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FinTech has strongly emerged in developed markets

FinTech, the emerging sector that uses technology to revamp financial services for both businesses and consumers, can have prodigious impact on economic activities. FinTech encompasses products and services within the categories of lending, personal finance, retail and institutional investments, equity financing, consumer banking and many more.[1] Today’s digital age demands easy access, convenience, efficiency and speed, which have created a consequential and enormous market for FinTech industry.

The industry not only consists of startups but also established financial institutions trying to implement FinTech solutions-banks also invest in, or even acquire FinTech to use their technology internally or offer the service to their customers exclusively. For example, in USA, in 2018, J.P Morgan acquired a payment startup, WePay[2]. Because they wanted to provide their 4 million small business clients with WePay’s fast and rapid payment technology, and the reason J.P Morgan is powering the payment method is because of achieving growth in business, so that businesses can accept payments instantly, get paid faster, and never lose a sale^2.

Eventually, the industry is enormously growing globally, and is expected to reach an investment of USD 70 billion by 2020[3]. The FinTech industry is huge –it refers to technological innovation in financial sector, including innovation in financial literacy and education, retail banking, investment, and even crypto-currencies. Similarly, in Bangladesh FinTech could have colossal impact in the financial sector, and in turn in the economy.

FinTech can be instrumental in driving greater financial inclusion in Bangladesh

The adoption of FinTech in Bangladesh was a progressive move for stepping into the emerging markets from a frontier market. In Bangladesh 35 million people were excluded under the modern financial industry despite the existence of the industry for the last 400 years.[4] Thus, the emergence of FinTech was essential to address the large unbanked population of Bangladesh.

One of the platforms of FinTech is Digital Financial Services (DFS), which opened up a new dimension and helped individuals and businesses to have more control over personal finances and, to make prompt decision and transactions. DFS consists of a broad range of financial services that are accessed and delivered through digital channels; such as payments, credit, savings, remittances and insurance. The DFS also includes mobile financial services (MFS). One of the most important impact of FinTech in Bangladesh that has not been intervened much yet is its ability to address poverty.

The four key elements of the Government’s “Digital Bangladesh Vision” are human resource development, people involvement, civil services and finally use of technology in businesses.[5] Since use of technology in businesses is of the key elements of making “Digital Bangladesh Vision”, MFS has made the most significant improvement over the years. However, still only 47% of the population are financially included[6].Meaning only 47% of the population have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in responsible and sustainable ways.

To bring the rest 53% of the population under the umbrella of financial services Micro Finance Institutions (MFI) can play a vital role. Till now Bangladesh’s MFI cover some 32 million people, and give out credit of more than USD7.2 billion annually. This has created scopes for people to become financially secure[7]. In Asia about 90% of the 180 million poor household dearth institutional financial services because most formal financial institutions deny the poor their services because of perceived high risks, the high costs involved in small transactions, and the poor’s inability to provide marketable collateral for loans[8]. So, MFIs is the main way through which these group can be financially included. In Bangladesh MFIs has been instrumental for making greater financial inclusion but had face relative stagnancy over the last couple of years due to emergence of agent banking services. In order for them to increase the inflection point, and target more people in turn create greater financial inclusion FinTech could play a great role.

Thus, to bring the financially excluded people under the umbrella of all the financial services an integration of MFS and MFIs would be significant.

MFIs could be the main beneficiaries of DFS

MFS still in its infancy has many downsides for example: interoperability, limited service and limitation on withdrawal among others. On the other hand, MFIs are facing competition from the banking sectors and the agent banking right now. MFIs lack a robust IT infrastructure which limits their ability to offer various products and services to the financially excluded segment in remote parts. On the other hand, if we take a glimpse of agent banking, we will see how it has grown both in deposit collection and loan disbursement. As of September 2018, loan disbursement through the agent banking channel was BDT 150 crore, up 9.8 % from a quarter earlier that year. At the same time, deposit collection went up 28 percent to BDT 2,577 crore, according to data from the central bank[9]. As MFS and agent banking are more like an extension of the conventional banks or in affiliation with banks and mobile phone operators, they can easily wean away the customers from MFIs[10].

In fact, despite being infancy in some of cases, these MFS are now even offering savings to the customers, and they also have technological support. However, social inclusion is not their main target.

MFIs can utilize the potentiality of FinTech in order to address poverty in a pro-poor approach by effectively using their vast customer database. MFS industry has not headed its potential yet due to its limitations of providing credit. This creates a big opportunity for MFIs as they can coalesce with the MFS in order to tap into a broader market, which would also facilitate growth of MFS.

The concern here might be if MFS industry can provide credit services in the nearer future why should they collaborate with MFI (?) Having an experience of almost 4 decades in Bangladesh gives MFIs a better understanding of swaying the financial sustainability of the institution itself and also an understanding of making greater financial inclusion. For example, in Kenya – where the presence of MFS is quite high, digital borrowers of MFS were having tough time balancing loans from more than one digital lenders, pointing to a refinancing crisis, that in turn created a greater crisis[11].  Thus, MFIs can therefore become more collaborative by combining strengths of their customer database, understanding of financial sustainability of the organization, financial and social inclusion with technology.

