HOW MICROFINANCE IS NAVIGATING THE FINTECH REVOLUTION IN AFRICA Exploring the opportunities and challenges of Fintech for microfinance institutions April 2018

Studies show that the microfinance industry is struggling with high costs and low earnings1. Hardly surprising then that development finance practitioners are very enthusiastic about the potential of ‘Fintech’ - the provision of financial services using technological innovations. This is expected to reduce operating costs and help microfinance institutions (MFIs) to increase their efficiency. At the same time, microfinance providers recognise the challenges created by Fintech. For one, new players such as mobile network operators (MNOs) and Fintech-based lenders are now entering the financial services industry and also targeting the unbanked and the underserved.

We have already seen a number of strategic partnerships between MNOs or Fintech companies and traditional financial services providers (such as the Ugandan initiative MoKash, a joint venture of MTN and Commercial Bank of Africa). In addition, Fintech company MyBucks has acquired a number of African MFIs. According to IFC2, unlike traditional financial services providers (FSPs), Fintech-based FSPs have the flexibility to provide affordable and accessible products and services, plus they are faster to tailor their service offering based on changes in consumer behavior.

So Fintech has increased the dynamics in the financial inclusion landscape in Africa and seems to offer enormous potential for the African continent. In Sub-Saharan Africa, especially in East Africa, the industry is drawing lots of attention from venture capital investors, with funding expected to increase to $608 million in 2018 from $414 million in 20143. At the same time, Fintech is still nascent in other parts of the continent.

This seemed a perfect moment for Triple Jump to look at how MFIs view the opportunities and challenges of Fintech in Africa and how they are adapting to this dynamic environment. And of course how this might affect Triple Jump’s strategy on both the lending and advisory fronts. Because how we respond to this new and

1 Mersland, R., & Strøm, Ø. R. (2013), "Microfinance: Costs, Lending Rates, and Profitability". In G. Caprio (Ed.), Handbook of Key Global Financial Markets, Institutions, and Infrastructure (Vol. 1, pp. 489-499). Oxford: Elsevier. 2 IFC (2017), ‘’How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective’’, Note 34.

evolving environment could determine the success of microfinancing in Africa long into the future.

Objectives and methodology

The goal of this article is to shed further light on how MFIs view Fintech, its potential uses, the drivers, challenges and critical success factors. We are also looking to provide insight for microfinance stakeholders into how MFIs can leverage Fintech solutions to remain competitive in the rapidly changing financial landscape in Africa. While it is still too early to present a definitive response to the opportunities and challenges of Fintech, we are convinced that MFIs will need to adapt to succeed in this increasingly dynamic microfinancing environment in Africa.

The article presents the results of a survey Triple Jump conducted among a small sampling of MFIs – 17 in total – from right across Africa4 (see graph 1). The preliminary findings reveal how a number of MFI market players view the risks and opportunities of Fintech. The findings also point to a number of potential areas of improvement.

3 Ibid foot note 3. 4 The survey consisted of a questionnaire via SurveyMonkey in English and French, which was completed by 17 of Triple Jump’s investees and prospects in Africa, plus several Skype interviews with MFIs, in July 2017.

1. INTRODUCTION

1 MFI

3 MFIs 2 MFIs

Graph 1: MFIs in the survey

So what is Fintech? Broadly speaking, Fintech refers to companies that offer or facilitate financial services using technology. According to PWC, Fintech is “a dynamic segment at the intersection of financial services and technology sectors, where technology-focused start-ups and new market entrants innovate the products and services currently provided by the traditional financial services industry”. These start-ups are developing financial products and services that are more user-friendly, less costly to deliver and are optimized for digital channels5. On the other hand, Fintech also refers to the technological finance solutions themselves.

