21.46 billion in loans outstanding to address its exposure in AP and assist with liquidity challenges. The CDR had two components:
<h3>1. Optionally Convertible Note (OCN)</h3>
INR 10 billion (46 percent) of the outstanding loan value, an amount equivalent to AP portfolio that was deemed irrecoverable, was restructured into a convertible quasi-equity instrument. A redemption premium of 12 percent per annum was payable at redemption. The lenders also had the option to convert these instruments into equity shares of the company, an option Spandana hoped investors would exercise.
<h3>2. Term Loan</h3>
The remaining INR 11.5 billion (54 percent) was bundled into a 72-month term loan repayable in monthly installments at 12 percent interest from April 2012. The term loan was secured by a pledge of 7.27 million Spandana shares owned by its founder, Padmaja Reddy.
<h2>Leaner and Stronger Operations</h2>
While the CDR resolved the initial liquidity issues keeping Spandana from defaulting, many other business and operational challenges had to be dealt with in order to ensure long-term survival. The first, most immediate challenge was Spandana's increasing operational costs coupled with declining revenue. After an exhaustive analysis of its operational costs, the team decided to reduce its number branches and staff.

The next challenge was to establish strong practices related to customer experience and engagement. This included organizing institution-wide staff trainings on appropriate field behavior and client communications. To further improve field behavior, the staff remuneration structure was changed so that 70 percent of staff salaries were fixed, as opposed to 30 percent before the crisis. The goal of this was to encourage staff focus on portfolio quality instead of growth.
<blockquote class="pullquote--right">Staff members were encouraged to focus on portfolio quality instead of growth.</blockquote>
In 2012, after waiting almost two years, the Supreme Court ruled that Spandana could restart lending and recovery operations in the state. This decision restored Spandana’s recovery efforts and it managed to collect INR 10 billion between FY 2011 and FY 2017. With collections resuming in AP, and the new liquidity provided by the CDR, Spandana decided to expand its portfolio to other states to counter perceived overexposure to AP. By deploying capital in other states, Spandana managed to lower its exposure in Andhra Pradesh to 3.1 percent of its active portfolio in 2017, significantly lower than the pre-crisis level of 51 percent.

Spandana also needed to show it was on track operationally. In FY 2014, Spandana reported disbursing INR 16.67 billion in new loans. The improved collection rate and business performance gave confidence to the CDR lenders, which helped Spandana persuade them to defer CDR payments for a period of two years, from January 2014 to December 2015. This agreement allowed Spandana to continue using the cash from collections to reinvest in the expansion of lending operations. ICICI Bank also stepped up to provide an INR 11.5 billion credit facility to boost portfolio growth outside AP. As a result of these efforts, Spandana was able to strengthen its financial performance and condition and begin servicing the CDR when initial payments came due in 2016.
<h2>Profitability and A Strong New Ally</h2>
The shift in strategy, resumed collections in AP, and operational changes allowed Spandana to become profitable starting in FY 2014 (2013-14) after three years of losses (see graphs below). In FY 2016, Spandana reported a profit of INR 2.45 billion. Moreover, its capital adequacy ratio, which was negative the prior two years, turned positive in FY 2017.

<img class="size-full wp-image-40382 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Profit-Tax-Chart-V6.png" alt="" width="750" height="458" />

<img class="aligncenter size-full wp-image-40383" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Capital-Adequacy-Chart-V5.png" alt="graph" width="750" height="399" />

Although Spandana attempted to fulfill the CDR obligations, there were times when collections and revenue were not adequate to cover payments. Therefore, in 2016, the management began scouting for investors to obtain new funding and buy out the CDR lenders who did not intend to convert their investment into equity. While Spandana continued to negotiate the payoff of the OCN, time was running out fast to find new equity investors. In 2017, Kedara Capital, recognizing Spandana's long-term value, invested by buying out the remaining portion of the OCN. Spandana was also able to get a consortium of banks to provide a loan of INR 11 billion to pay off the outstanding term loan of the CDR. Following these moves, Spandana exited the CDR package, which assisted in improving its credit rating

<img class="aligncenter size-full wp-image-40325" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Spandana-Timeline-V2.png" alt="spandana timeline" width="1500" height="613" />

By 2019, Kedara Capital gradually increased its investment in Spandana to 59.1 percent. As a majority shareholder, Kedara took an active role to help Spandana consolidate the number of lenders and increase the availability of capital at lower cost. With the support of Kedara, the number of lenders was reduced to five, and Spandana was able to obtain new financing for business expansion. Kedara also advised the company to improve its governance structure by bringing in industry experts to serve as independent directors. This rebuild fueled Spandana’s operating and profit margins while enabling the upgrade of its credit ratings.
<blockquote class="pullquote--right">Kedara advised Spandana to improve its governance structure by bringing in industry experts to serve as independent directors.</blockquote>
Finally, 10 years after the AP crisis, Spandana came full circle when it successfully launched its IPO in 2019.  It went well: the company’s share price rose more than 33 percent between August 2019 and late February 2020. Then, COVID hit…

<em>What are some of the dos and don’ts and key success factors that the microfinance sector can learn from the Spandana case? CFI’s forthcoming report, </em>Weathering the Storm II<em>, will draw on lessons from Spandana and cases from microfinance institutions in four other markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia, Palestine and Nicaragua. See the original Weathering the Storm report from 2011 <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">here</a>.
</em>

<em>The author is extremely grateful to N.K Maini, ex-Deputy Managing Director of SIDBI, Gourisankar Gollapudi, CEO of Manaveeya Development and Finance Limited, Nitin Agarwal (former CEO of Spandana between 2010 and 2014) Prakash Kumar, CGM, SIDBI, for agreeing to be interviewed about the Spandana crisis and revival. This case would not be complete without their contributions.</em>

Weathering the Storm II: A Case Study of Spandana

<em>Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – Azerbaijan, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovina</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a> – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

Aynur Aliyeva began 2015 in limbo and facing uncertainty. Her CEO had just left Azerbaijan and gone back to the Philippines, thousands of miles away, having been denied a renewed work visa a few months earlier. As his deputy at the Azerbaijani microfinance company Viator, Aliyeva stepped in, working feverishly with lawyers and government authorities to bring the CEO back. Unbeknownst to her, a far greater challenge loomed just ahead.

On February 21<sup>st</sup> of that year, the Azerbaijani currency, the manat, lost 25 percent of its value — all in a single day. For a country whose currency had been steady since at least 2000, even during the height of the global financial crisis in 2008-09, such a devaluation was a major shock. It capped a year of severe economic pressures, with falling oil prices over the past year having already been felt in every corner of the petroleum-driven economy. Even with that, the devaluation was something new entirely — “snow in the middle of summer,” thought Aliyeva.

These pressures were bearing down on Viator. Like other MFIs in the country, much of Viator’s portfolio was lent out in USD-denominated loans, and most of its debt was likewise in dollars. Now its borrowers — few of whom actually earned USD incomes — were facing large payment shocks, on top of already being affected by the slowing economy. Viator was entering an existential crisis. Meanwhile, Aliyeva spent those initial few months navigating between a remote CEO, concerned investors and staff, and a loan portfolio that was fast deteriorating.

<img class="wp-image-40041 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-1-v2-1-1024x620.png" alt="" width="400" height="242" />In April 2015, Aliyeva was finally appointed CEO. With that uncertainty resolved, Viator embarked on a crisis response. Its first step was to change its lending policy; until then, Viator had been lending between a third and half of its loans in USD. With the devaluation, it began to sharply curtail this practice, bringing USD disbursements down to zero by the end of the year. That was just in time, because on December 21<sup>st</sup>, the manat was suddenly devalued again, this time by another 32 percent. With these two devaluations, the manat had lost half of its value — and the decline would continue through 2016 into 2017.

The resulting fear and uncertainty, combined with a major recession, destroyed trust and threw the entire financial sector into turmoil. Viator was a small fish, had no deposits, and certainly did not meet the too-big-to-fail test. Its primary shareholder was a Norwegian NGO that, while morally supportive, had little financial expertise and no access to additional capital. If Viator was to survive, it would have to do it on its own.

And survival was indeed at stake. Several of the country’s MFIs, far larger and more important than Viator, would not make it.

Aliyeva had never run an MFI in the midst of crisis, but that had its advantages, too — she carried no “founder’s syndrome” baggage; whatever mistakes were made previously were made by her predecessor. This allowed her to ignore the past and focus entirely on the present and the future.

<img class="wp-image-40055 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-2-v4-1024x660.png" alt="" width="600" height="387" />In the meantime, in Viator’s portfolio, things were going from bad to worse. By the end of 2015, 47 percent of its loans were overdue. A year later, that number had grown to 77 percent, comprising mostly loans that were by then more than 12 months behind. Faced with such numbers, most managers would panic.

Aliyeva did not panic. With many of the country’s financial institutions — banks and MFIs alike — hunkering down in the midst of crisis, Viator suddenly found a wide-open market. In the face of uncertainty and volatile cash flows, people still needed to borrow. And so Viator continued to lend. Indeed, no matter how bad things got during the long crisis period, Viator never stopped lending.

Having already switched to entirely local currency loans, Viator focused on the best clients and low-risk products. Chief among these was the jewelry loan, which allowed clients to monetize the gold received during weddings and other family events — a common cultural practice in Azerbaijan. With this secure and relatively liquid collateral, Viator could lend during the depths of the crisis, and still keep credit risk low.

Of course, this new lending was far below pre-crisis levels. Midway through 2016, monthly disbursements averaged AZN 0.6 million, or 70 percent lower than a year earlier. By mid-2017, this was cut again by half, down 83 percent from the level set two years before. These lower disbursements were accompanied by lower operating costs; in 2016 alone, operating expenses were halved, mainly through salary cuts and staff attrition, as well as layoffs that prioritized retention of the best-performing and most experienced staff.

<img class="aligncenter size-full wp-image-40044" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-3-v2-e1604330128251.png" alt="" width="1200" height="438" />

Though shrinking, Viator was by no means closing its doors. Despite the greatly reduced levels, new disbursements proved crucial to its survival. By January 2017 — a year after the second devaluation that marked the full onset of the crisis — repayments from its new portfolio of jewelry-backed loans accounted for nearly two-thirds of Viator’s total cash inflows. Indeed, for nearly five years during the period 2015-2019, loan repayments were Viator’s sole source of cash inflows. That proved crucial not only for allowing Viator to continue disbursing new loans, but also to continue to repay its debt.

<img class="aligncenter wp-image-40045" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-4-v2-1024x587.png" alt="" width="797" height="457" />

At the start of 2015, nearly all of Viator’s funding was in the form of debt from foreign social investment funds, mostly in foreign currency. Given the depth of the crisis, its investors were naturally worried. Many had also invested in other MFIs in Azerbaijan, not surprising considering that just before the crisis, the country was one of the five largest markets in the world for microfinance investment. Now these investors were faced with preserving capital and minimizing losses.

Complicating matters further, some investors had disbursed their investments as recently as February 2015, while others were already near the end of their loan maturities. With Viator in violation of multiple debt covenants, investors faced the same coordination problem that arises with nearly every crisis-stricken MFI: if all of them were to follow the loan covenants and accelerate their debts, they would be fighting for the meager leftovers of a liquidated entity. Not only would they face steep financial losses, they would also be abandoning an MFI that was one of the few institutions still providing loans to excluded rural households in Azerbaijan.

<img class="aligncenter size-large wp-image-40047" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-5-v2-1-1024x350.png" alt="" width="1024" height="350" />

To nearly all investors, the answer was clear: the debt had to be restructured. Despite this, the negotiations among them proved challenging. Some of the investors had prior experience handling workouts, but for others, this was the first time. There were additional obstacles that some negotiators faced when needing to explain these inter-creditor discussions and tentative agreements to their own credit committees, some of which had limited experience investing in microfinance or even in emerging markets more generally. For one credit committee, the sole reference point for debt restructuring was a court-supervised process — a drawn-out and deeply uncertain option in the context of Azerbaijan. Educating them in these realities took time.

One crucial input into these negotiations was an assessment and recommendations from an external advisor, hired by Viator in early 2016 upon the recommendation of one of its investors. The advisor had extensive experience managing situations such as this, having worked at a crisis-stricken MFI in Bosnia and Herzegovina during its turnaround following the 2008 crash. Her report found that while Viator was deeply affected by the crisis, its operations were sound and it remained a viable institution that could survive the crisis. The report also contained a series of suggestions to Viator, especially aimed at strengthening collections on overdue loans — advice that Aliyeva readily adopted.

The consultant went further and invited several of Viator’s senior staff to her former MFI in Bosnia to directly observe the collections systems the MFI had instituted during its turnaround. This experience, along with training of Viator’s collections staff, were crucial factors into Viator’s crisis response.

