Accessing the Future: Beyond the Traditional Microfinance Space

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Jan 2012
Washington, US, January, 07 2012 - In five years, how will the poor be accessing financial services? If we could step back in time to 2006 with the microfinance sector scaling rapidly across the globe, it would have been hard to imagine that today mobile money users would outstrip all banked individuals in some countries, or that in other countries commercial banks would have overtaken microfinance institution (MFI) outreach to the poor in just a few years.

CGAP reports that 2.7 million people globally remain unbanked around the world, a gap that requires a depth and breadth of financial services to truly address.  We’ve learned that scale alone is not the answer; it must be accompanied by approaches that keep client well-being at the center.  However, we still have not found an approach that meets this challenge in a way that addresses both scale and client needs at the same time.  There are a number of intriguing scenarios for how the poor could be accessing appropriate financial products and services in the future, all of which draw on players beyond the traditional microfinance space.  Here are three potential scenarios:

1) Mobile money makes the leap to mobile financial services.  Mobile money (payments and transfers) is scaling in a handful of countries, but we have yet to see a truly scalable link between mobile money and mobile financial services (credit, savings, or insurance products delivered via the phone).   To do so requires resolution of two major hurdles: 1) The interoperability challenge needs to be addressed, since few mobile network operators have the dominant market share that, for example, Safaricom did in Kenya when it launched M-Pesa; and 2) The business model conundrum must be solved: creating a viable business model for all parties in a joint bank-mobile network operator approach has emerged as one of the key hurdles.

2) Agile fringe providers – such as pawnshops in the Philippines – are able to innovate with client-centered products much faster and more nimbly than banks, MFIs or mobile network operators.  These fringe providers start to incorporate mobile phone technology in a way that allows cost-effective outreach to rural and remote populations. From the client perspective, many prefer the flexibility and accessibility of these offerings, although a potential drawback is that with many small, nimble providers, it is more difficult to ensure client protection.

3) Microfinance institutions reinvent themselves as banking correspondents, or other similar “servicer” intermediaries.  Such an approach, in partnership with commercial banks, allows outreach to the poor in an efficient way.  The value the MFIs bring to the table in this scenario is knowledge of how to reach and relate to the poor, how to design products and services that meet the needs of different client segments, and the efficiencies that come from streamlined field force management.  The banks bring economies of scale, back-end systems, and capital. We are seeing MFIs such as Cashpor in India embrace a banking correspondent approach, at the same time leveraging the mobile phone for efficiencies and scale.  Nevertheless, it remains to be seen if this is a model that will flourish in other regulatory environments.

These are but three approaches that have potential to address both the supply-demand gap and client needs.  There are surely many more innovative models that will be in play five years from now, but I expect most will reflect the common themes across these three approaches above: 1) the role of a digitized device like the mobile phone to drive outreach and scale; 2) shift from a one-size-fits-all approach to regionally-tailored models, and 3) engagement of a variety of actors and channels who we haven’t traditionally thought of as being part of microfinance.



 

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