There are many reasons why MFIs might be hesitant to undertake digital transformation. Firstly, heavy up-front investments are required for such initiatives, and small MFIs might lack the necessary resources. Even large MFIs should always conduct careful financial analysis and build a long term digital strategy before launching a digital initiative. Additionally, strong support from the management team is needed to undertake a digital transformation, which requires a significant change management strategy and plan to help pivot the organization from its traditional mindset to a digital culture. Finally, another significant problem is the lack of enabling regulation. As MFI digital transformation initiatives are quite new, clear regulation does not exist in many countries. This hinders the widespread launch of these initiatives, as MFIs often have to undertake lengthy negotiations with regulators for their digital offers to be approved.
Despite those considerations, many business models do exist, which make it possible for MFIs of all sizes to consider undertaking a digital transformation, and more specifically, to adopt alternate and digital channels for their product and service offering.
Small MFIs with limited resources, can become agents for MNOs, such as Kafo Jiginew, a Malian MFI who signed a contract with Orange Money in 2010. This allowed the MFI to discover how DFS initiatives work and offer innovative services at low cost, while earning commissions and reaching potential new clients. Small MFIs can also choose to join efforts, in order to share costs and launch a joint initiative. For example, in Benin, some members of the consortium Alafia have launched a plan for a shared mobile banking platform.
Larger MFIs, with more bargaining power, can get into partnerships with MNOs. FINCA Tanzania adopted this model by partnering with Vodacom in 2013, and then Airtel and Tigo in 2015. The MFI thus reduced the level of investment necessary to launch its service by taking advantage of 3 existing mobile money networks. In 2014, FINCA Tanzania also launched its own agent distribution network, FINCA EXPRESS, to increase its presence and touch points for its clients. However, it is easy for MFIs to be overpowered by the competitive and often MNO-led mobile money offers. For all parties to benefit, MFIs have to make sure to sign a Service Level Agreement beforehand, clearly defining each party’s responsibilities and harmonizing strategic objectives.
Finally, some MFIs make the choice of focusing uniquely on building their own digital platform and agent network, such as Baobab (ex. Microcred). They are able to design their model so that it fits exactly to their needs, and enjoy total control over the delivery and management of their services. However, this solution requires heavy up-front investment and a solid commitment of the management team, and may not be suitable for many MFIs.
Other, more atypical, business models have also been developed in recent years such as a tri-partite agreement in Tunisia between Taysir, Ooredoo and La Poste Tunisienne.
Even with the right business model, undertaking digital transformation will require MFIs to make a large number of adjustments to their operational processes. For example, the client relationship, a core part of MFIs’ work, will obviously change drastically – a client using DFS has less need to visit MFI branches and will rather communicate with his/her local loan officer or nearest agent. Even though the digital channel takes away some elements of the human touch, MFIs should work towards making clients feel just as valued, by implementing easy ways for them to contact and interact with the institution, at all times, even if digitally. Some providers, such as Juntos Finanzas, offer this kind of services by building trust-based relationships, through automated communication and support via mobile channels such as SMS messaging. Another consideration would be the risk management framework used by the MFI, which should also be adapted. Even though credit risk may be contained by more holistic data collection and new scoring models, other types of risks appear with digital transformation, such as strategic risks, partnership risks, consumer protection or cyber-attack risks, etc.
MFIs will therefore need to show resilience and creativity to place themselves at the heart of the digital revolution and confirm that they are an apt and indispensable part of the digital and financial inclusion landscape. MFIs hold a unique relationship with their clientele, often accompanying business endeavours and empowering their clients as their business and standard of living grow. Given this strong relationship, MFIs should place their organisation, their clientele and their intrinsic strengths as the central core around which to build their unique selling proposition as they plan to go digital. In doing so, MFIs will play a crucial role in determining whether the digital revolution will reach the underserved and underbanked, while unlocking their potential to further financial inclusion and economic development in their respective markets.