Adapting to disruption: MFIs consider fintech

By Micaela McCandless 

I’m sitting in a conference room surrounded by CEOs and board members from microfinance banks throughout Latin America. There is tension in the room. Everyone is sitting forward in their chairs trying to absorb the words of a panel of representatives from fintech companies and fintech investment firms.

Many microfinance banks have worked tirelessly to build a client base, become sustainable, and create a positive impact in their community. It has been an expensive and long process. These same MFIs are now holding their breath, hoping someone doesn’t create a start-up that offers the same services via a mobile app for a minimal cost per customer. They are worried that a fintech company could have the same impact on the microfinance industry as Uber had on the taxi industry.

Limitations for MFIs

Many MFIs feel frustrated with the limitations they are facing when trying to compete with fintech firms. In many countries, fintech companies have greater flexibility for innovation because regulations written for banks do not apply to tech firms. Regulatory bodies can also be slow to react and create a more even playing field. Additionally, the classic microfinance methodology is costly because loans are small and require a lot of time from bank employees. In comparison, fintech companies can provide their service via a mobile application for a marginal cost per customer.

So, why won’t microfinance banks create an app for their clients?

Obstacles for MFIs to incorporate fintech

Incorporating new technology is very expensive: the technology must be designed, it must function with the existing software, all internal staff must be trained to use it, and it must be marketed. In some countries, like Nigeria, a bank may need to build branches before incorporating new technology to instill a sense of trust in the community because a history of fraud has created a culture of skepticism. And since technology advances so quickly, there is concern that by the time the bank has adopted an app, a newer, better, trendier tool will be available, and the bank will constantly struggle to stay relevant.

What can banks do?

According to the panel, MFIs have an advantage — they understand their client’s needs and therefore can make sure that their banking products meet those needs. Additionally, the bank can best support the client in staying financially healthy. Rather than competing with fintech companies, banks should look internally at the issues within their organization and see where fintech companies can make the bank more efficient. For example, consider data as a way to expand your client base, SMS to engage with customers, electronic money transfers, as well as incorporating tablets or cell phones for agents or branches to gather information remotely and send it directly to the main office.

Additionally, microfinance banks may want to consider creating incentives for innovation within their own company. As one panelist said, “there is someone sitting at a desk in your company who has ideas on ways to make your processes more efficient.” Provide incentives for them to share their ideas and explore ways to support their creations. Consider mentoring, investing in a start-up, or creating a start-up boot camp.

Following the lead of fintech companies

New fintech companies will continue to be invented. However, people continue to take into consideration the quality of customer service, the products offered, and the mission of the organization when choosing their bank. As long as microfinance organizations focus on their mission and the needs of their clients, while open to innovation and change, they will be able to compete in the market.

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