The work this consultant did for Viator was not only important to the MFI; included with her report was a series of cash flow projections that showed the turnaround to be very much possible. These projections would prove a critical input for Viator’s investors.

Throughout this time, Viator’s transparency and openness with both the external advisor and with its investors played an important role in building trust. As it happens, several of the fund managers had also invested in another Azerbaijan MFI that took an approach that was diametrically opposite from Viator’s. Its unwillingness to communicate and share information made Viator’s openness even more notable in the investors’ eyes — and made them more willing to make the difficult decisions required for the workout.
<blockquote class="pullquote--left">Viator’s transparency and openness with both the external advisor and with its investors played an important role in building trust.</blockquote>
With the consultant’s report concluded in June 2016, negotiations among Viator’s creditors swung into high gear, and finally in August 2016, they signed an inter-creditor agreement that extended all loans, regardless of maturity. The agreement specified a single repayment schedule for all investors, who would be paid pro rata, but using a formula that gave some additional preference to debts with the earliest maturities. The agreement also fixed a discounted interest rate of 5 percent for all creditors. Over the course of the next two years, reflecting the depth of the crisis, this agreement would be amended twice more, adding further discounts to the interest rate.

During these negotiations, Aliyeva was adamant that rather than funneling all excess inflows from loan repayments back to its creditors, Viator should use a substantial portion of these cash flows in order to reinvest in new lending. For investors, this meant they would have to sacrifice some repayments in the short-term. It is here that the external consultant’s projections proved crucial, for they showed the value of reinvesting cash flows into new loan disbursements. Indeed, a number of Viator’s investors used these same projections as a benchmark to monitor Viator’s performance over the coming months.

<img class="alignright wp-image-40058" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-6-v3-1-1024x713.png" alt="" width="550" height="383" />With its liquidity thus stabilized, Viator could focus on managing its solvency situation. Here, things were arguably even more challenging. It certainly helped that Viator entered the crisis well-capitalized, with equity comprising 40 percent of total assets at the end of 2014. Even so, that generous level of capital was not enough when 63 percent of its pre-crisis portfolio was six or more months delinquent by the end of 2016. One way that Viator handled this challenge was by adapting its provisioning practices. At the outset of the crisis in 2015, it provisioned generously (100 percent for all loans overdue by more than 90 days), in 2016-18 provisioning dropped to as low as 64 percent, even when nearly all overdue loans had by then exceeded 12 months.

The decision to change its provisioning rules helped conserve much needed equity, which by 2017 had eroded to just 13 percent of assets. Doing so bought crucial respite during the years that non-performing loans continuing to fester on its books. Finally, rescue arrived in 2019, four years after the onset of the crisis, when the Azerbaijani government implemented a rescue package for the microfinance sector. Through it, Viator received both a grant and a subsidized loan from the Central Bank of Azerbaijan that allowed it to cover a major portion of its losses. Only then did Viator once again fully provision for its delinquent portfolio. Almost exactly five years after the onset of the crisis in February 2015, Viator could finally close the last page on this difficult episode and truly look forward.

A few months later, it was facing COVID-19…

<em>What are some dos and don’ts and key factors of success that the microfinance sector can learn from the Viator case? CFI’s forthcoming report, </em>Weathering the Storm II,<em> will draw on lessons from this case and cases from microfinance institutions in four other markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovenia</a>, India, Palestine and Nicaragua. See also CFI's original <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">Weathering the Storm</a> report from 2011</em>.

Weathering the Storm II: A Case Study of Viator

Maha Khan

Simon Agez

<h2>I. Operationally Resilient Fintechs: Conserving cash and protecting core operations</h2>
<p>Fintech CEOs have had to make very difficult decisions to ensure they survive the pandemic. Our findings suggest that fintechs are employing diverse strategies to keep their staff on-board, such as salary cuts, work-from-home measures, and shifting to part-time to preserve cash: the median number of employees in May 2020 was seven, compared to six in December 2019. The relatively small increase in the median number of staff may be explained by the growth in payment, savings, and financial management and insurance services during this time period, discussed in detail in point four. The small median number of salaried employees in general (Figure 3) seems to have made it easier for early-stage fintechs to manage costs, likely <a href="https://www.themix.org/news-blog/disrupting-fintech-four-ways-early-stage-firms-are-adapting-to-deal-with-the-effects-of-covid-19" target="_blank" rel="noopener">avoid layoffs</a> and, in some cases, marginally increase the number of their staff.</p>
<h4>Figure 3. Change in Salaried Employees, by business model</h4>
<p><img class="alignnone size-large wp-image-40003" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-3-v3-1024x606.png" alt="" width="1024" height="606" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-3-v3-1024x606.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-3-v3-300x177.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-3-v3-768x454.png 768w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<h6>N = 409<br />
Note: B2B—business to business model; B2B2C—business-to-business-to-consumer model; B2C—business-to-consumer model</h6>
<p>For fintechs with more than 50 employees (a total of 39 with the majority Series A/B), only 30 percent decreased the number of their employees. They comprise mainly digital lenders which may reflect the decrease in their services during the pandemic (discussed in detail in point 4). These findings are also reflected in MSC’s <a href="https://nextbillion.net/weathering-covid-emerging-markets-fintech/" target="_blank" rel="noopener">qualitative research</a> whereby fintechs are implementing “softer” measures like salary cuts before thinking about more stringent measures such as layoffs and furloughs.</p>
<h4><em>Maintaining a cash buffer</em></h4>
<p>To continue operations and survive the crisis, it’s prudent to keep more cash on hand. Given that startups rely on cyclical, often short-term funding for each phase of their product development, preserving cash may be more challenging. Interestingly, our data shows only a slight decrease in fintechs’ median cash runway before and during the pandemic: seven months of cash runway in May 2020 compared with nine months cash runway in December 2019. Undoubtedly seven months is considered a short runway, especially given the limited debt liquidity in the market at the moment. Nevertheless, the cash buffer that fintechs have still been able to maintain between December 2019 and May 2020 supports our qualitative findings that fintechs have been preparing for three-, six-, and nine-month slowdown scenarios and options to decrease spending, which demonstrates operational resiliency. Some resilience may come from the growth in payment and savings/financial management services as well (discussed further in point four).</p>
<p>Interviews with investors indicate that early-stage fintechs are seeking bridge rounds to maintain and grow this cash buffer and are being advised to budget six months, for example, for an equity raise during these challenging times.</p>
<p>A little less than a third of fintechs (29 percent) have a year or more of cash reserve (the majority in growth stage), and a similar percentage have six months or less (Figure 4).</p>
<h4>Figure 4. Fintech Cash Runway (May 2020)</h4>
<p><img class="alignnone size-large wp-image-40004" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-4-v3-1024x569.png" alt="" width="1024" height="569" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-4-v3-1024x569.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-4-v3-300x167.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-4-v3-768x427.png 768w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<h6>N = 316</h6>


<h2>II. New Partnerships: Increasing business opportunities in partnership with institutions that need to accelerate their digitization processes/services</h2>
<h4><em>Creating new strategic alliances</em></h4>
<p>Findings from the Inclusive Fintech 50 dataset reveals that COVID-19 gave many fintechs the impetus to further leverage their unique skills and assets to digitize features and services they had not yet digitized. As demonstrated in Figure 5, the majority of fintechs focused on adapting their delivery channels (i.e. increasing partnerships/customers) and processes (i.e. digitizing features).</p>
<h4>Figure 5. Changes Fintechs made due to COVID-19</h4>
<p><img class="alignnone size-large wp-image-40005" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-5-v3-1024x525.png" alt="" width="1024" height="525" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-5-v3-1024x525.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-5-v3-300x154.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-5-v3-768x394.png 768w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<h6>N = 409 (respondents) N = 701 (responses) (multiple select options)<br />
The majority in the ”Other” category refers to “no change/no impact,” followed by fintech “working remotely.”</h6>
<p>It also presented an opportunity for B2B and B2B2C fintechs to build partnerships with businesses that may be non-traditional to them, such as banks, logistics services, and e-commerce platforms. This relates to the growing trend of <a href="https://www.cbinsights.com/reports/CB-Insights_Fintech-Webinar-Q2-2020.pdf" target="_blank" rel="noopener">embedded finance</a>, where the provision of financial services is integrated within the offering of any business service. This new perception of the delivery of financial services is bringing new prospects for fintechs.</p>
<p>Our qualitative findings suggest that the majority of these new partnerships are with institutions that need to digitize quickly due to COVID-19 lockdowns. A B2B fintech based in India that provides lending to MSMEs in our sample started working with banks, as they could not fully operate during the COVID-19 lockdown. The fintech introduced digital compliance measures to make it easier for banks to continue their service, and as of early June 2020, this fintech had created 12 new partnerships. The fintech also noted that they have received more demand from MSMEs and as a result, the fintech has tailored portions of their onboarding processes for MSMEs.</p>
<p>Some fintechs in our sample are partnering with companies considered essential to continue their operations, like e-commerce platform Jumia or logistics service providers to deliver essential goods during the lockdown.</p>
<p><em>“Prior to COVID-19, our clients, the (boda) drivers operat[ed] as individual business[es]. However, the government has restricted drivers from operating [and] this has led to lack of jobs, business for the drivers and the ripple effect is inability to pay towards the full acquisition of their assets. [We have] started partnerships with [e-commerce platform] and other delivery houses who still require the services of the drivers as they are allowed to operate.”</em> (B2B Credit Fintech, Sub-Saharan Africa)</p>
<p>Others are taking a leaner approach to partnerships by targeting community organizers, business owners, and neighborhood clubs that could implement the fintech’s platform for free.</p>


<h2>III. New Approaches to Customer Acquisition: Focusing on online strategies and offline functionality</h2>
<h4><em><strong>Increasing use of Facebook and WhatsApp for customer acquisition</strong></em></h4>
<p>The early-stage fintechs in the Inclusive Fintech 50 sample are increasing their use of digital acquisition channels, such as Facebook, to market their products. Qualitative findings point to an increased use of targeted social media campaigns, webinars, and other online marketing strategies such as email campaigns or WhatsApp chat room for clients — indicating that these channels are cheaper than TV and print media and likely more effective.</p>
<p>Our findings also indicate that for customers who may not have access to these platforms, some fintechs are using SMS messages and radio to communicate information about a product, registration, and even training materials. In fact, a payments fintech operating in Sub-Saharan Africa reverted to a phone and SMS campaign, due to COVID-19, which resulted in a customer conversion rate of 15 percent compared to 17 percent of door-to-door campaigns they conducted prior to the COVID-19 crisis. They have found that their SMS/phone campaigns have a higher return on investment due to the reduced investment in the resources required for door-to-door campaigns.</p>
<h4><em><strong>Increased use of training and offline functionality as a way to onboard consumers and agents</strong></em></h4>
<p>Online training is a common solution for fintechs to guide first-time users. Similarly, fintechs are adopting remote and online processes and tools to onboard and train their agent network (i.e. using video call services like Skype). This shift away from in-person customer onboarding may disadvantage some consumers; some fintechs (7 percent of the IF50 sample) are taking into consideration rural clients (7 percent). Aiming to improve their outreach to these populations, fintechs have added offline functionalities to their products, like apps that work offline in order to for users to consume content, apps that can use mobile network signals to synchronize users’ or a savings group’s data, and cards that can be read by POS machines.</p>