For the purpose of the survey and based on current literature and interviews with experts, Triple Jump has made a pragmatic categorization of Fintech solutions. One primary distinction is between ‘B2B’ and ‘B2C’ solutions. B2C Fintechs directly target end-clients, both consumers and companies, by providing credits (and sometimes savings accounts) via mobile phones or online, such as the digital lending services provided by m-Shwari, Jumo or Mo-Kash. B2B Fintech solutions target financial institutions and consist of a range of technology solutions to support their operations. These range from digitizing workflows or MFI delivery channels to biometric identification and credit scoring solutions.

5 World Economic Forum (2015), "The Future of FinTech: A Paradigm Shift in Small Business Finance"; PWC (2016), "Blurred Lines: How Fintech is Shaping Financial Services, Global Fintech Report". 6 UNCDF-MM4P (2017), “Case study: Disrupting the savings and lending market in Uganda - The story of MoKash”.

The survey among 17 MFIs from different regions in Africa revealed these initial findings:

Fintech is considered more as an enabler than as a disruptor.

- The MFIs surveyed perceived Fintech more as an opportunity than as a threat to their business (see graph 3: 88% consider it as a (very) great opportunity, while only 35% see a moderate to high threat).

- Few MFIs foresee increasing competition in the future from Fintech-based (B2C) companies. This is explained by the fact that most digital lenders enter relatively easy markets with a target audience that is tech savvy, literate and more urban and where data and technical infrastructure are already available. But to access more informal and rural client segments effectively, these Fintech players face a number of challenges, such as client acquisition, initial high write-offs and limited profitability. For example, MoKash in Uganda found that engaging rural customers requires more field work, direct engagement and education on a regular basis than for urban customers6.

Actual deployment of Fintech solutions is still low among survey participants.

- Graph 4 shows that mobile banking and mobile money7 are the main Fintech solutions in use or at the pilot stage among more than 50% of the surveyed MFIs (respectively n= 10 and 9). East Africa is clearly in the lead, which seems

7 Mobile banking is defined as transacting directly on an account, through systems primarily owned or operated by the Financial Institution, while mobile money refers to clients receiving loans or making repayments using the systems of Mobile Network Operators and the like.

2. FINTECH REFERS TO A RANGE OF TECHNOLOGIES

3. FINTECH IS CONSIDERED A FRIEND, NOT A FOE

Graph 2: Categorization of Fintechs

Graph 3: Opportunity or Threat

logical, as mobile money started spreading with Kenya’s MPESA in 2007. Other African regions, especially southern and western Africa, are gradually catching up.

- Cloud computing like SaaS8 and Digital Field Applications (DFA), such as tablets, are following suit (>40%). MFIs cite the reduction of data input errors and the shortening of loan application processing times as key reasons for the automation of field staff workflows. Identification technologies and agent banking are slightly behind (35% of respondents). This could indicate a gradual trend towards the digitization of workflows, made possible by increased availability and usage, as well as the improving cost-efficiency of technology.

- Despite the obvious enthusiasm for Fintech solutions among MFIs, adoption has been slow to take off. In general, the MFIs surveyed are barely using or piloting internet banking9 and alternative credit scoring and are not using solutions like P2P lending, digital factoring, digital financial education or virtual currencies. In Africa, these types of applications are being used to some extent by specialized Fintechs (B2B and B2C), such as digital lenders. That said, several MFIs are seriously considering the implementation of advanced credit scoring techniques, inspired by these credit-providers. This will require them to master advanced data storage and quality, and they will need to have sufficient transaction data and client numbers to make this work, so it is likely to be some time before actual implementation takes off.

MFIs demonstrate a huge interest in Fintech solutions.

- Graph 5 shows broad enthusiasm for Fintech solutions, covering the entire spectrum. It does not demonstrate very distinctive preferences for technologies, though

8 SaaS = Software as a Service

there is a bias towards solutions being used and piloted already, such as mobile banking.

- Also, the survey reveals that Identification technologies (such as biometric KYC) and digital financial education are attracting a great deal of interest (15 out of 17 respondents), although their actual usage is still low or non-existent. Moreover, alternative credit scoring is clearly on the radar of MFIs.

