FINTECH IN THE MICRO-FINANCE SECTOR

Introduction

After carefully considering the Risk Management and issues associated with staff fraud, we now turn our attention to how MFIs can improve their institutions and deliver services to their clients in affordable yet efficient manner. One such tool is the application of technology for both front-end and back-end. At the front end, where clients are served either directly or indirectly, we shall look at Fintech.

There are still two billion unbanked people around the world. According to the Global Findex Report, as many as 72 per cent of these live in South Asia, East Asia and the Pacific and Sub-Saharan Africa, and 55 per cent are women.

Definition

Fintech is computer programs and other technology used to support or enable banking and financial services (Source: dictionary.com)

Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions (Source: Investopedia.com)

Background

“There are billions of people in the world who are not connected—so they’re effectively not in the economy,” said Scott Picken, Founder, and CEO of Wealth Migrate, a real estate investment firm that uses crowd funding to provide greater access to property ownership. “If we have 7 billion people on the planet and only 2 billion are economically active, what effect will it have if there’s a three-fold increase?”

At the end of 2016, only about half of the world’s population had access to the internet—and in Asia and Africa, that rate is even lower (44.7% and 26.9% penetration, respectively). But internet usage in third-world regions is growing exponentially—and those emerging markets also hold enormous opportunity for fintech, said Picken.

“In the first world, new fintech applications are nice to have, but people have plenty of alternatives,” he said. “But in the emerging world, they’re a necessity.”

A stunning success story of fintech in just such markets is M-PESA, a mobile money system introduced in Kenya in 2007 by Vodafone for Kenya mobile telecom operator Safaricom; as of 2014, it had more than 15 million subscribers who transact as much as 60% of the country’s GDP over the mobile platform. The service has since been expanded to Albania, the Democratic Republic of Congo, Egypt, Ghana, India, Lesotho, Mozambique, Romania, and Tanzania.

A report last year by McKinsey Global Institute concluded that widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6%, or a total of $3.7 trillion, by 2025—which could provide market access to 1.6 billion unbanked people, enable an additional $2.1 trillion in loans to individuals and small businesses, increase government tax revenue, and increase the balance sheets of financial services firms by as much as $4.2 trillion.

In addition to bringing financial opportunities to those who have never had it before, fintech holds plenty of potential for financial firms and their customers in the developed world. For example, fintech in the age of machine learning could bring a level of service to the middle class previously enjoyed only by the wealthiest investors.

“Currently, robo-advisors provide standard service—you fill out an online profile, they categorize you, and then they provide standard services based on that category,” said Ting Li, CEO of Yunfeng Financial Group, who spoke on the panel with Picken. “But this is the first phase. In the future, robo-advisors will use machine-learning technology to calculate an individual investor’s risk profile and needs by identifying that investor’s behavior online and have a 360-degree view of who that investor is. This should result in more customized choices for the consumer.”

No wonder that forward-looking CFOs are looking for modern, cloud-based financial tools to help them become more proactive.

While investment in fintech companies fell to $25 billion in 2016 from $47 billion in 2015, according to The Pulse of Fintech Q4 2016 report by KPMG, in 2013-2016 more than 4,200 M&A and venture deals took place that was worth $113 billion. The drop in investment in 2016 may have much to do with one-off global uncertainties, and the analyst firm believes that by the close of 2017, the year will see an increased level of investment in fintech-related data and analytics as well as artificial intelligence (Source: forbes.com)

What ways could Fintech improve delivery of Financial Inclusion?

Fintech could be applied in many ways to improve the organization as a whole. The MicroSave Founder and Managing Director Graham Wright laid out five basic options:

  1. The first way MFIs could potentially use fintech is to set up their own e-money system, he said, like Equity Bank in Kenya. “If you look at Equity Bank now, the vast majority of their transactions are conducted at agents. The vast majority of their loans, 85 percent, are pushed out automatically from the system, and then cashed out and repaid through agents – so there’s a bank that is really leveraging fintech to its full potential.”
  2. Another option for MFIs is to use their outreach to create a cash-in/cash-out agent network. “We’ve seen this with World Vision in Cambodia, with Finca in DRC, and so on,” he said. “It’s expensive to do, but is an important and high-potential role for MFIs in areas where there are inadequate agent networks.”
  3. A third option is simply to “ride the rails,” he said, using the payments systems that a fintech or mobile money system provide in order to make loan disbursements or repayments. “You’ve got a very large range of MFIs doing that, a lot of them using the Musoni system that allows them to have the back-end integrated with those payments systems.”
  4. The fourth option is to use fintech’s data capability to facilitate communication, loan decision-making, and other essential banking functions. “We see a lot of Indian MFIs using this – there’s an organization called Artoo that provides an excellent tablet-based system for loan officers to screen SMEs and facilitate loan decision-making. And of course you’ve also got a growing number of cloud-based core banking systems that tailor to the needs of MFIs specifically – Oradian is an example of that.”
  5. “The fifth option that we always put on the table for MFIs is to wait and watch,” he said, “because everything is moving so quickly, it’s terribly difficult to figure out what to do, and we’re not really sure which of these fintech companies will survive and blossom into the future. But that period of being able to wait and watch is rapidly disappearing. … Fintech offers opportunities to reduce cost structures, improve loan decision-making, improve communication with clients, and so on, that MFIs really do need to leverage into the future.”

Application of Fintech Around the World

China has outperformed India and Britain to top the globe for financial technology (fintech) usage, according to a report by Ernst & Young (EY) -27th August 2017

The country’s fintech adoption rate came at 69 percent in an EY index that measures users’ activity in various areas, including money transfer, payments, investments, borrowing and insurance, the highest among 20 major markets around the world.

It was followed by India and Britain, which were gauged at 52 percent and 42 percent, respectively. The global average was 33 percent, more than double that of two years ago.

The accounting firm believes China is leading the world in the widespread application of fintech, with new technological and business models sprouting at an unprecedented pace.

“Efficient and convenient mobile money transfer and payments, especially in coastal areas, have become a new feature of China. They are the most widely-adopted fintech services and have deeply integrated into people’s lives,” said Jack Chan, EY Greater China’s managing partner of financial service.

Chinese users also outshone their overseas peers for using fintech in deposits, investment and wealth management, Chan said.

EY predicted fintech would continue gaining momentum around the globe with the average adoption rate to increase to 52 percent. Emerging markets including South Africa, Mexico, and Singapore are expected to pick up the pace.

The research was based on more than 22,000 online interviews on “digitally active” consumers who used two or more fintech services in the last six months (Source: xinhuanet.com)

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