When most people talk about digital finance, they are referring to business-to-customer (B2C) solutions like mobile banking products and other digital payment mechanisms. E-payments undoubtedly have the potential to reach and benefit remote populations, but there are other fintech solutions that make me even more enthusiastic. Though perhaps less developed, innovative business-to-business (B2B) solutions represent a tremendous boon for microfinance institutions (MFIs) and other institutions looking to advance financial inclusion. Among their many benefits, new B2B solutions have the potential to improve internal operational efficiencies drastically, lowering the cost of doing business, which in turn supports lower prices for financial services and expanded access to excluded populations.
A few examples of B2B fintech applications are: artificial intelligence (AI) that provides cognitive analysis and advice to credit officers evaluating the creditworthiness of previously-unbanked individuals; distributed ledger technologies (blockchain) that enable the viability of new forms of collateral that wouldn’t be otherwise trusted or usable without digitizing them in a ledger of value; and data analytics to better predict risks such as liquidity issues, client desertion, or loan default.
There’s no doubt that financial intermediation, the way we know it now, will continue to change as a result of fintech and that the role of MFIs and their credit officers will be further redefined. However, to take advantage of many of these emerging technologies we need a key input: data. Very little of the information that MFIs capture is digitized, making the use of developments like AI a challenge. Moreover, getting data from excluded populations is a challenge because they do not have digital footprints – for example, we cannot find many of the unbanked on the internet because they do not use it! Additionally, in many countries there are no digital identification systems, and credit bureaus only record information from regulated financial services providers.
However, MFIs have their own unique advantages. MFIs have a resource more valuable than gold: knowledge and information (digitized or not) about each one of their customers. I would assert that there are no organizations that know their clients better than microfinance institutions, which, after all, is the reason the microfinance model works.
Although much client information remains in paper files, many MFIs are starting to or are already using tablets or smart phones to capture detailed information about their clients and their businesses. One priority area for digitization is the social or qualitative assessment of clients’ circumstances, which normally accounts for roughly half of the decision to grant a loan. Such data are rarely recorded or digitized. Many MFIs consider numerical information more worthy to capture, or they think that capturing qualitative information coming from officers working in the field is too difficult. However, data, whether quantitative or qualitative, such as the notes loan officers make when they complete their loan assessments, are equally valuable, and their collection is possible with technologies, such as document processing and parsing or data transformations such as voice-to-text. With some groundwork, MFIs could store information for future discovery and develop useful predictive models, perhaps employing machine learning components. With proper initial data capture, the sky is the limit.
In the immediate term, MFIs do not need to have solutions to mine their data – they can outsource analysis to B2B fintechs. But MFIs must collect and gather data from the field in an orderly and diligent manner to enrich their gold mines… I mean their data repositories. Doing so will strengthen their power, creating new value and expanding reach in a future digital world that will be led by data and more data. MFIs should have more staff positions dedicated to managing data to harness the power of analytics for both their bottom line and financial inclusion.
Image credit: Accion
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