<h2>IV. New Products and Product Changes: Adapting products and service to meet clients’ changing needs</h2>
<h4><em>Growth in payment and savings and personal financial management services</em></h4>
<p>Our data (Figure 6) shows that payments (comprising 24 percent of Inclusive Fintech 50 data) and savings and financial management services (comprising 23 percent of Inclusive Fintech 50 data) grew during the early days of the pandemic (approximately 2 percentage points and 7 percentage points, respectively). The growth in payment services is unsurprising. While the World Bank predicts a <a href="http://worldbank.org/en/news/press-release/2020/04/22/world-bank-predicts-sharpest-decline-of-remittances-in-recent-history" target="_blank" rel="noopener">20 percent fall in remittances</a> during COVID-19, remittance providers themselves are noting very large increases in June 2020 due to scaling digital channels.</p>
<p>According to UNCDF’s <a href="https://www.uncdf.org/article/5606/covid-19-changing-the-landscape-for-migrants-and-remittances" target="_blank" rel="noopener">survey of remittance service providers</a>, Moneygram’s account deposit and mobile wallet transactions increased <a href="https://www.bloomberg.com/press-releases/2020-07-31/moneygram-international-reports-second-quarter-2020-results" target="_blank" rel="noopener">148 percent year-over-year</a> in the second quarter of 2020 globally. Before COVID-19, Vodafone MPAiSA Fiji <a href="https://www.centerforfinancialinclusion.org/remittances-and-financial-inclusion-sending-money-home-in-the-covid-era" target="_blank" rel="noopener">did 6,500 transactions</a> — almost USD$1 million — per month, which has now increased to 22,000 transactions per month and USD$3.1 million in volume.</p>
<p>In Pakistan, mobile money provider Easypaisa reported a <a href="https://tellimer.com/article/pakistan-digital-payments-boom-under-covid-19" target="_blank" rel="noopener">35 percent increase</a> in new customers during the lockdown, with inactive customers also returning to the service.</p>
<p>Moreover, fintechs are adding services to their anchor products to meet the financial needs of their clients at this time, such as mobile wallets, credit, and microinsurance products (i.e. health insurance due to COVID-19-related illness and income protection insurance). A B2B credit fintech in sub-Saharan Africa, for example, added cargo to their ride-hailing services to grow their business post-lockdown measures. Another B2B Fintech in South Asia that offers digital tools to financial service providers (FSPs) revised their credit scoring algorithm to acquire more customers and introduced new processes and tools so their clients could continue conducting basic activities like disbursements, loan approval, and customer onboarding mechanisms without time-consuming registration processes.</p>
<p>Given the pandemic’s toll on household incomes, we did not expect to see a rise in savings products. However, 53 fintechs, representing 57 percent of the savings and financial management product category in the Inclusive Fintech 50 dataset, focus on financial management/education services and investment. Some of the savings and financial management fintechs are either now offering incentives as a result of COVID-19 to save in flexible ways, or bundling services on top of their core products to increase their scale, such as insurance and payment.</p>
<p><em>“We introduced a new product which was an emergency fund ROSCA, which are five months long allowing people to gain access to quicker cash for shorter time. We also introduced working capital committees and connected people who wanted to help with those who were in need of help to build resilience and accountability rather than just give out donation. We saved multiple women-run businesses and gave them ability to remain afloat.”</em> (B2C Savings Fintech, South Asia)</p>


<h4><strong><em>Growth in insurance products</em></strong></h4>
<p>The Inclusive Fintech 50 data also reflects a very slight growth in the uptake of insurance products between December 2019 and May 2020 (Figure 6), which is likely an outcome of the health crisis created by COVID-19. In fact, the founder of Toffee Insurance, based in India and a 2019 Inclusive Fintech 50 winner, <a href="https://www.accion.org/everyone-is-out-there-reassessing-how-much-liquidity-they-have-toffee-insurances-rohan-kumar" target="_blank" rel="noopener">discussed</a> with Accion Venture Lab (AVL) how people across income levels are “proactively looking for products.” He argues that COVID-19 is changing consumer perceptions of insurance and that fintechs can meet this demand.</p>
<h4>Figure 6. Fintech Compound Monthly Growth Rate, December 2019 and May 2020</h4>
<p><img class="alignnone size-large wp-image-40006" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-6-v3-1024x576.png" alt="" width="1024" height="576" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-6-v3-1024x576.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-6-v3-300x169.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-6-v3-768x432.png 768w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<h6>N = 170</h6>
<h4><em><strong>Offering clients flexible repayment options</strong></em></h4>
<p>As shown in Figure 6, credit services slightly decreased between December 2019 and May 2020. This is no surprise given that COVID-19 lockdowns are negatively impacting small businesses, and moratoria have been offered on repayments. Similar to MFIs <a href="https://www.cgap.org/pulse" target="_blank" rel="noopener">giving leniency</a> to its clients, credit fintechs too are implementing similar measures, such as flexible repayment options, grace periods, or increasing the number of payment installments. This is associated with a reduction in lending and tightening of the underwriting process, reflecting fintechs’ risk mitigation strategies.</p>


<h2>V. New Funding Sources: Fintechs are changing their fundraising strategies</h2>
<p>In a recent blog, <a href="https://www.centerforfinancialinclusion.org/fintechs-next-best-ideas-might-be-discovered-remotely" target="_blank" rel="noopener">we wrote</a> that while fintechs are looking for the cash they need to prove their business model and scale, in the absence of face-to-face meetings and travel restrictions, fundraising and investment will look very different for fintechs and investors. While the investors we spoke with are ready to invest in emerging fintechs as the pandemic subsides, our data tells us that<strong> </strong>fintechs are turning to different types of investors and instruments to grow their business. Interestingly however, more than a quarter of our respondents noted their fundraising strategy as of May 2020 had not changed (Figure 7).</p>
<h4>Figure 7. Fintech Fundraising Strategies due to COVID-19</h4>
<p><img class="alignnone size-large wp-image-40007" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-7-v3-1024x592.png" alt="" width="1024" height="592" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-7-v3-1024x592.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-7-v3-300x174.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-7-v3-768x444.png 768w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<h6>N = 409 (respondents) N = 556 (responses) (multiple select options)</h6>
<p>The majority of inclusive fintechs (self-funded/seed) that have changed funding strategies are no longer primarily seeking equity investments and instead have broadened their search to include shorter-term investment instruments such as debt and grants. They are approaching impact investors and development financial institutions, given the increase in interest — due to the pandemic — in inclusive finance and fintechs’ product offerings. There were some self-funded fintechs that noted they were ready to move to equity financing as debt financing interest rates were high. This finding supports our interviews with impact investors that fintechs have a pressing need for short-term cash.</p>
<p><em>“[We] originally planned to raise a Series A round, but given the COVID investment climate and drastic reductions in valuations we pivoted to raising a seed extension. [We] see an opportunity while economic access and inclusion has been brought to the forefront by this pandemic. We are now in closing conversations on our Seed Extension for an incremental $2 million.”</em> (B2B Credit Fintech, Seed/Angel Stage, United States)</p>
<p>For later-stage fintechs (Series A and B), the Inclusive Fintech 50 data points to a mix of financing instruments — debt financing, equity and equity-like instruments such as convertible notes. Their willingness to continue equity financing reflects that they are willing to accept reduced valuations, which may attract new investors.</p>
<p>Nigel Morris of QED Investors argues that “<a href="https://www.accion.org/a-great-company-going-into-covid-is-invariably-a-great-company-coming-out" target="_blank" rel="noopener">investing in consumer-centric, value-creating, [and] digitally-oriented</a>” fintech models have remained largely unchanged, and he believes that “a great company going into COVID is invariably a great company coming out.” Fintechs in our sample remain hopeful because of the value-added, customer-centric services they are offering to those who need it the most in this time of crisis and hope that their agility signals their resilience and commitment.</p>


<h2>What’s Next for Fintechs?</h2>
<p>The findings have demonstrated how the COVID-19 crisis has created opportunities for fintechs to expand and tailor financial services and contribute to the financial resilience of small businesses and low-income households. They have proven operational resiliency and agility, created new partnerships, designed strategies to acquire new customers, and pivoted products to meet customer needs. Indeed, a recent survey of <a href="https://bfaglobal.com/catalyst-fund/insights/women-and-youth-may-be-weathering-covid-better-than-others-but-the-most-vulnerable-are-getting-left-behind/" target="_blank" rel="noopener">fintech customers</a> conducted by BFA’s Catalyst Fund found that there is clear demand for credit and other financial products, and large gaps in insurance coverage of all kinds (i.e., health, life, disability). They also found that almost 50 percent of fintech customers report they have utilized the startup’s services since the onset of the pandemic, and 60 percent report that the service was very useful.</p>
<p>Still, fintechs’ biggest need is access to an investor network and capital in order to continue innovating. It is incumbent on investors to rise to this occasion and fuel fintechs with the tools they need to respond to the needs of the hour. We provide recommendations to assist investors in their strategies and fintechs wanting to learn from their peers.</p>
<h4><strong>Recommendations </strong></h4>
<p>Investors:</p>
<ul>
<li><strong>Streamline investments efforts by collaborating with other investors </strong>to deploy capital to high-impact investment opportunities more quickly, and better monitor rapidly emerging trends. Initiatives like the <u>Nest</u>, the <u>Response, Recovery, and Resilience Investment Coalition</u>, and Village Capital are connecting impact investors with impact-oriented start-ups.</li>
<li><strong>Assist fintechs with management advice and technical assistance. </strong>Technical assistance models, such as those offered by SCBF, enable financial institutions to innovate and scale in order to increase uptake.</li>
<li><strong>Deploy bridge loans </strong>to provide early-stage fintechs cash buffers to protect their operations and continue innovating.</li>
</ul>
<p>Fintechs:</p>
<ul>
<li><strong>Employ customer-centric research to design products/services </strong>that respond to the needs and preferences of your target market.</li>
<li><strong>Design a segmented partnership strategy </strong>that leverages the opportunities COVID-19 is presenting: accelerating digitization of traditional institutions and digital platforms that are embedding financial services in their product suite.</li>
<li><strong>Win hard-earned customer trust by employing robust and transparent consumer protection</strong>.</li>
</ul>
<p>We hope that these findings and the insights from the <a href="https://www.inclusivefintech50.com/white-paper-2020" target="_blank" rel="noopener">2020 Inclusive Fintech 50</a> white paper will provide investors with evidence to assist them in their discovery process.</p>


The economic crisis brought about by the COVID-19 pandemic is disproportionally impacting small businesses and low-income households. While there is emerging evidence about how individuals and MSMEs have been impacted by COVID-19, the impact on the providers that serve these customer segments is less clear, particularly when tech-enabled providers play an important role in mitigating the economic impacts of the pandemic for households and businesses by <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/PFFIEA.pdf" target="_blank" rel="noopener noreferrer">deploying services quickly and efficiently</a>. Additionally, fintechs are well-suited to <a href="https://www.consultancy.eu/news/4523/covid-19-crisis-also-an-opportunity-for-fintechs-says-bcg" target="_blank" rel="noopener noreferrer">bounce back</a> and reorient themselves in times of crisis given their <a href="https://www2.deloitte.com/us/en/pages/financial-services/articles/beyond-covid-19-new-opportunities-for-fintech-companies.html" target="_blank" rel="noopener noreferrer">agile nature</a>. However, in order to determine how best to support fintechs, more information is needed to understand how these providers have adapted to a challenging economic landscape.

To understand more about the impact on and the role of these providers, CFI, in partnership with the <a href="https://scbf.ch/" target="_blank" rel="noopener noreferrer">Swiss Capacity Building Facility</a>, conducted research to understand fintechs’ early adaptation and coping models under COVID-19. This brief draws findings from the <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> applicant data coupled with key informant interviews with investors and fintechs conducted in March 2020. During June and July 2020, 403 early-stage fintechs (Figures 1 and 2) applied through a publicly available online form that gathered data related to target market, financials, product details, as well as seven COVID-19-specific questions exploring changes in fintechs’ business and operating models between December 2019 and May 2020. The findings also include COVID-19 survey findings from six 2019 Inclusive Fintech 50 winners.
<h4>Inclusive Fintech 50 Sample Distribution
Figure 1. Inclusive Fintech 50 Distribution by Product Category</h4>
<img class="alignnone size-large wp-image-40001" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-1-v3-1024x627.png" alt="" width="1024" height="627" />
<h6>N = 409
Note: Infrastructure includes a fintech whose main business is to provide processes and tools that enable multiple types of financial services such as credit, payments, insurance, and personal wealth management.</h6>
<h4>Figure 2. Inclusive Fintech 50 Distribution by Fintech’s Operating Country</h4>
<img class="alignnone size-large wp-image-40002" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-2-v3-1024x671.png" alt="" width="1024" height="671" />

The findings show these early-stage fintechs innovated rapidly to meet the changing needs of their customer base, while simultaneously reconfiguring operating models, internal policies, and growth strategies. Importantly, the findings present clear opportunities for investors to play a central role in expanding financial services to the underserved through these critical providers.<strong> </strong>

Findings from our research reflect five key takeaways:
<ol>
 	<li><strong>Fintechs are operationally resilient.</strong> Fintechs are maintaining a cash buffer and employing diverse strategies to keep their staff on board.</li>
 	<li><strong>New partnerships.</strong> The pandemic is enabling early-stage fintechs to increase their business opportunities by creating new partnerships with banks, government, and non-governmental organizations (NGOs) that need to digitize their services.</li>
 	<li><strong>New approaches to customer acquisition.</strong> Early-stage fintechs are employing digital delivery channels like platforms to increase uptake.</li>
 	<li><strong>New products and product changes.</strong> Early-stage fintechs are pivoting products to meet client needs. Payments and — surprisingly — savings and financial management fintechs grew their services between December 2019 and May 2020.</li>
 	<li><strong>New funding sources:</strong> Almost all of the fintechs have had to change their fundraising strategies in light of COVID-19, mainly diversifying their funding base.</li>
</ol>
While fintechs have shown resilience by innovating and evolving their offerings in the wake of the COVID-19 crisis, their biggest need remains access to capital in order to continue innovating.