Better operational efficiency, risk reduction and customer convenience are the main drivers.

- 90% of the MFIs that have implemented a Fintech solution cite improved efficiency and productivity as their reason for doing so, as shown in graph 6. Moreover, eliminating cash handling and better credit analytics reduce risks and improve customer convenience.

- This could point to a context of increased competition, pushing the need for efficiency. Relatively few MFIs in this sample mention the replication potential of Fintech, although this is a significant driver for some MFI networks in Africa. Two major MFI networks, serving respectively 425,000 and over 500,000 clients in Africa, have a digital financial strategy at holding level and implement this via their subsidiaries, who are all using the same core banking system.

9 Intended as desktop-based

Graph 5: Popularity (use, pilot and interest) of Fintech solutions

Graph 4: Deployment of Fintech solutions

The high costs of acquiring the technology and making partnerships work are challenging and could explain the slow adoption.

- The main challenge identified by almost 75% of MFIs that have adopted Fintech is the high cost of acquiring of the solutions, as can be seen in graph 7.

- Also, around half of the MFIs sampled cite the difficulty of partnering with MNOs and the change management challenges of Fintech implementation. The integration of Fintech solutions into the existing MIS is the #4 main challenge experienced by MFIs.

Staff commitment and shareholder support are the critical success factors of Fintech deployment.

- The MFIs with Fintech experience cite committed and available human resources as the key success factor (>90%: see graph 8). This shows that transition to mobile delivery channels or automated workflows has a major impact on the institution. At one MFI, tablet introduction was started solely as an IT project, but the preparations for the transformation also required the involvement of the operations department. In addition to the necessary technical testing, this helped prepare the staff for new ways of working. This kind of project can easily take a year or more to complete. This is why strong change management, including staff involvement and training, is crucial.

- Other major success factors include supportive shareholders willing to invest in Fintech and the quality of the Fintech partner. The survey revealed that the majority of cases involved an external technology partner (like Software Group and Neptune), although in three cases Fintech was implemented through in-house IT development.

Based on a limited survey among African microfinance institutions in the Triple Jump portfolio, the preliminary findings show that:

1. MFIs see Fintech solutions as a major opportunity and not (yet) as a rising threat from Fintech players entering their markets, for instance as digital lending platforms; Fintech is considered more an enabler than a disruptor.

2. African MFIs are actively looking for ways to improve customer convenience, reduce risks and improve efficiency and productivity by leveraging Fintech solutions. The basic use of digital delivery channels like mobile banking and mobile money are mostly in use or in the pilot phase, especially in East Africa. The intermediate level of digitizing or automating workflows is on the rise. This includes the likes of Digital Field Applications (DFA) and identification technologies.

On top of that, the MFIs surveyed offered some fresh perspectives on how they are navigating the Fintech revolution:

3. Fintech solutions like digital financial education and (alternative) credit scoring are definitely on the radar of MFIs, albeit not yet in use at MFI level. These digitized services and products could be considered as a third

4. CONCLUSIONS

Graph 7: Obstacles and challenges of Fintech implementation

Graph 6: Main drivers of Fintech demand Graph 8: Key success factors

phase in digitization, requiring a robust foundation, especially on the data availability and quality fronts.10

4. Deploying Fintech solutions entails major challenges for MFIs, the most significant being the high upfront investment needed to acquire and implement the technology. Other obstacles include finding the right Fintech partner, the required change management and the integration of Fintech solutions into existing MIS.

5. This implies that to leverage Fintech successfully, MFIs should be forward looking and that they need to pro-actively manage the required transition for the institution, its staff and its clients. Strategic guidance from the board and management and sufficient financial and human resources will be indispensable in this respect11.

10 Geraldine O'Keefe (2017), “Digital Trends Implications for Providers”. For Africa Board Fellowship - Centre for Financial Inclusion.

11 Research and main authors: Imelde Adjaffon CFA and Gera Voorrips. For more information www.triplejump.eu or reach out to gera@triplejump.eu.