Digital Financial Services:What does this mean for MFIs?

Claudia McKay

9 March, 2016

For several years following the explosion of mobile money in Africa, MFIs struggled to adapt…

…but the story is changing

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5.00

10.00

15.00

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2008 2009 2010 2011 2012 2013 2014 2015

Finca Tanzania’s progression towards DFS

Tanzania active mm customers, in millions

2013: • Mobile banking

through Vodacom M-Pesa

• Development of Agency Banking

2014: Agency Banking pilot

2015:Mobile banking via Aggregator with all MNOs

Until 2012: Only branch

Source: CGAP estimate 3

MotivationsThe three main motivations for an MFI to leverage Digital Financial Services

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Expected decrease in cost of funds from both institutions

Key Motivation 1: Lower Cost of Funds

90%0%

5%

10%

15%

20%

Traditional Agent channel

Finca Tanzania Microcred

Average cost of funds

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Key Motivation 2: Lower Cost of Infrastructure

• Total channel expenses stabilize at around 2% of assets

• Majority of expenses are from commissions, which reflect customer activity (which generates revenue)

0

0.5

1

1.5

2

2.5

2014 2015 2016 2017 2018 2019

Commissions Comms OPEX

Sample projectionAgent channel cost (% of assets)

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Key Motivation 2: Lower Cost of Infrastructure

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50

100

150

200

0%

2%

4%

6%

8%

2014 2015 2016 2017 2018 2019B

illio

ns

Total branch costs Total outlet costs

Channel expenses Total Assets

• Overall distribution costs decline as a percentage of assets

• The savings in branch expenses alone compensates the channel expenses

Sample projectionTotal distribution cost vs. asset growth

CFA Francs(billions)

Cost as % of assets

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Key Motivation 3: Own the Customer Experience

Control the customer experience and branding

For Finca, brand attributes warmth, responsible banking and growth of customers runs through all customer channels.

$

Control the pricing strategy

Since the main goal is to collect deposits, some MFIs are making cash in/out as well as payment transactions free.

“We’ve seen different players try to use the mobile channel and it’s never worked. We wanted control over the customer experience.”

—Microcred

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Finca DRC attributes

30%of their customers to

the agent channel

Another Motivation: Grow Customer Base

Originally, customer growth was cited as a key reason for MFIs to build agent channels. However, this has not turned out to be a driving factor yet.

Perhaps this is because MFIs are following a hub-and-spoke model where they start off with agents quite close to branches and only gradually expand away from branches.

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Of customers who signed up via an agent, 50% were active and performed an average of 4 cash-in or cash-out transactions / month

50%

One year after launching mobile banking, 20% of all transactions were going via mobile channel

Early evidence is positive

20%

An account active on mobile banking has 3X the balance vs. a normal active account$

$

$

Within 9 months, 35% of all cash transactions were being done on agent channel35%

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Outstanding Questions

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What about the impact on loans?

Surprisingly, no clear evidence yet of impact on microloans

• Some MFIs, like SMEP in Kenya, have reduced group meetings from weekly to monthly as a result of digital payments

• However, most MFIs are still unclear about impact on loans. Loan officers in some institutions actively discourage clients from paying digitally, worried about their own redundancy.

Leading MFIs are thinking about digital credit

• Access Bank plans to develop a consumer credit product aimed at customers of their MSME customers.

• Microcred has already piloted a digital credit product with positive results.

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Outstanding Questions

? How many MFIs will be able to do this, especially individual MFIs without a network over which to spread huge upfront IT investment? What happens to the others?

How much will MFIs try to get into the payments business?Some are starting to compete directly and offering bill payments and P2P products. Is this a good strategy?

?Some MFIs are talking about moving into digital credit. Is it worth investing significant donor funds to help MFIs reach 1 million clients when CBA can reach 10 million more quickly and easily??Will MFIs be overtaken as banks, MNOs and others have figured out ways to reach same customer segments at lower cost??

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Advancing financial inclusion to improve the lives of the poor

www.cgap.org