Rapid Innovation: How Fintechs are Adapting Under COVID-19

Tanwi Kumari

This report shares findings from a client survey in Cambodia on the consumer protection practices of financial service providers. A guidance note is also provided for organizations seeking to conduct similar surveys by IVR.

Consumer protections are a critical component of a stable financial system, particularly when dealing with vulnerable and low-income populations. Because of the difficulty in reaching some consumers due to lack of access to technology, pandemic-related challenges in collecting face-to-face data, and other factors that prevent standardized and widespread data collection, new tools have become necessary to survey consumers about the protections they receive from their financial service providers (FSPs).

In Cambodia, CFI — in partnership with the Cambodia Microfinance Association (CMA) and with support from the Mastercard Foundation — conducted a survey using interactive voice response (IVR) for client feedback regarding their interactions with their FSPs. Overall, clients surveyed in Cambodia expressed a strong level of satisfaction with FSPs with regard to client protection principles (CPPs), indicating that the protections put in place by the three FSPs participating in the survey are functioning as intended. The three participating FSPs - AMK, MAXIMA, and HKL - received high marks from consumers in areas such as providing appropriate product and service options, prevention of over-indebtedness, and treating consumers fairly and respectfully.

While the overall client feedback was positive, a few areas of opportunity became apparent. The survey results reveal that many consumers are unaware of how to access FSPs’ complaint resolution mechanisms, and some are unlikely to use them, even if the process is clear. Survey results also indicate that there is room for improvement with regard to transparency, as consumer awareness of charges and various terms and conditions was found to be somewhat lacking.

Client Perspectives on Consumer Protection: Analysis of a Client Survey in Cambodia

Latest Publications

<p>Mishra&#8217;s research interests are in empirical banking, credit access, contract theory, and empirical asset pricing.</p>


Doctoral Candidate, Department of Banking and Finance, University of Zurich

Mrinal Mishra

<p>Jonathan Fu is a postdoctoral researcher at the University of Zurich affiliated with the CSP and the Centre for Human Rights Studies (CHRS). He conducts empirical research on financial inclusion and entrepreneurship.</p>
<p>Before earning his doctorate, Fu was a U.S. Peace Corps volunteer and a senior research analyst at Acumen, a social policy consultancy in the US. He holds a master&#8217;s in public policy from the London School of Economics and the Sciences Po and a BA in economics from the University of California, San Diego.</p>


Postdoctoral Researcher, Department of Banking and Finance, University of Zurich

Jonathan Fu

<p>Anindita Chakraborty joins the Center for Financial Inclusion as Senior Specialist, Special Projects &amp; Operations. In this role, Anindita will work closely with the CFI leadership team focused on events planning, presentations, social media, research, fundraising, and internal knowledge management.</p>
<p>Anindita recently graduated from Columbia University School of International and Public Affairs (SIPA) with an MPA in Economic and Political Development. She is currently completing a fellowship with the UN Foundation’s Digital Impact Alliance (DIAL). She is working on a category management guide to enable governments to procure digital technologies strategically. Anindita has worked for several financial inclusion organizations, including IFMR Rural Finance, M-CRIL, and Entrepreneurial Finance Lab. While working as the Partner Success Manager at Entrepreneurial Finance Lab, she helped financial institutions in India and Nepal adopt psychometric credit scoring to safely accelerate lending to low-income households and enterprises.</p>


Senior Specialist, Special Projects & Operations

Anindita Chakraborty

<p>Nusrat leads BIGD’s knowledge management team, develops and implements communication strategies for effective stakeholder engagement, and oversees the quality of BIGD’s external communication. Nusrat also works with the research teams for developing new projects and writing proposals.</p>
<p>Before joining BIGD, Nusrat worked as a research coordinator at the Bangladesh office of Innovations for Poverty Action (IPA). Her experience in managing poverty reduction programs and exposure to the world of development research, combined with her passion for writing, have shaped her interest in promoting evidence-based development interventions and made her effective in bridging the gap between research and practice.</p>
<p>Nusrat holds a Master’s degree in public administration-development practice from the School of International and Public Affairs (SIPA), Columbia University. She completed her Bachelor’s degree at the Institute of Business Administration, University of Dhaka.</p>


Head, Business Development and Knowledge Management, BRAC Institute of Governance and Development 

Nusrat  Jahan

<p>Munshi is a researcher for BRAC International in Africa and an advisor for the BRAC Institute of Governance and Development (BIGD). He has over 15 years’ experience in conducting operational research and impact evaluations using experimental and quasi-experimental methods. He previously worked as a research director at Innovation for Poverty Action (IPA) and Save the Children. Munshi completed his Ph.D. in development studies from the London School of Economics and Political Sciences (LSE) and spent a year as post-doctoral associate at the Economic Growth Center at Yale University.</p>


Regional Research Lead, Africa, BRAC International 

Munshi  Sulaiman

<p>Rachel&#8217;s research interests are in development and labor economics, with a focus on increased labor market opportunities for women in developing countries (such as the garment industry in Bangladesh). She studies how these new job opportunities are changing women&#8217;s lives, the factors that influence women&#8217;s decisions to join the labor force, and how firms make hiring decisions.</p>


Assistant Professor, Department of Economics, University of Washington

Rachel Heath

<p>Cristina has been active in the financial sector for more than 25 years and is widely experienced in the Central and Eastern Europe financial markets through her work with both financial services providers and final beneficiaries. After graduating with an MBA from the Manchester Business School in 2005, Cristina entered microfinance with the European Fund for Southeast Europe. In 2013, she joined the inclusive finance team at EIF and was directly involved in the implementation of EU programs for microfinance and social entrepreneurship finance.</p>


Senior Investment Manager, Inclusive Finance, European Investment Fund

Cristina Dumitrescu

<p>Olivier heads the EIB’s microfinance unit covering microfinance operations outside the EU. He is responsible for the origination and execution of equity and loan operations (direct or indirect via funds) supporting micro-entrepreneurs and financial inclusion, notably via microfinance institutions.</p>


Head of Microfinance Unit, Non-EU Equity and Microfinance Division, European Investment Bank

Olivier Edelman

General Manager, Vitas Palestine 

Alaa  Sisalem

<p>Chiara Pescatori has been working in the microfinance sector over 13 years. Her experience in financial inclusion spans different markets and financial service providers. She now advises financial services providers on customer-centric design, ESG, client protection and social performance. She has experience in facilitation of decision-making and strategic reflections, organization design, and business modeling. Chiara is currently the social performance and impact assessment committee chairwoman at Maha Agriculture Microfinance., Myanmar, supporting the company in the implementation of a sustainable, environmentally friendly and socially responsible strategy. For more than 10 years, Chiara worked for MFR (MicroFinanza Rating), where she successfully managed social business activities, including the various certification schemes (Smart Campaign Certification, GSMA Mobile Money Certification, etc.). At MFR, Chiara evaluated and advised more than 100 financial companies in different markets and regulatory environments.</p>


Chair, Social Performance and Impact Assessment Committee, Maha Agriculture Microfinance

Chiara Pescatori

<p>Jessica and the financial institutions team work with financial institutions, regional and global networks and fintechs to provide the tools, materials, and technical assistance needed to develop and scale a water and sanitation loan product. She has twenty years experience in international development, with a focus on increasing access to financial services for low- and mid-income households. Jessica has served as Deputy Director of the EBRD Micro and Small Finance Facility in Kyrgyzstan, working with seven local banks to develop credit products for low-and-mid income households. She has also worked with non-profit microfinance institutions in Africa and Asia and with ProCredit Banks in Latin America. She has managed complex, multi-million dollar small loan portfolios, and has provided technical training to bank executives, credit managers and loan officers. Her articles on financial inclusion have appeared in Enterprise Development and Microfinance, the Journal of Public and International Affairs and the Akipress Kyrgyz Analytical Journal.</p>


Senior Manager, Financial Institutions, Water.org

Jessica  Jacobson

<p>Narasimhan Srinivasan has four decades experience &#8212; including 25 years as a development banker – in development finance and rural livelihoods. Over the last 13 years, he has advised the design, supervision and evaluation of several development finance and rural livelihood initiatives and institutions in India and abroad. Apart from significant work in India, he has advised policy authorities and projects in financial inclusion, development banking, micro/rural-finance and rural livelihoods in Vietnam, Myanmar, Laos, Bangladesh, Nepal, Bhutan, Ethiopia, Rwanda and Tanzania. He has authored four Microfinance India: State Of the Sector reports and has coauthored multiple State of India’s Livelihoods Reports. He has published books on rural finance in India and corporate social responsibility, and contributed to many other publications. He currently serves as a board member/adviser/consultant to many development organizations and networks.</p>


Development Finance Expert, Author, Researcher

<p>Madison researches cash-based assistance, urban livelihoods, and gender and protection in forced displacement contexts. She has been published in the Berkeley Undergraduate Journal, The Huffington Post, the Columbia University RightsViews Blog, and the Harvard Kennedy School Review. She has worked with Catholic Relief Services, the International Rescue Committee, the U.S. Department of State, and various other organizations focused on humanitarian assistance and migration. Madison is currently a master’s degree candidate at The Fletcher School of Law and Diplomacy at Tufts University studying development economics and humanitarian response, with an emphasis on locally-led solutions to livelihoods challenges at the intersection of forced migration and gender.</p>


Graduate Student Researcher, The Fletcher School of Law and Diplomacy

Madison  Chapman

<p>Joana has experience both as practitioner and researcher in the microfinance sector. Among other topics, she has conducted research on client overindebtdness and impact evaluation methodologies in microfinance with field work in the Dominican Republic, Pakistan, Zimbabwe, and Ecuador. She started her career in 2005 as a credit officer at an NGO in Portugal, and co-edited the 2019 book, “Emerging Challenges and Innovations in Microfinance and Financial Inclusion.”</p>
<p>Joana holds a doctorate in economics and finance from the University of Portsmouth, and a master’s in microfinance from the Université Libre de Bruxelles, Belgium.</p>


Financial Inclusion Specialist, European Microfinance Platform (e-MFP)

<p>Simon Agez is a data analyst supporting the design and implementation of Inclusive Fintech 50 —an initiative that recognizes promising early-stage fintechs driving financial inclusion and resilience around the globe. Simon is a seasoned financial inclusion professional with experience in operational, advisory, and research activities. He worked alongside MFIs in India, Vietnam and Cambodia, and holds a Specialized Master&#8217;s degree in Microfinance from the Solvay Brussels School of Economics and Management.</p>


<p>A 20-year veteran and leader in financial inclusion, Mayada El-Zoghbi became CFI&#8217;s Managing Director in September 2019. She leads the vision and strategy for CFI, building on its strong foundation of innovative, industry-shaping work.</p>
<p>Mayada&#8217;s experience includes serving as Lead for Strategy, Research &amp; Development for CGAP. In that role, she led CGAP’s strategy development and its research on women’s financial inclusion, financial services in crisis environments, and other emerging topics. Prior to this, she managed CGAP’s work with the donor and investor community based in Paris, France.</p>
<p>From 2002 to 2009, Mayada founded and managed a development consulting firm. She has also led numerous technical assistance, evaluation, and research assignments, served as a research director for a USAID initiative, and lectured at Columbia&#8217;s School of International and Public Affairs. Mayada started her career working with several non-profit organizations establishing inclusive financial institutions in the Palestinian Territories, Bosnia and Herzegovina, Croatia and Kosovo.</p>
<p>A dual national of Egypt and the U.S., Mayada is fluent in Arabic and English, and continues to work on improving her French.</p>


Managing Director

Mayada El-Zoghbi

<p>Eric Noggle is the Senior Director of Research at the Center for Financial Inclusion at Accion (CFI), where he leads a team of researchers who study financial capability, financial health, digital financial services, and innovations in the sector. He is also leading CFI’s new workstream on the role of financial services in helping low-income populations mitigate and adapt to the effects of climate change.</p>
<p>Prior to joining Accion, Eric served as Research Director at Microfinance Opportunities where he led a dozen Financial Diaries studies which examined a diverse set of topics, including pay-as-you-go energy services, savings groups, and the economic condition of garment workers. He also worked with banks, impact investors, and mobile operators to assess the impact of their policies, products, and services on customers. Eric holds a Master of Public Administration from the Maxwell School at Syracuse University and a Bachelor of Arts in Economics and Political Science from the University of Nevada.</p>
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Senior Research Director 

