European Microfinance Week 2019

INTRODUCTION

Gera VOORRIPS started by defining the core concepts of the session. Digital transformation, she stated, takes the whole process into account: from digital diagnostics, strategy definition, implementation, to the staff’s and clients’ attitude towards the uptake of digital change. Secondly, she defined FinTech as all technology used for financial services. She clarified that, in her view, this can refer to fully digitalised companies offering financial services to end-clients (e.g. digital lenders), but also to companies that offer special services to banks or MFIs (e.g. biometric identification). 

Voorrips then briefly explained the Digital Transformation Accelerator¹, which supports MFIs in fast forwarding their digital transformation, in a faster, more cost-effective and more impactful way. She then gave the floor to the panellists to briefly describe what their company is doing for digital transformation and FinTech.

PRESENTATIONS

Petar CHAVDAROV described that Finance in Motion manages and advises impact investment funds whose blended finance structures bring together public and private investors. These funds are focused on MSME and Green Finance and provide debt, equity and technical assistance to support investees. Chavdarov stressed that there is a strong interest in engaging with FinTech companies which focus on innovative financial services and financial inclusion.

Vincent VAN DUGTEREN explained that most of Oikocredit’s investments go to financial inclusion, in the form of loans and equity to financial institutions (FI). Within this financial inclusion portfolio six FinTechs (balance sheet lenders) are supported. Oikocredit’s ambition for 2020 onwards is to offer specific support on digital transformation to financial institutions, alongside its core financing proposition. Van Dugteren underlined that they cannot do this in isolation. In order to succeed they have a strong need for collaboration with different financial inclusion industry stakeholders and specialists.

Jessica SCHICKS presented the results of a survey conducted by BIO on the level of digitisation of its FIs clients. The survey underlined that many organisations have digital transformation as one of their top strategic priorities, mostly to enhance internal efficiency and to increase clientele. Schicks described how MFIs often want to move as fast as possible, without having a digitalisation strategy, a dedicated team or budget, or basic IT fundamentals in place – necessary elements for success in the long run. She added that a stronger focus from MFIs on customer and customer experience is needed. 

Jurgen HAMMER then presented the Universal Standards for Social Performance Management², a comprehensive manual of best practices which help financial service providers (FSPs), networks, investors and regulators to put customers at the centre of their strategic and operational decisions. SPTF supports the sector on their respective digitalisation paths, partly by setting up stakeholder meetings to discuss common interests and needs and by sharing experiences to enable collaborative learning. Hammer stressed that looking back at learnings is key in promoting good practices as there is no need to reinvent the wheel. 

DISCUSSION

After the presentations, Voorrips opened the floor for questions. The panellists were asked for their suggestions on how a development bank should go about deploying digital transformation well, given that technology has become easier to acquire over the years. Van Dugteren replied that today’s challenge is to build a framework to see what is out there, as the number of new start-ups and solutions is accelerating fast. With this increasing offer, Chavdarov then argued, MFIs need to better target with whom they want to work.

Schicks agreed that technology has become cheaper, but that MFIs are often still stuck with the same systems. Acc­ording to her, moving out of that is the biggest challenge. She referred to BIO’s survey and highlighted that the level of digitalisation in their sample was higher amongst commercial banks than amongst MFIs. The reason was mostly high IT costs. The financial power of a commercial bank is much bigger than that of MFIs, which explains why MFIs more often rush for quick fixes, without having the fundamental IT processes in place. Voorrips added that it is key for an organisation to assess whether staff, clients and organisational structure are ready and prioritise how to integrate technology into its business processes.

The next question was whether there is a need to focus on establishing partnerships between FinTechs and traditional financial institutions. For Van Dugteren this was a no-brainer: yes. He explained that Oikocredit already gets many questions from FIs on what they can learn from the FinTechs in Oikocredit’s portfolio as well as questions on which institutions are ready for collaboration. He concluded that, as partnerships are already happening, the question should be instead “How to accelerate this and make it easier?”

Schicks slightly disagreed. As developments happen fast, partnerships are needed, she said. But there are also risks, especially for smaller MFIs. For instance, a partnership between a large FinTech and an MFI might result in small negotiating power for the MFI. This comes with a lack of control of the partner’s service level quality, reputational risks, and sometimes unilateral technological or strategic changes. The MFI might worry about losing client data or to give client contacts to future competitors, because FinTechs often take on more tasks over time by integrating tasks from MFIs.

Hammer added that partnerships involve learning from both sides: smaller MFIs will learn from FinTechs, and vice versa. He questioned how to integrate past learnings to increase the chance of successful partnerships. Chavdarov replied that he believes that it is crucial that MFIs learn to understand and focus their own needs. Technology is often seen as a solution to everything, but MFIs are still a relationship-based business. This implies that personal elements should not be overlooked. In addition, he said that the new guidelines on Responsible Investing for Digital Financial Services are a good basis for responsible evaluation of investment in financial services.  

The panellists were asked how they focus their technical assistance offer towards supporting institutional development of an MFI. All panellists said that capacity building is based on the needs of the MFI. Involving consultants is key: they visit the clients, sit together and jointly develop suggestions and create materials for trainings. 

The next question was on how impact investors could ensure more funding continuity for capacity development during all stages of digital transformation. Chavdarov stated that investors should collaborate more and provide a joint project and sponsor for the technical assistance phase. Schicks added that investors should take the time to understand a company’s needs and to assess to what extent parties can contribute to the project. Voorrips added that the cooperation for such a joint project also takes time, which should then be done in a more agile way.

Voorrips then wrapped up the session by giving some main conclusions: 1) Digital innovation is a top priority for MFIs;
2) Customer experience should be at the centre, it should not just be about supply side and internal efficiency; and 3) Partnerships and cooperation between investors is needed for technical assistance for digital transformation to ensure MFIs are futureproof and to ensure they provide responsible digital services.

1 https://digitalinclusivefinance.org
2 https://sptf.info/universal-standards-for-spm/universal-standards