I am continually impressed by the innovation of digital financial services in emerging markets. This innovation is often assumed to be solely the work of fintechs, but we are increasingly seeing that regulated financial service providers (FSPs) are playing a pivotal role in driving financial inclusion through their own digital initiatives. This development is typically driven by their regulatory licensing, access to low-cost funding, and strong brand and distribution networks they have developed in their respective regions.
To help such institutions think about their digital strategy and plan a roadmap for digitization, my colleague Amy Stewart recently discussed the Digital Maturity Matrix (take the quiz to see your institution’s digital maturity). Our latest paper Demystifying Digital Lending examines digital lending in detail and how financial institutions can implement their digital offering.
As FSPs look to digitize, the natural first question to ask when applying the Digital Maturity Matrix is How should we develop our digital maturity, and to what extent? The matrix speaks of three different levels of digital maturity — Early Stage, Base Level, and Digital Plus — and it is important that institutions aim to develop to a digital maturity that drives sustainable growth and is appropriate given their specific context.
It is our view that FSPs should not necessarily aim to develop their digital maturity to Digital Plus, the highest level on the matrix. Most can benefit significantly and compete in the changing lending landscape by reaching Base Level maturity and perhaps selecting elements of Digital Plus maturity.
But even reaching Base Level maturity requires FSPs to fundamentally change their products and the way they are offered to customers. This is no easy task, and it’s understandable that many FSPs may get overwhelmed with where to start. And so, I would like to introduce five fundamental principles that can help FSPs when applying the Digital Maturity Matrix as they develop their digital capability:
1. Digital happens throughout the organization — including the C-Suite
This one sounds obvious, but for digital transformation to be genuinely effective, digital initiatives must be able to integrate across all functional teams to deliver a fluid customer experience. A good example would be that if an applicant for a digital product needs to use a lender’s physical branch network to register Know Your Customer (KYC) details, this means that branch staff must be familiar with this new digital product to assist the customer as per the planned customer journey. In the pilot phase of launching a digital product, we have seen FSPs successfully silo the launch within a small team. While this can be effective to quickly prove commercial feasibility, ultimately scale cannot be achieved without full buy-in and collaboration across all functions.
To achieve this digital scale, full support from the CEO and C-suite are paramount. Ensuring that the C-suite has the requisite digital skills can significantly influence the execution of digital initiatives. The way the digital team is structured (for example — across functional teams, as a separate digital team, or even as a separate “fintech subsidiary”) also affects the capacity of the institution to digitize effectively.
2. Developing digital readiness is a prerequisite to digital lending
Before FSPs can offer digital products, they must ensure that their systems and processes can support a digital transformation. This includes building scalable and interoperable systems that can organize and visualize data, having intuitive and clearly defined and mapped business processes before they are digitized, and developing a deep understanding of existing and potential customer segments to allow lenders to design products to meet specific needs.
Without these in place, we often see FSPs with ambitious digital plans forced to delay product launches and revert back to the basics first.
3. Digital products can be varying levels of digital
Once FSPs have developed their Digital Readiness they can start digitizing their existing product range or developing new digital products with more personalized propositions. But these options can have very different demands for a lender:
- Digital Propositions speak to the use of digital tools to digitize an existing product range. This would include, for example, using USSD or a mobile app to enable digital application. This improves the customer experience in piecemeal additions, without offering a fundamentally different product.
- Digital Products introduce fundamentally new business models enabled by digital tools, and allow lenders to offer new products to serve the specific needs of customers.
The reason why this is so important is that many FSPs think of the most digital version of a product and aim to go there first. However, there is often a more gradual path to offering a fully digital product which frequently involves digitizing parts of existing products first. This route also allows for quick wins which management teams are often in need of to show progress to the board before investing heavily in newer digital technologies.
In this sense, planning different types of products with varying levels of digital capability over time can be an easier and less complex way of building an FSP’s digital product offering. We encourage FSPs to develop multi-year digital roadmaps beyond 12-month budgetary cycles, to allow for momentum in planning key digital milestones.
4. Human touch will remain relevant in several markets when implementing digital lending
As discussed in a recent Accion blog, human touch will remain crucial for many FSPs given their legacy of high-touch customer acquisition as well factors such as customer preferences and sophistication, larger loan sizes, and to facilitate cash transactions in markets where this is preferred. This means that FSPs should not think that digital no longer requires investment in physical distribution; it will more likely require an explicit design of the customer journey to balance tech and touch points. Furthermore, the need to enable remote support to customers will naturally mean that decentralized touch points such as call centers and mobile-based platforms will require significant investment to support efficient scale. Institutions will need to start planning for these touch points in terms of skills and systems.
5. Partnerships are a key enabler of digital product launches
For FSPs, driving digital maturity can be a time-consuming and expensive process, and in some instances, they will not have the skills or systems to fully execute on a desired product offering. Partnerships with fintechs that have the technology and skills to execute a specific product or functionality can significantly reduce time-to-market and decrease the risk of failure for a digital product launch. A recent paper by the Center for Financial Inclusion concluded that partnerships can be an effective strategy for FSPs to gain access to new market segments, create new offerings for existing customers, enable data collection and management, and deepen customer engagement and usage.
There is no guaranteed formula for digital transformation, but the above principles are a helpful start to promoting meaningful planning and collaboration within lending institutions (and externally, where required) as they look to transform their business models.
And to those FSPs out there already starting their journey — good luck, the future looks bright!
Looking for more guidance on how your institution can enable digital lending? Watch our recent webinar.