<p>Alexandra (Kobishyn) Rizzi is the Senior Director of the Smart Campaign and works closely with the Vice President on Campaign strategy, communications and management.  Prior to joining Accion, Alex was a Project Development Manager at Innovations for Poverty Action where she helped create the Microsavings and Payments Innovation Initiative (now part of the Global Financial Inclusion Initiative), a research fund focused on rigorous impact evaluations of savings products and payment systems.  She has also worked at the Centre for Micro Finance at IFMR Research in Chennai India, where she was the Head of Knowledge Management and Dissemination and contributed to the launch of the Microfinance Researchers Alliance Programme (MRAP).</p>
<p>Alex holds a bachelor’s degree in political science from Princeton University, and a Master of Science in Foreign Service from Georgetown University where she focused on international development and was part of the business diplomacy program.</p>
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Senior Director, Smart Campaign 

<p>Alex plays a leading role in CFI’s research and policy influence work focused on two themes: advancing responsible data practices for inclusive finance and addressing the barriers to women’s financial inclusion. Alex joined CFI in 2017, originally focused on consumer protection and digital finance. Her current portfolio builds off previous work on consumer protection to examine issues such as the increasing use of alternative data in financial products, emerging data rights frameworks, and algorithmic governance. She also supports projects on gender and women’s economic empowerment, with a specific focus on how social norms interact with financial inclusion goals.</p>
<p>Alex’s background blends journalism and communications experience with research on financial inclusion. In her previous role at Monitor 360, Alex helped build data-enabled products to provide strategic communications insights and advised clients from government agencies, foundations, and the private sector on marketing and outreach strategies. She also worked as a reporter and editor for The Daily Star newspaper in Beirut, Lebanon, covering Middle East politics and Lebanese civil society. More recently she led projects examining the barriers to entrepreneurship in the Middle East for the Wamda Research Lab and analyzed Rwanda’s regulatory environment for financial inclusion for the Economist Intelligence Unit.</p>
<p>Alex holds a Master of Arts in Law and Diplomacy from The Fletcher School at Tufts University as well as a Bachelor’s degree in International Relations from Tufts.</p>


Research Manager

Alex Kessler

<p>As Lead Research Specialist, Jacqueline Foelster is responsible for managing a portfolio of applied research activities, and ensuring they lead to impact in the financial inclusion industry. Her portfolio includes a growing set of research and initiatives related to financial health and financial capability.</p>
<p>Prior to joining CFI, Jacqueline worked at the International Finance Corporation (IFC) as an M&amp;E and Data Analyst Consultant for the Pacific Gender and Finance &amp; Markets teams. She has also worked at the Microfinance Information Exchange (MIX), where she oversaw the rollout of the Voice of the Client pilot survey in Cambodia and Peru. Jacqueline holds a Master of Arts in International Economics and Southeast Asia Studies from the School of Advanced International Studies (SAIS) at Johns Hopkins and a Bachelor of Science in General Business from the University of Maryland. She speaks English, French, and Spanish fluently, as well as intermediate Khmer and beginner Bahasa Indonesia and Mandarin.</p>
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Lead Research Specialist

Jacqueline Foelster

<p>Garrett supports various projects for CFI including the Board Leadership for Impact Program, the Africa Board Fellowship Program, the Financial Inclusion Equity Council, and the HBS-Accion Program on Strategic Leadership in Inclusive Finance. He also researches topics related to financial inclusion, international development, and impact investing. Prior to joining CFI, Garrett worked for the Accion U.S. Network, where he served as the state lead and primary loan officer for Accion in Texas.</p>
<p>Garrett holds a BA in International Affairs from the University of Colorado at Boulder, where he also minored in business and financial analytics.</p>


Specialist

Garrett Jaso

Our Experts

Mobile Money in Rwanda At-A-Glance

Rwandans Speak on Digital Financial Services

<p>Most people in Rwanda are satisfied with mobile money services, and with the agents and user interfaces that provide it. However, there are many ways that DFS operations and practices can be improved to better protect clients and strengthen trust.</p>


This report was prepared by Laterite, Ltd., in close collaboration with the Smart Campaign, with support from Mastercard Foundation. 

The authors of this report are Emily Farbrace, Loes van der Velde, Medha Sethia, and Alexandra Rizzi, with support from Mike O’Doherty. Data collection was supported by Jean-Baptiste Muhoza, Jean-Claude Rukondo, Fabiola Niwenshuti, and Ezron Mucyo. Data analysis was performed by Emily Farbrace, Loes van der Velde,
Medha Sethia, and Patrick Hitayezu.

The authors would like to thank the Smart Campaign and the National Advisory Council that was assembled for this project for their guidance and support for this research. In addition, the authors thank all of the respondents who shared their experience with us.

Acknowledgments

Based on a survey of over 1,200 people in three districts in Rwanda, this Smart Campaign report delves into the experiences of individuals who use digital financial services, the main client protection issues they are concerned about, and the impact and prevalence of negative experiences.

Today there are close to 700 million mobile money accounts registered worldwide — a number that, if it were a population, would rank as the world’s third-largest country. East Africa continues to lead in digital financial innovations as well as account usage, with two-thirds of the combined adult populations of Kenya, Rwanda, Tanzania, and Uganda actively using mobile money. With the proliferation of mobile financial services, particularly among underserved populations, it is vital that users be treated fairly and with dignity. In the momentum to define responsible digital finance and recognize providers of high-quality financial services, the industry must not forget the consumer.
<h1>Client Voices: Why We Listened</h1>
<a href="/about/what-we-do/the-smart-campaign/">The Smart Campaign</a>, a global initiative to create an environment in which financial services are delivered safely and responsibly to low-income clients, has long recognized that client perspectives are often underrepresented in consumer protection discussions. With the Client Voices Project, the Campaign questions whether the industry’s assumptions about what constitutes problematic treatment rightly reflect what clients themselves worry about.

The dual objectives of the project are to solicit input from low-income clients about what they consider good and bad treatment in their interactions with financial service providers and to assess the prevalence of consumer protection problems among these clients, using quantitative surveys. The project is designed to act as a catalyst for financial service providers, regulators, industry associations, consumer advocacy groups, and others to improve client protection in ways that are grounded in client feedback.
<h1>Major Findings</h1>
Based on a survey of over 1,200 people in three districts in Rwanda, this report delves into the experiences of individuals who use digital financial services (DFS), the main client protection issues they are concerned about, and the impact and prevalence of negative experiences. We find that mobile money enjoys a high degree of satisfaction and trust from clients in Rwanda, even though 40 percent of clients report being targeted by fraudulent schemes, which have become increasingly sophisticated.
<blockquote>Customers report wising up to scams and fraud, but with a continuous influx of new mobile money users and fraudsters who innovate quickly, the threat is real and constant. Fraud represents the greatest potential to damage customer trust and engagement with mobile money in Rwanda.</blockquote>
However, there are many ways that DFS operations and practices can be improved to better protect clients and strengthen trust. Client recourse mechanisms, for example, represent an important area for improvement: many clients shared that they feel helpless and unsure about what to do after realizing they have been duped. Additionally, for business models that rely more on the mobile interface than on human interaction, clients increasingly rely on agents for information and guidance. This presents an opportunity to provide better service, as well as a risk for poor client treatment.

We hope that providers, industry associations, support organizations, regulators, consumer protection advocates, and clients can benefit from these findings to create a stronger, more inclusive client protection ecosystem. We offer specific recommendations for many of these stakeholders.

Client Voices: Rwandans Speak on Digital Financial Services

Benin’s microfinance industry continues to grow and the country boasts the largest number of institutions in the West African Economic and Monetary Union (WAEMU). Between May-October 2014, BFA conducted qualitative and quantitative data collection, guided by a National Advisory Council chaired by the Alafia Network. What did client voices in Benin tell us?

Benin’s Client Voice research includes the voices of over 1,500 current and former microfinance clients to understand the market’s consumer protection challenges. The Smart Campaign selected Benin as the African market for the Client Voices project for several reasons. First was the need for more demand-side research in Francophone West Africa, as relative to Anglophone East Africa. The Campaign also believed that the relevance of the Benin findings would likely extend beyond the country itself to the other seven members of the West African Economic and Monetary Union (WAEMU) given their operating under a common regulatory regime. Finally, Benin was selected because of the engagement of local stakeholders such as the Consortium Alafia – a 34-member local microfinance association.
<blockquote>Transparency, fair and respectful treatment of clients, and complaint resolutions mechanisms are the key consumer protection concerns for clients in Benin.</blockquote>
From May – October 2014, Bankable Frontier Associates (BFA) and its local research partner the Centre pour L’Environment et le Developpement en Afrique, Benin (CEDA Benin) carried out qualitative and quantitative research. The quantitative survey reached 1,733 Beninois (1,028 current MFI clients, 526 former clients, and 179 non-clients).

Key client protection risks emerged around the issues of transparency, fair treatment and complaint resolution mechanisms. Addressing these concerns requires a market-level approach that takes into consideration the unique role that regulators, the MFI industry, and clients themselves each must play. This page contains the results of the initial qualitative research, the follow-up quantitative survey and the final country report which weaves both pieces together. Finally the page has a link to the raw, anonymized data from the quantitative survey along with the survey instrument so that fellow researchers and client protection data wonks can play draw their own conclusions.

Client Voices: Benin Country Report

Georgia’s microfinance industry’s robust regulatory framework is undergoing reform. The Consumer Protection Division is in the process of becoming an independent agency, highlighting the country’s ongoing dedication to client protection. The reform makes the Client Voice report research timely. Between March and July 2015, BFA conducted qualitative and quantitative research to determine the concerns of microfinance clients in Georgia. What did client voices in Georgia tell us?

Georgia Client Voice research included the perspectives of 1,000 current and former microfinance clients to identify the consumer protection impediments that persist in the country. The Smart Campaign selected Georgia as the market in Eastern Europe and Central Asia for the Client Voices project for several reasons, primarily because of the current regulatory reform at the national level. As the Consumer Protection Division becomes its own entity, operating outside of the regime of the National Bank of Georgia, this research will enrich the discussion and inform the next steps in the country’s consumer protection arena. The building blocks for a thriving industry are already set, including a credit bureau, CreditInfo. Regulators, local partners, and microfinance institutions all have a role to play to raise awareness among clients and cement customer protection in the industry.
<blockquote>Top concerns among microfinance clients in Georgia are: over-indebtedness, appropriate product design and delivery, and transparency.</blockquote>
Various research methods were implemented in the qualitative phase, including focus group discussions, individual in-depth interviews, and a photography exercise to gain a deeper and contextualized understanding of clients’ views of good and bad treatment. The quantitative sample consisted of 800 currently clients and 200 former clients, 59 percent of whom were women.

The research finds that the majority of clients, around 66 percent, are happy with their institutions and thus stay with their institutions for a long time. Primarily, microfinance institutions’ service and treatment was ranked as matching or exceeding commercial banks. However, clients’ understanding of terms and conditions is still lacking, especially around the high risks associated with taking loans in U.S. Dollars.

Client Voices: Georgia Country Report

Pakistan has a thriving microfinance sector and one of the most enabling regulatory environments among microfinance markets globally. From March to October 2014, BFA conducted qualitative and quantitative research in the provinces of Punjub and Sindh, the regions most saturated with microfinance. What did client voices in Pakistan have to tell us?

Pakistan’s Client Voice research includes the voices of roughly 1,000 current and former microfinance clients to identify consumer protection challenges in the country. The Smart Campaign selected Pakistan as the market in Asia for the Client Voices project for several reasons. Notably, a priority objective of this research is to catalyze industry discussion, which requires strong and engaged local partners. The Pakistan Microfinance Network (PMN) has long-demonstrated its leadership and commitment to client protection among its members and was a natural partner for this exercise.
<blockquote>Top concerns among microfinance clients in Pakistan are transparency, fair and respectful treatment of clients, and mechanisms for resolving complaints.</blockquote>
Between March and October 2014, Bankable Frontier Associates conducted qualitative and quantitative research. The qualitative portion included individual interviews as well as participants taking photographs that represented their positive and negative experiences with microfinance. On the quantitative end, over 900 clients and 100 former clients participated in a survey expressing any concerns related to microfinance practices.

The research confirms Pakistan’s advanced consumer protection ecosystem while underlining the issues that persist. Key client protection risks emerged around the issues of harsh treatment of clients, inflexibility in the case of late repayment, and unclear terms and conditions. Unlike other markets, the regulatory environment for the microfinance industry is well-developed in Pakistan with the Credit Information Bureau (MF-CIB) exclusively monitoring activity.

Building on the country’s strong regulatory environment and addressing these client protection concerns requires a market-level approach that takes into consideration the unique role that regulators, local partners, microfinance institutions, networks, and clients themselves each must play.

