The future of microfinance in the FinTech age

As 2015 comes to a close, what’s in store for microfinance? What will it look like in five, or ten years’ time, and did 2015 give us a glimpse of the future? Rupert Scofield, president and CEO of leading microfinance institution FINCA reflects.

This year, despite some reputational damage in 2010, demand for microfinance remained strong and kept on growing. Microfinance is still needed and valued by the majority of people living at the bottom of the pyramid. They cannot start or grow a business without affordable capital. 

But 2015 was undoubtedly the year of the FinTech (technology that provides financial services). While FINCA were the major disruptors in the financial sector 30 years ago, now all traditional microfinance organisations are being disrupted by the growth of digital finance. 

The growth of the microfinance FinTech

The explosion in digital disruptors started relatively recently with the massive uptake of mobile phones by people earning just a few dollars a day. Next, mobile phone-based money transfer and microfinancing service M-Pesa took off in Kenya. Since then, the developing world and its governments have started to see the social and economic benefits of financial inclusion. Today, new FinTech companies are being created on an hourly basis. 

It’s a good time for FinTechs. The investment factor is loaded in their favour. Everyone wants to get in at the start of a successful FinTech that grows exponentially and reaches millions of customers. But all is not lost for traditional microfinance companies. We still have the advantage on the ground, backed by a four-decade track record of meeting the financial needs of millions of small and micro-enterprises. At the moment we understand our customers’ lives and ambitions better than the FinTechs. And FinTech tools are available to us too.

I believe we’re going to see a huge take-up of digital technology by traditional players over the next couple of years. The only question is how long will the current configuration of partnerships continue to favour the technology companies? And how soon will we get open access to disruptive technologies?  

FinTechs are driving us forward

Commercial FinTech companies play a vital role and they’re driving change within the industry. Their technologies make finance more accessible, quicker and on a much larger scale than our ‘sandals-on-the-ground’ models. We need to adapt to compete – and many of us are. For example, the industry is beginning to adopt credit-scoring models that increase productivity and accelerate loan-approval times.

But FinTechs do have a challenge looming. They’re almost exclusively for-profit businesses. Right now, organisations like FINCA, driven by a social mission, are at a disadvantage. We can’t work as fast, approve loans as quickly or potentially reach as many people. But unless the commercial FinTechs change, the clients we lose to them will come back because they’ll understand that microfinance organisations like FINCA truly care about them and want to see them build wealth, not just the company.

What does the future hold for microfinance? The answer is much bigger than just microfinance. The social enterprise model is winning out against the profit-maximising, benefit-the-shareholder financial model – even in big corporations. Take Unilever for example, which has scrapped its corporate and social responsibility department in favour of an approach that means every single department, and every single employee, has to behave in a socially responsible manner when doing business. 

If you transfer this ethos to FinTechs, there may be companies that become enormously profitable. But if they do so without any real regard for the impact of their way of doing business on the welfare of the customer, eventually they will pay a price for that and lose those customers. That’s why we have always modelled FINCA according to the social enterprise model of placing the customer first. Not just saying we do. But running the whole business based on that model. 

I believe traditional microfinance organisations like FINCA are sustainable long term.  We’ll be around in 50 years’ time. The needs of the customers will be different and hopefully the segment we work with will have improved their lives to the extent that they no longer need to live on a dollar or two a day. Hopefully they’ll be beginning to enter the middle class. But we’ll be around because, like every good business, we plan to grow and adapt accordingly to best serve them and their changing needs – and FinTech is a big part of this future.

 

Photo credit: Johan Larsson