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The potential and limits of the fintech revolution in emerging markets

by Andrée Simon | FINCA
Tuesday, 30 May 2017 17:59 GMT

Shobha Vakade, 28, who took a loan of rupees 18,000 ($400) from a micro finance company to start her own business, strings beads into necklaces outside her house in a slum in Mumbai in this 2010 archive photo. REUTERS/Danish Siddiqui

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* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

Innovations in financial services technologies help expand on the mission of responsible micro-lending. But we must be mindful of the drawbacks

Microfinance was long been seen as the silver bullet for poverty alleviation. Over the years, we have learned that it has limitations, but it’s still one of the most powerful tools for financial inclusion.

Now, financial technology, or fintech, promises us another revolution, one that could potentially reach millions more through nano-savings and credit delivered through increasingly intuitive and accessible mobile phones. But will the revolution help those at the bottom of the pyramid? Only if we are intentional.

For more than 10 years, Beatrice Normal and her husband supported their family in Carrefour, a poor community near Haiti’s capital of Port-au-Prince, Haiti, by selling books and stationery items. They did it with the help of small loans – a few hundred dollars at a time – from FINCA, which has long offered socially responsible microfinance in Haiti.

The arrangement worked well for Beatrice – except when, at least once a month, she had to take the 23-mile trip to a bank branch to make a payment and consult with her loan officer. Those journeys ate up valuable time that she could have spent running her business, and they exposed her to getting robbed along the way of the cash she’d worked so hard to earn.

This year, FINCA started serving clients using MonCash in Haiti – the first-time microfinance services were offered via mobile in the poorest country in the Western Hemisphere. This will allow Haitians to borrow up to the equivalent of a few hundred dollars and make regular repayments using rapid, fully digital transfers via clients' mobile wallet accounts on the MonCash platform. Also, Digicel’s local agents carry out face-to-face transactions in communities around the country.

MonCash is life-changing for clients like Beatrice, and it’s a boon to many others in Haiti, a geographically dispersed, rurally settled landscape that presents major physical and logistical limits to internal travel.

Such mobile finance technologies are not especially new in today’s banking world. In FINCA subsidiaries across African and South Asia, technology tools like these are already expanding the pool of newly banked consumers at an astounding pace.

But for Haiti, still recovering from the devastating effects of two hurricanes, the introduction of these new technologies is transformative, and it’s only going to get bigger. 

For those of us providing financial services in emerging markets, this explosion of fintech is something we could only dream of a decade ago. But it also raises concerns, especially in countries like Pakistan and Malawi where we’re drawing in many more people without any prior experience with formal banking services – people who may be less aware of how to manage their finances and potentially more vulnerable to becoming over-indebted.

I’m not arguing that new technologies do not have an important role promoting financial inclusion. I’m saying that, as this revolution plays out, financial services providers must be mindful of socially responsible practices that will protect these new borrowers and savers.

That means, first, resisting the temptation to rely entirely on the technology. Yes, technology is making it possible to bring our services to remote corners of emerging markets. But there’s a risk of leaning too heavily on algorithms to determine customer credit-worthiness, almost to a point where customers and banks are anonymous to one another. That raises the likelihood that borrowers could get in trouble, since anonymity can strip away social responsibility.

How can we address the pressure to turn our business over to increasingly efficient machines? We need to acknowledge the value of better credit scoring algorithms that can predict the likelihood a customer would repay and determine the real credit capacity of clients. It drives cost efficiencies and makes services faster, more standardized, and more objective. But, as socially responsible lenders, we need to recognize that it’s our relationship with our clients that makes us responsible towards them, and we have to continue to build that relationship in tandem to modernizing our credit process. FINCA is doing this today in places like the Democratic Republic of Congo, where our extension of services through agents – alleviating pressure in our branches and driving down costs – has created time for our credit staff to build more intimate relationships with clients who have more complex needs.

Second, education about these new products is crucial, especially for the unbanked. FINCA’s financial education programs have long been a core part of what we offer our customers. In places like Uganda, for example, where we’re holding financial literacy camps. In Georgia, where we’re teaming with various media outlets to spread messages about good personal finance practices. And in Tajikistan, where we have public forums on family budgeting, accounting, planning and savings.  

Technology is allowing us to expand on that financial literacy mission; using smart SMS messaging we can regularly remind people of their borrowing status and encourage them to seek additional information. We can now help our clients to drive their own financial development, at their own pace. 

Third, we must be nimble enough to learn from our mistakes and change course as we go to ensure we’re serving our clients well. This is the most important of all, from my perspective. We are entering uncharted territory, and we have no choice but to learn as we go.  What I believe, unconditionally, is that I want a responsible provider like FINCA to be learning alongside everyone else. 

We had to be flexible in the rollout of projects like MonCash to be sure it was giving our customers what they needed and was manageable for us, and in many other projects around the world, we keep a close, continuous watch on how our new products are progressing and being quick to change course when we must. Having a trusted, on-the-ground team – not just data gathered through new technologies – makes that possible. 

As our work around the world shows, innovations in financial services technologies help expand on the mission of responsible micro-lending. But, as we use them, all of us in the financial services industry must be mindful of the drawbacks this seemingly limitless revolution might bring. We have to be ready to change course if the results aren’t what our clients need. We have to be ready to stop altogether, even if the profits are robust but the impact on clients are negative. We won’t get it right the first time. But if we are intentional, we will create another effective pathway to financial inclusion.

Andrée Simon is chief executive officer of FINCA Impact Finance, a global provider of responsible financial services.