Client Voices: Pakistan Country Report

Peru has the most conducive environment for microfinance, as evidenced by its top position in the 2015 Global Microscope for its  leading client protection regulatory frameworks. From January through July 2015, BFA conducted qualitative and quantitative research in Peru to determine the biggest concerns of microfinance clients. What did client voices in Peru tell us?

Peru’s Client Voice research included the perspectives of 1,000 current and former microfinance clients to identify consumer protection challenges and opportunities in the country. The Smart Campaign selected Peru as the market in Latin America for the Client Voices project because of its strong consumer protection regulations, recourse mechanism, and well-functioning credit reporting system.
<blockquote>The top concerns that emerged for clients in Peru are prevention of over-indebtedness, transparency, and fair and respectful treatment of clients.</blockquote>
Between January and July 2015, Bankable Frontier Associates (BFA) and Datum International, a local research firm, conducted qualitative and quantitative research. Peruvian clients of savings and loan institutions, cooperatives, and NGOs offering group loans participated in the qualitative research. The quantitative research included 550 current clients and 450 former clients.

Peru has a favorable environment for financial services, in recent years earning the top spot in the Economist Intelligence Unit’s Global Microscope rankings. Although a strong government consumer complaints institution (INDECOPI) exists, over-indebtedness, transparency, and fair and respectful treatment emerge as the most prevalent concerns for clients in Peru. Addressing these concerns requires a market-level approach that takes into consideration the unique role that regulators, the microfinance industry, and clients themselves each must play.

Client Voices: Peru Country Report

Client Voice Research

As a means of reaching underserved customers at low cost, financial institutions have designated authority and responsibility to banking agents to deliver financial products and services. Agent banking is a model for delivering financial services whereby an institution — be it a financial service provider or a mobile network operator — partners with a retail agent to extend services in remote or hard-to-reach areas.
<blockquote>Innovative financial institutions are streamlining and digitizing their processes, and utilizing real-time data and analytics to increase both the efficiency and effectiveness of agent networks.</blockquote>
Despite the growing volume of agents, the agent network model is rife with utilization and operational challenges. The good news is that technology offers financial institutions an opportunity to make agent models more efficient and productive for themselves and their customers. Based on in-depth interviews with industry experts and senior bank officers, and supplemented by a review of the literature, this brief examines the role of technological innovation as a potential driver for improving the quality and maximizing the productivity of agent models.

We found it useful to study this topic across two time-horizons: the short-and long-term; and from the perspectives of the main stakeholders in the agent network triad: the financial institution, the agent, and the customer. This structure allows us to account for two key trends: 1) the diminishing role of cash as a payment form, and 2) an increasing readiness of institutions to embrace digital transformation. It also allows us to explore commonly-cited challenges with agent networks through an illustrative, hypothetical narrative lens, giving voice to each stakeholder group. The narratives are accompanied by real-world examples of how technological integration and innovation has helped to improve and streamline processes within agent networks. Finally, we anticipate that in a future financial services ecosystem that is digital and cashless or cash-lite, we will see the role of the agent evolving from transaction processors to solution providers.

Leveraging Technologies to Improve the Quality and Maximize the Productivity of Agent Models

<h1>Introduction</h1>
Financial services are going digital. Digitization will change the way financial institutions organize themselves to relate to their customers, and it will dramatically change how customers experience financial services. These changes will be especially profound for traditionally underserved customers who are the targets of financial inclusion efforts.

The good news is that digital delivery models make it possible—and profitable—for banks to serve many people who were previously excluded because their incomes were too low or their locations too remote to reach through high-touch models. The high operational costs associated with physical buildings and staffing only makes sense if the branches break even and provide a satisfactory return within an acceptable timeframe. Low-income customers with thin credit histories borrowing small amounts of money have long presented a challenge to the analog way of doing business. Thus, serving the underbanked customer segment through digital channels presents an opportunity—by lowering operational costs and increasing customer engagement—to transform financial inclusion into a sustainable business. Additionally, digitization allows thin-file customers to have their creditworthiness assessed through alternative scoring models that incorporate other types of behavioral records.

When done effectively, the returns to digital transformation can be significant. For example, DBS Bank, a financial services group in Asia named <a href="https://www.euromoney.com/article/b18k8wtzv7v23d/world39s-best-digital-bank-2018-dbs">“world’s best digital bank” by Euromoney in 2018</a>, has seen digitization contribute to rising shareholder value. DBS customers who process more than half their transactions remotely bring in more revenue than traditional customers. <a href="https://www.economist.com/finance-and-economics/2018/03/08/how-digitisation-is-paying-for-dbs">Two-thirds of DBS’s gross profit currently comes from digital customers</a>. A DBS staff member told us, “The cost-to-income ratio for digital customers is just 34 percent, compared to 55 percent for traditional customers. The return on equity from digital customers is, impressively, at 27 percent.” Numbers such as these make it attractive to reach new customer segments. But if the transition from face-to-face to digital is to succeed, financial institutions will need to understand and address the special characteristics of these segments and get the digital customer journey right—for both their own operations and the customers’ experience.
<h2>Walking vs. Flying</h2>
For customers, the difference between a traditional and a digitized customer journey can be as dramatic as the difference between walking and flying in an airplane. The traditional customer journey includes traveling to branches to talk with a customer service representative, assembling pages of paper documents to meet KYC requirements, and then waiting for days to receive decisions. With digitization, customers can discover and apply for products on their phones and receive funds into mobile wallets, all in a matter of minutes.
<blockquote>The difference between a traditional and digitized customer journey can be as dramatic as the difference between walking and flying in an airplane.</blockquote>
In order to produce such a streamlined journey, financial institutions must address technical and operational challenges and regulatory issues. And, as we discuss in this report, the journey they construct needs to work well for customers—especially when those customers are new to their services. Digitization can bring enormous gains in speed and convenience to customers, but it can also create gaps as it shifts from familiar, person-to-person interactions to interactions that take place on a digital device.

Charting the Customer Journey in the Digital Age

<h6>LEGACY AND NEW FINANCIAL SERVICE PROVIDERS HAVE A LOT TO GAIN FROM NEW DATA</h6>
<h3>The traditional boundaries separating players in adjacent industries are blurring, and the future market for financial services is up for grabs.</h3>
There are many internal and external challenges that providers must address for the promise of new data to be fully realized. From getting the right culture and technical talent in place to engaging with regulators and partners on data sharing and management, there are numerous obstacles to negotiate in capitalizing on the explosion of new data to reach underserved and unserved markets with new commercially viable solutions.

This report is intended to help mainstream financial institutions accelerate their efforts to confront these challenges and future-proof themselves for what the data revolution has in store, but may be useful to other financial service providers as well. However, this report is not an attempt to provide a “how-to” guide for navigating the various stages of the data value chain—there are too many contingencies to prescribe a “one-size-fits-all” solution. Instead, it is an effort to shed light on the potential of data to improve financial services for the underserved.

Accelerating Financial Inclusion with New Data

<em>Banking Sector Approaches to Customer Engagement and Capability</em> explores how financial institutions are leveraging innovation, new technology, social networks, and other tools that inform and engage customers. This brief builds on the belief that good product design builds the financial capability of customers. The research captures a number of successful models, including:
<ul>
 	<li>RBL offering unsecured loans that allow customers to build up a credit score for the first time in India</li>
 	<li>Standard Bank leveraging existing informal group savings culture combined with a lottery to incentivize and reward savings activity in South Africa,</li>
 	<li>A small cooperative bank “rounding up” loan repayments to create an auto-saving mechanism among credit recipients in Mexico<em>.</em></li>
</ul>
This brief is part of the Mainstreaming Financial Inclusion: Best Practices initiative which aims to facilitate learning and action on how mainstream financial institutions around the world can reach underserved populations with quality financial services. The project is completed in partnership with the Institute of International Finance (IIF), with support from MetLife Foundation.

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Banking Sector Approaches to Customer Engagement and Capability

We use the term “inclusive  insurance” to encompass many different approaches to reaching the unserved,  underserved, vulnerable, or low-income populations in emerging markets with appropriate and affordable insurance products. These range from microinsurance for people with very little disposable income to new  products and  services for an emerging middle class around the globe who have not been served by traditional  insurance. Based on insights from written submissions and in-depth interviews with 30 people across 22 institutions, this report invites us to re-think the concept of insurance and its fundamental role in society.
<h2>Major Findings</h2>
In  the  broadest  terms,  the  challenges  of  providing  insurance  to  lower-income  population segments are similar to those of providing mainstream insurance: identifying, understanding, and connecting with customers; providing relevant products; and carrying out the administrative work of collecting premiums and paying claims. For customers at the base of the economic pyramid, the small incomes from which premiums must come require insurers to solve these challenges in highly cost-efficient ways. Adding to the intensive cost pressure, several factors amplify the challenge of connecting with these customers: their remote locations, lower education levels, and lack of experience with formal institutions.

Strategies for effectively serving this target market include:
<ul>
 	<li>Simplifying products so they are easy to understand, easy to enroll in, and easy to claim against. For institutions, such simple products engender trust and are lower cost to provide.</li>
 	<li>Finding new distribution channels and aggregators-from telcos to farmer cooperatives to banks—to identify and connect with low-income customers.</li>
 	<li>Leveraging digital channels and new “insurtech” (insurance technology) innovations to connect with, and serve, low-income customers.</li>
 	<li>Implementing new business models and products to provide and administer the risk mitigation solutions at scale that meet low-income customers’ needs.</li>
</ul>
This report is part of a two-year initiative, <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/mainstreaming-financial-inclusion">Mainstreaming Financial Inclusion: Best Practices</a>, to help advance efforts of financial institutions to reach customers at the base of the economic pyramid. This report was completed in partnership with the <a href="http://www.iif.org">Institute of International Finance</a>, and made possible with support from <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>.

Inclusive Insurance: Closing the Protection Gap for Emerging Customers

This report examines how partnerships between mainstream financial institutions (e.g., banks, insurers, and payment companies) and fintechs are addressing financial inclusion challenges and expanding access to the formal financial economy for underserved segments of the global population, particularly in emerging markets. It incorporates insights from 24 in-depth interviews with people at the frontlines of this innovation and highlights 14 partnerships focused on financial inclusion that we think exemplify best-case scenarios and good practice. Contrary to the popular narrative, financial institutions view fintechs as partners in innovation, not threats to their core business. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institutions with help from fintech partnerships.
<h2>Major Findings</h2>
Mainstream financial institutions partner with fintechs to improve product offerings, increase efficiency, and lower costs – goals with special relevance to low-income customers. By partnering with mainstream financial institutions, fintechs get to scale their technology and can access capital to grow. As a result of these partnerships, low-income customers who are left out of – or poorly served by – the financial sector have greater access to higher quality, more convenient, and less expensive financial products and services.

To facilitate productive fintech partnerships, mainstream financial institutions are organizing internally for innovation, strategically integrating systems and staff, and developing contractual agreements to ensure stability and success. Fintech partnerships enable legacy institutions to engage with and learn from new technology in low-risk, low-cost ways. They are also key to allowing incumbents to compete in a world where alternative players, like Facebook and Amazon, are threatening the central role of financial institutions in the lives of customers. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institution.

One encouraging and somewhat unexpected finding is that the partnerships between financial institutions and fintechs represent a slow but pervasive financial industry shift toward customer-centricity. Better data management and use, new digital banking products, and greater customer engagement all enable better service for underserved customer segments.
<h2>Who Should Read This Report</h2>
The primary audiences for this report are those in mainstream financial institutions who want to know how their contemporaries are engaging with innovators to pursue financial inclusion, and those in fintech companies who want to understand the way banks are likely to approach them. In addition, venture capital firms, multilaterals, and industry associations have much to learn from this research about what drives banks to partner, what gets in the way, and what comes next.
<h2>Acknowledgements</h2>
This report is part of a two-year initiative, <a href="/about/what-we-do/mainstreaming-financial-inclusion-best-practices/">Mainstreaming Financial Inclusion: Best Practices,</a> to help advance efforts of financial institutions to reach customers at the base of the economic pyramid. The initiative and this report were made possible with support from <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>.