MFIs need to augment their services to capture larger market share

The top MFIs in Bangladesh right now are Grameen Bank, BRAC, ASA, BURO Bangladesh, and SAJIDA Foundation among others [12]. In the traditional ways of disbursement of loans and collection of repayments both MFIs and the customers had to approach centers or branches as there was no digitization involved in the value chain. The disbursement is typically in cash and the repayments are made in hand in the branches or centers.

Even now the medium through which these MFIs disburse loans and also collect repayments are not cost and time efficient.

For example, in BRAC Bangladesh, the credit officers must go to villages to collect money from individual borrowers in groups and then give input into tablets in bKash interface. As soon as the cash repayments are made, the clients receive an SMS confirming the transaction. Even BRAC Bangladesh, the repayment of loan process is not fully digitized as of yet. The situation in BURO Bangladesh, SAJIDA Foundation etc. is also similar.

Presence of a person or agent banks are always essential to process the credit or repayment the loans – which is patently not efficient. Lack of technological enhancement hinders MFIs to access and reach out more customers.

The cash management process is also haphazard – as cash management is a human intensive activity in MFIs, operations ranging from disbursement to repayment collection are conducted in physical cash. This results into low productivity, leakage, fraudulence and also many other operational risks.

Majority of the MFIs capture client information through paper-based forms, which are then fed into an MIS solution in the center branches – again not time and cost efficient. So, availability, quality and responsibilities of the MFIs will be questionable and these are elements of Service level agreement (SLA).  These are the factors that are pulling the MFIs back.

MFIs Can Utilize Look-ins By Integrating with DFS

According to Bangladesh Microfinance statistics, the number of MFI borrowers are growing. However, due to the insufficient technological support, MFIs are not being able to hit the target of capturing its valued customers.

Now, if the MFIs integrate DFS, they will be able to address the challenges mentioned above and also will be able to get access to more customers. Thus far with the amount of digitization took place that has increased efficiency in loan collection, loan disbursement, cash management, documentation, accessibility and also caused reduction in malpractices in different branches ^10.

MFIs can drive greater financial inclusion (even in a pro-poor manner) which in turn affects the customer class and pushes the entire economy towards greater financial inclusion.

Challenges Associated with Fully Digitization of MFIs

Despite all the advantages, fully digitization of the microfinance industry will be strenuous as a lot of challenges are associated with it.

First of all, the cost of implementing digital field application is very high for MFIs. In a report published by UNCDF, one of the senior managers of a large MFI established in Bangladesh mentioned that, the cost of hardware, for example: mobile, tablets will be too high for them^10.

One of the toughest challenges for MFIs will be obtaining customer trust. As most of the customers of the MFIs are villagers, they dearth financial and technological literacy. In fact, the senior manager of TMSS mentioned that, if they ask their customers to apply for loans through mobile apps or SMS, the customers will think they are harassing them ^10.

Fully digitization will require a strong cyber security system and also a disaster recovery center, and there is also cost associated with establishing a disaster recovery center. Fully digitization will also require assistance from Government of Bangladesh; for example, by providing everyone with a NID (smart card) as soon as possible, and combating the fraudulence of it. After that if the MFIs had access to the NID database, they could assure authenticity.

Let’s now see some of the major challenges MFIs have to face while adopting some of the very important digitized services.

  • If we think about cashless loan disbursement, the type of challenges that are associated are partnership agreements with MFS for instance. As there is a cap on cash-out, MFIs are not being able to utilize digital loan disbursement, and acquire the advantages of digitization. However, Bangladesh Bank has recently doubled the daily transaction cap to facilitate MFS. [13]
  • One of the challenges associated with digitization of loan repayments is lack of having a strong digitization of processes in regional areas. Then there is also transaction cost associated with digitized loan repayment, which will be an added cost component for MFIs. Obtaining clients trust will be a big challenge too as discussed earlier as they dearth financial and technological literacy.
  • The most attractive service that the MFIs can offer in future is Digital Credit. In the report of UNCDF about “Digital Transformation of MFIs in Bangladesh” it is explained how Digital Credit can work. Let’s assume that the customer finds out about the loan via an SMS, within minutes the customers downloads the file and applies for the loan with minimum documentation, the loan request is accepted within minutes and sent the money into the customer’s mobile wallet, and the repayment will be done in the same way. For help, there will be branch office giving 24/7 service. But to adopt this MFIs have to face lot of challenges. Like gaining customer trust, cost of hardware, financial and technological literacy, customers not having high-end mobile phones, combating fraudulences, unclear design of the product and many more, targeting people living in a low-income bracket.

If the MFIs integrate DFS, it can have a causality effect over the entire economy by targeting the financially excluded pro-poor segment of the economy, and pushing the economy toward greater financial and also social inclusion. Through this integration MFIs will become more efficient, and will be able to access more people living in remote parts of the country. Eventually, these people will be financially and technologically literate, and will no more be excluded from economic activities. Their economic activities will be acknowledged, and they will not only have a better standard of living but also a better standard of life. Thus, the entire society will be benefited, and in turn the economy. However, in order to achieve that, the challenges need to be addressed in a structured approach.

Nahian Hasnin, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]

References

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