How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines

Blog Post

With the explosive growth of data and the breakneck pace of digitization, mainstream financial service providers (FSPs) are increasingly turning to new and alternative data sources and analytics tools to more efficiently reach emerging markets and help bring the world’s 1.7 billion underserved people into the formal financial system. This “new data,” largely separate from traditional credit bureau data, represents a tremendous opportunity for commercial banks to identity new customers, many of whom were previously “credit invisible,” and to better understand and serve the needs of their existing client base. However, the path to greater data utilization is not always clear, as FSPs must weigh the benefits of embracing a data-centric approach with significant operational challenges, including changing a risk-adverse banking culture, recruiting top technical talent, upgrading legacy IT infrastructure and navigating a complex regulatory environment. Building upon in-depth interviews with banks, fintechs and other actors, <em><a href="http://bit.ly/Data4FI">Accelerating Financial Inclusion with New Data</a></em>—the newest joint report from the Center for Financial Inclusion at Accion (CFI) and the Institute of International Finance (IIF), supported by MetLife Foundation—examines the data landscape and evaluates the progress FSPs have made in innovating around data and areas where they have faced obstacles.
<blockquote>
<h4>The path to greater data utilization is not always clear, as providers must weigh the benefits of embracing a data-centric approach with significant operational challenges.</h4>
</blockquote>
The sheer volume of data now available to mainstream FSPs is truly immense, with some estimates projecting the size of the digital universe to increase five-fold between 2015 and 2020.

<img class="alignnone size-full wp-image-25687" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/06/2_twittercharts.png" alt="Growth of Global Data Graphic" width="1020" height="512" />

Emerging technologies such as artificial intelligence and blockchain will only enhance providers’ ability to analyze both traditional and non-traditional data. For providers looking to break into emerging markets, leveraging alternative data—which includes, but is not limited to data derived from social media, email, utility payments history, mobile phone and e-commerce activity, and psychometric test results—is a necessity.

<strong>It is difficult, in practice, to collect alternative data, convert it into a format which can be readily analyzed, and extract actionable insights without collaborating extensively with external partners or building up internal capacity.</strong>

But as our interviews with banks and fintechs revealed, it is difficult, in practice, to collect this data, convert it into a format which can be readily analyzed, and extract actionable insights without collaborating extensively with external partners or building up internal capacity. Banks and fintechs commonly source non-traditional data from third party providers (such as utility companies, social media companies, and mobile network operators), frequently a time-consuming process which is further complicated by data privacy, protection and ownership regulations, KYC requirements, anti-money laundering statutes and the like. FSPs sometimes end up deploying multiple solutions for various jurisdictions/countries to comply with these rules. For example, Artoo—a customer relationship management (CRM) solutions company working with microfinance and other lending institutions in India—had to switch from using Amazon Web Services to another local cloud service provider to satisfy Indian data localization laws that mandate the retention of customer data within the country’s borders.

<img class=" size-full wp-image-25688 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/06/5_twittercharts.png" alt="The data journey infographic" width="1020" height="1167" />

Ultimately, FSPs might find that only some alternative data types are useful, as their utility is contextual and depends heavily upon the particular product or use case in question. There is no “one-size-fits-all” solution for tapping into underserved markets.

Despite the constraints, <a href="http://bit.ly/Data4FI">our research</a> also shows that many FSPs have found success utilizing new data sources and analytics tools. Our report details four snapshots highlighting different products and approaches to data-driven innovation:
<ul>
 	<li>As China’s first private online-only bank, WeBank has capitalized on its connections to tech giant Tencent and utilizes an iterative approach to incorporating social media data into its loan decisioning processes.</li>
 	<li>In Mexico, BBVA Bancomer has pursued partnerships with fintechs to test new alternative credit scoring and customer engagement strategies in combination with internal efforts to change customers’ use of transactional products, such as checking and savings accounts.</li>
 	<li>Following in the footsteps of Bangladesh’s Grameen Bank, Grameen America has taken a high-touch approach by collecting data directly from customers, instead of using credit scores and other external data sources for its lending decisions.</li>
 	<li>SCB Abacus has spun off entirely from Siam Commercial Bank to achieve greater flexibility and autonomy needed to pursue digital innovation.</li>
</ul>
These examples, and others featured throughout the report, underscore the benefits for banks and fintechs of data-centric innovation and proactive engagement with the broader ecosystem of players in this space, including financial regulators and other policymakers.

<em><a href="http://bit.ly/Data4FI">Accelerating Financial Inclusion with New Data</a></em> represents a concerted effort to evaluate the impact and potential of new data and analytics techniques for financial inclusion, and illuminate how mainstream financial institutions and fintechs have adapted their strategies to reach underserved customers in this increasingly data-centric world.

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I have been an inclusive insurance enthusiast ever since I worked for Opportunity International and witnessed the experiments that later became <a href="https://microensure.com/">MicroEnsure</a>. In those early days, Richard Leftley framed insurance as the missing piece in the game of Chutes &amp; Ladders (Snakes &amp; Ladders for those outside the U.S.). He likened credit and savings to ladders that could provide a way up for those with lower incomes --but without insurance, each borrower or saver was just one disaster away from slipping back down into destitution. I remember his—at the time—revolutionary concept of paying insurance claims within 10 days or less. He would say that days-to-payout was the only report he wanted on his desk every morning. (Today, of course, payouts can be automatic or even come pre-loss.)

As is often the case with breakthroughs, Richard, of course, was not alone. Thanks to many innovators, an entire industry has emerged with profitable models reaching millions of people, and there is a growing understanding around the world, across social strata of the impact that insurance can have for families, communities and societies. The NGOs that pioneered microinsurance spurred the interest of commercial giants such as Allianz, AXA, MetLife, Swiss Re and Zurich, which have lent their considerable weight to solving the business challenges of extending insurance to underserved and unserved customers. Market catalysts such as A2ii, MicroInsurance Centre, MicroInsurance Network, ILO’s Impact Insurance Facility, and Cenfri have offered insights on everything from the customer experience, to good product design, to proving the business case, to creating an enabling regulatory environment for reaching new insurance markets.

Into this mix comes a new paper on inclusive insurance from the Center for Financial Inclusion at Accion and the Institute of International Finance. <a href="http://bit.ly/2AFOUZa"><em>Inclusive Insurance: Closing the Protection Gap for Emerging Customers</em></a> gives a global snapshot of the inclusive finance sector, examining how providers have extended service offerings using new technologies and innovative business models, and highlighting the challenges that persist. It suggests how the industry can further expand its reach to this massive, virtually untapped potential market. The study focuses on actual on-the-ground experience of providers in emerging markets.

Here are a few of the report’s main takeaways:

<strong>Insurers are bullish on the <em>size of the market opportunity</em>.</strong> Using Allianz’ model, which refers to the inclusive insurance market as those with the bottom 60 percent of incomes, we estimate the potential market to be 3.8 billion people worldwide (though more study is needed on segmentation). Insurers report feeling great personal satisfaction about the social impact of their products -- but by far the most significant drivers of inclusive insurance are the base of the pyramid (BOP) market size and the rise of the middle class. In fact, Martin Hintz, previously with Allianz, said, “Don’t get distracted by charity! There is a clear business case.”

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/market-graphic.png"><img class="wp-image-24870" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/01/market-graphic.png" alt="" width="614" height="349" /></a>

<strong><em>Insurtech</em> goes far beyond mobile payments.</strong> Insurers are using tech innovations to build new products, increase trust among customers, and more. In Colombia, prospective DaviPlata customers can send an SMS with their national ID number and they are instantly enrolled. In Indonesia, robo-calls and automated text messages teach Allianz customers about the products they are already enrolled in and build customer trust and loyalty.  In Zimbabwe, weather satellite systems provide data that allows Blue Marble Microinsurance to offer parametric insurance with automatic payments in the event of drought – without customers even submitting a claim! And all around the world, new sources of data are available on customers who were previously invisible, with sophisticated analytics making it possible to design products to meet their needs.

<strong><em>Simplicity</em> is the best innovation for the BOP.</strong> Insurers are cutting down costs and reaching new customers by simplifying processes and products. MicroEnsure has designed life, accident and hospitalization products with no exclusions, which dramatically reduces the cost of enrollment. Some policies are based only on phone numbers, without even capturing customer names, ages or any demographic information. Recognizing that lower income people often prefer to pay for things in small increments, Lorenzo Chan of Pioneer Life in the Philippines promotes “insurance in a sachet”—a concept that in many emerging markets is yielding trials of micro terms, micro cover and micro payments. And Aviva looks at the full range of services people need at different life stages (not limited to insurance), and bundles them together into simple packages that, in their words, “kill complexity.” Take, for example, the wonderfully named <em>YOU</em>, <em>ME</em> and <em>WE</em> products in Poland. In the case of WE, the needs of young families are met through a bundle that includes insurance for property, education, childcare, critical illness for parents and children, disability, and household goods.

<strong><em>New customers </em>are being identified.</strong> AXA has shared a <a href="https://cdn.axa.com/www-axa-com%2F57b5a3a4-c7cc-4dea-97c9-5f7d9f47232c_sheforshield_final-web2015.pdf">landscape study</a> on the women’s market for insurance, predicting the annual premium value of the women’s global market to grow six to nine times by 2030 to between $569 and $874 billion. Met99 is reaching rural residents in Mexico by partnering with the Government. And insurers are looking at the customer journey for low-income mass markets for health insurance in India as well as for niche markets such as motorcyclists working in the sharing economy.

<strong>Insurers see new opportunities to move risk models <em>from protection to prevention.</em></strong> This is especially apparent in regards to climate risk. As an example, Blue Marble Microinsurance, Swiss Re, and others are not only ensuring that farmers have agriculture insurance and other financial services, but they are also working with a range of partners to provide access to farm inputs that help guard against climate risk through water conservation methods and other climate-smart strategies.

<strong><em>Distribution channels</em> make or break inclusive insurance.</strong> Microinsurance was first distributed through community organizations, microfinance institutions and cooperatives that addressed the last mile challenge and served hard-to-reach customers. In the last 10 years, mobile network operators have stepped in with the convenience of payments by mobile phones and banks have begun to cross-sell as part of their bouquet of services. Insurers are working with retailers, postal banks, workplaces, governments, and everyone you can think of to aggregate customers and find convenient ways to reach them. CARD Pioneer Microinsurance (CPMI) in the Philippines works with over 70 distribution partners.

This last point is one of the key findings of the report -- that insurers are doing their part, but they can only do so much on their own. They need partners from the private, public, and non-profit sectors to come alongside to make protection possible for all. In his foreword, Denis Duverne of AXA writes that “Informal risk management is ten times less efficient than formal protection mechanisms, and one single emergency can force families to sell productive assets, move back to the village, remove children from school to help the household earn extra income or go back into poverty.” With these kinds of consequences, the real life game of Chutes &amp; Ladders takes on added urgency, and all those who can play a part in ensuring protection for the vulnerable should seek an insurer to partner with. The insurers are ready.

<em>To learn more about inclusive insurance, from the many sources doing good work around the world, see the curated <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/inclusive-insurance-resource-list-pdf-final.pdf">Resource List</a> that accompanies <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/973-inclusive-insurance-closing-the-protection-gap-for-emerging-customers">the paper</a> to get a glimpse of the wealth of material that insurance experts have produced.</em>

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<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/04/13/making-microinsurance-work-in-bangladesh-three-takeaways/">Making Microinsurance Work in Bangladesh: Three Takeaways</a>

<a href="https://cfi-blog.org/2014/10/06/bundling-mhealth-info-and-microinsurance-to-improve-health-outcomes-in-kenya/">Bundling mHealth Info and Microinsurance to Improve Health Outcomes in Kenya</a>

<a href="https://cfi-blog.org/2014/08/29/the-formula-for-mobile-microinsurance-success-in-senegal-and-pakistan/">The Forumula for Mobile Microinsurance Success in Senegal and Pakistan</a>

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Mainstreaming Financial Inclusion Series

Global Microscope

Finance for All

Global Findex

Financial Health

Keeping Clients First

CFI Report Series

Amin Khairy

This report is part of a two-year initiative, Mainstreaming Financial Inclusion: Best Practices, which aims to help advance efforts of financial institutions to reach customers at the base of the economic pyramid. This initiative and this report were made possible with support from MetLife Foundation, and in collaboration with the Institute of International Finance. The views and opinions expressed in this report are those of the authors and do not necessarily represent the views of the MetLife Foundation or the interviewees. All errors are our own.

Partners

Despite the growing volume of agents, the agent network model is rife with utilization and operational challenges. This brief examines the role of technological innovation as a potential driver for improving the quality and maximizing the productivity of agent models.

Pablo Anton-Diaz

<p>During the interviews we conducted for this report, it became abundantly clear that the mobile phone plays an essential role in fostering the digitization of customer journeys, particularly in the case of products that cater specifically to low-income segments. Indeed, the increased penetration of mobile phones and mobile money services among low-income segments has highlighted handheld mobile devices as the appropriate tool to finally incorporate financially excluded individuals into the financial sector. GSMA’s Mobile Economy 2017 report highlights the growth trends of mobile money transactions. Between 2012 and 2017, mobile money transaction value increased by 350 percent to $31.5 billion, while the number of transactions increased by 428 percent to 1.8 billion.</p>


<p>How are mainstream financial institutions creating effective digital customer journeys for lower-end clients? In this report, which is based on interviews with senior staff members from fifteen financial institutions in the financial inclusion space, we explore the challenges of digital transformation in each phase of the customer journey: <strong>discovery</strong>, <strong>onboarding</strong> and <strong>continuing use</strong>. We provide examples of how innovative financial institutions are addressing these challenges with creative solutions for emerging customers.</p>


Discovery [Stage One]

<p>The discovery stage begins when customers identify a need for a financial service. Broadly, it incorporates three steps by the customer: developing an awareness of potential options, evaluating those options, and selecting the most appropriate product. Companies compete for customers’ attention in this stage in an attempt to build brand awareness and communicate value.</p>
<p>One of the pre-digital era challenges banks faced targeting lower income segments in emerging markets was the relative ineffectiveness of conventional marketing techniques on those segments. The target clients of financial inclusion efforts are generally less literate than the overall population. Moreover, they often lack the confidence to approach financial institutions, fear that the institution does not want them as a customer, and discount marketing messages. They often think, “That’s not for people like me.”</p>
<p>One of the obstacles hindering financial inclusion is the fact that underserved customers have traditionally distrusted financial service providers. According to the Global Findex Database 2017, 16 percent of adults without an account at a financial institution cited <a href="http://documents.worldbank.org/curated/en/332881525873182837/The-Global-Findex-Database-2017-Measuring-Financial-Inclusion-and-the-Fintech-Revolution">distrust as their main barrier to opening an account</a>. Digital awareness and marketing campaigns may reach a big audience at low costs compared to traditional methods. However, to create trust among underserved segments, financial institutions need to make concerted efforts to improve how they are perceived by the unbanked.</p>
<p>With digitization, messages can be delivered directly to clients’ phones and tablets in simple terms or with images. For customers in the digital ecosystem, much of this happens through targeted advertising: companies compete to deliver targeted ads to specific handsets at critical moments as customers browse the internet or use social media.</p>
<blockquote><p>Underserved customers don&#8217;t believe products are for them, but targeted digital messages can overcome this.</p></blockquote>
<p>These channels overcome an access to information challenge and may make it less costly to raise awareness. As underserved clients connect to the internet and develop digital footprints, companies will be increasingly able to reach them with these methods.</p>
<h2>That Human Touch</h2>
<p>However, our interviews suggest that, to be effective, digital models must be combined with elements of human touch that customers still prefer or find more comforting. This is especially true for customers new to digital experiences. While targeted advertising is useful, it cannot address many of the concerns clients have when evaluating and selecting products.</p>
<p>As described in CFI&#8217;s <em>Uniting Tech and Touch: Why Centaur Products Are Better for Consumers and Providers</em>, consumers with limited exposure to digital financial services find it especially important to <a href="https://www.centerforfinancialinclusion.org/uniting-tech-and-touch-why-centaur-products-are-better-for-consumers-and-providers-evidence-from-kenya">speak to a person when they are first learning about a product</a>. Rather than scrolling through FAQs, customers can ask questions in their own words, which builds confidence. A guiding hand may be especially helpful for underserved clients who are <a href="https://content.accion.org/wp-content/uploads/2018/10/1122_TechTouch-RO6-Singles.pdf.">unaware of the range of available products, lack the digital savviness to evaluate products, or mistrust financial institutions</a>. Many customers interviewed for our <em>Tech and Touch</em> study said that their very first question is whether a new brand or service is legitimate. To be convinced, they want to speak to a person they can look in the eye.</p>
<p>Many of the financial institutions we interviewed for this paper use tech and touch during the discovery stage. Several institutions reported that offering a human touch to prospective customers is critical to boosting adoption, and some of the products with the highest rates of adoption add human elements to primarily digital experiences.</p>


Discovery Case Studies

Onboarding [Stage Two]

<p>Once a person decides to apply for a product, the provider initiates a series of activities to establish the customer’s credentials and eligibility and set up the account. This stage also involves underwriting decisions for credit products, providing detailed information about product terms and conditions, and signing contracts. Most of this process used to involve paperwork, for the obvious reason that it traditionally required customers to sit with staff to fill out paper forms and check documents.</p>
<p>In its traditional form, the onboarding stage can be especially difficult for underserved clients. The prospect of opening an account the same day was often low due to insufficient documentation, such as lack of proof of income (especially hard to obtain for people working in the informal sector). According to the 2017 Global Findex survey, nearly <a href="http://documents.worldbank.org/curated/en/332881525873182837/The-Global-Findex-Database-2017-Measuring-Financial-Inclusion-and-the-Fintech-Revolution">one quarter of adults without an account at a financial institution cited a lack of documentation as a reason</a>. When documentation is completed on paper, a customer may have to travel to and from a financial institution several times, which is time consuming even in urban environments. Approximately one-fifth of the Findex respondents without accounts also cited distance to a financial institution as a barrier. For loan products, this stage is even more difficult for customers: the approval process can often take days or weeks, and understanding contract terms and conditions can be daunting, even for the well-educated.</p>
<p>Over time, onboarding processes have gone digital, as staff members were given tools to enter information directly into a computer rather than first writing it down in paper. Today, a fully digital onboarding process—in which customers can sign up for a product on their phones or computers from any location, often within a few minutes—is spreading. With fully digital onboarding, the customer gains convenience and speed, while the provider reduces personnel costs.</p>
<p>In response to these barriers, financial service providers are working to make the onboarding process easier for clients wherever possible by creating tools that allow customers to complete portions or entire onboarding processes digitally. In our interviews, we found that financial institutions are moving toward digital onboarding, though not all have fully reached that destination. There are a number of examples where the process occurs entirely from a smartphone, and others that still require some face-to-face element.</p>
<blockquote><p>In countries with digitized national identification systems, know your customer (KYC) can be fully digitized.</p></blockquote>
<p>One of the most helpful advances in this stage concerns processes. In countries with digitized national identification systems, KYC can be fully digitized through provider links to the national identification database. However, in a number of instances, the national identification system has not been fully implemented or streamlined sufficiently to allow for onboarding to take place remotely. The role of government in establishing an enabling environment to promote financial inclusion and digital financial service adoption was a major theme in many of the interviews conducted.</p>


Onboarding Case Studies

Continuing Use [Stage Three]

<p>The continuing use phase includes product use, customer engagement, cross-selling and responding to inquiries or complaints, as providers work to build extended relationships with clients. Financial institutions hope that this will be the longest stage in the customer journey, and it is certainly the stage in which initial investments in discovery and onboarding pay off. However, as low account usage rates—particularly for mobile money accounts—suggest, it is also one of the most difficult for financial institutions to get right. According to the latest Global Findex, 20 percent of account owners worldwide reported having an inactive account, that is, no deposit or withdrawal—digital or otherwise—in the past 12 months.</p>
<p>Many FSPs that are just starting to cater to clients at the base of the pyramid struggle to build a relationship with clients. Learning about their financial lives and habits in order to continue improving and innovating their service offerings is challenging because they are thin-file customers, so records about their financial lives are scarce. Additionally, many clients of this market segment are interested only in a particular feature of the product that they have identified is beneficial for them and thus are thought to be less open to exploring other beneficial features. Because of this, FSPs face many challenges when trying to engage their clients in this segment.</p>
<p>In a traditional financial institution, contact with customers is limited to times when customers visit branches for transactions or inquiries, or to expensive phone or mail outreach. Digital systems allow for ongoing contact at a much lower cost, giving institutions the opportunity to develop a different kind of relationship with their customers. The digital footprints that customers leave allow companies to conduct a range of analytics, so that messages sent by SMS or other means can be highly targeted. Our interviewees reported using machine learning to cross-sell products at certain moments for the customer and using chatbots to provide customer service assistance. The digital relationship can also incorporate nudges, tools and reminders based on behavioral insights to encourage clients to save more, manage better their debts, keep closer track of their expenses, and build more accurate personal budgets. In this way, a bank can contribute to customer financial health.</p>
<p>Banks can also offer enhanced, tailored financial services to emerging customers through digital means. mBank is using machine learning to identify what managing director Jakub Fast calls “natural scenarios,” during which they can offer tailored financial services. For example, if their system detects that a customer is using his or her mBank card to pay for transportation to the airport, the customer might receive an offer for a travel insurance product. Or an additional line of credit might be offered to a customer with a good credit score who has maxed out his or her credit card during a transaction. Similarly, Bancolombia uses machine learning to analyze the savings behavior of its Ahorro a la Mano (“Savings on Hand”) customers to identify an approval limit for their Credito a la Mano (“Loan on Hand”) product. The customer can go through the complete customer journey for these products—from signing up for Ahorro a la Mano, to applying for and repaying credit from Credito a la Mano—digitally.</p>
<p>At financial institutions with digital offerings, examples like these are not particularly unique. The majority of institutions we spoke with mentioned the importance and use of some exciting new technology or the application of analytical tools to their data.</p>
<p>One area where human touch may still be needed is complaint resolution. Institutions are using email, chatbots, live chat and call centers to handle inquiries and complaints, and these mechanisms may take care of the great majority of inquiries. However, our research with customers in Kenya suggests that while they are comfortable with digital transactions, when something goes wrong they want to know that they can have <a href="https://www.centerforfinancialinclusion.org/uniting-tech-and-touch-why-centaur-products-are-better-for-consumers-and-providers-evidence-from-kenya">ultimate recourse through a person</a>. If most inquiries can be answered through automated means—inexpensively—the FSP may still be able to provide a human response for more difficult cases, while saving money overall on the complaints function.</p>
<p>What was most interesting in the examples we identified related to this phase was the degree to which innovative bank offerings relied on partnerships with technology companies to reimagine the customer journey. Such partnerships allow for rapid experimentation, take advantage of the technology know how of other companies, which may be more attractive than in-house development. BBVA, for example, runs an Open Innovation program, which supports its business verticals to find and integrate cutting-edge technology start-ups. The bank uses a variety of methods to identify partners, such as competitions where start-ups pitch their ideas to senior executives. The winners of those competitions are then put on a fast track to deploy their solutions as quickly as possible.</p>


Continuing Use Case Studies

Takeaways

<p>The case studies presented throughout this report offer important lessons about how mainstream financial institutions can create a successful customer journey in the digital age.</p>
<p>One important message is that it will likely be necessary to maintain some portion of touch even as the majority of transactions shift to tech. As the case studies in the discovery stage show, this is especially important in early stages of the customer journey, and to assist with complaint resolution. Quite possibly, as clients interact in a digital environment, they will become more comfortable locating and deciphering digital information and will rely less on the human touch to usher them along at key stages in their journey. However, as long as trepidation about new products and services still exists, the availability of a human touch element is needed. As Keith Sandbloom of FINCA International put it: “We want to maintain the [human] touch with our clients, but we [also] want to implement tech to offer new products through new channels that add convenience to our clients’ lives. When we talk about how our business model is evolving, we use a phrase we call ‘touchtech.’”</p>
<blockquote><p>Maintaining some portion of human touch might be necessary even as the majority of transactions shift to tech.</p></blockquote>
<p>Our case studies also show how policymakers and regulators play important roles, particularly in setting up the framework for smooth digital onboarding. The advent of national identification systems and changes in KYC regulation have allowed banks to launch fully digital customer journeys. Scans of photo IDs and/or biometrics, verified with uplinks to national databases, have replaced trips to branches and photocopies of national registration cards.</p>
<p>We have also seen that partnerships between financial institutions and fintech and other technology companies are important in facilitating the customer journey. Companies that have largely digitized their operations make use of predictive analytics to segment their clients and offer products and services in a targeted way. They are also using artificial intelligence chatbots to serve customers. Partnering with fintech and technology companies provides institutions with capabilities that are otherwise difficult to acquire. In our case studies, we highlighted a partnership that allows for communication between deaf customers and frontline staff and a conversational AI tool to that supports a digital bank. Developing even one of these solutions in-house is a time-consuming and costly process, and collaborations represent an efficient way for mainstream financial institutions to adapt to the digital environment and improve the customer journey.</p>
<p>Transformation from traditional to digital models is not easy. It requires deep rethinking of business models, rather than simply automating existing ones. The challenge is both internal (such as major changes in staff roles and upgrading in-house data analytic capabilities) and external (such as adapting to new regulations or forging new partnerships).</p>
<blockquote><p>Transformation from traditional to digital models requires deep rethinking of business models, rather than simply automating existing ones.</p></blockquote>
<p>Digital transformation takes time, upfront investment and ingenuity. However, the potential benefits make digital transformation models worthwhile, as mainstream financial institutions gain new customers and while reducing operating costs, and emerging customers enjoy faster, more convenient and more tailored financial products and services.</p>


Acknowledgements, Interview List and Endnotes

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