MicroFinance & Fintech
Traditionally, microfinance has revolved around providing small loans to the underprivileged – women, minorities, and individuals suffering from poverty or lack of access to traditional financial services. Over time, the definition has broadened to include not just microcredit – but a variety of financial services such as savings accounts, insurance, and payment solutions, to a much wider audience. The aim of microfinance today is to provide affordable financial products and solutions to “everyone”. With a large portion of the world still unbanked, new technologies and services in the financial space offer a great avenue for improving the world of microfinance, particularly in the sphere of microcredit and small loans.
When you hear the word microfinance, the typical thought that comes to mind is a group of women co-guaranteeing small loans for each other, using these loans of USD 200 to 500 to set up a small business. Fintech, in contrast is the use of advanced technology and innovation in the world of finance. What could the two possibly have in common you wonder?
Fintech and microfinance may be closer allies than you might think. With both aiming to improve financial accessibility. By embracing fintech, microfinance institutions have the ability to achieve their mission faster, and more efficiently than they could ever imagine.
There are many ways that the use of fintech in microfinance can be a huge opportunity for improving financial accessibility. Firstly, fintech can be leveraged to make loan disbursement and loan repayment easy and efficient – using mobile money, or mobile wallets that may already be in existence. Secondly, fintech’s data capability can be used to analyse profiles, make loan decisions, and improve communication. In both cases, the use of fintech can greatly improve the speed, and cost of doing business for these institutions.
There are already a number of businesses making great progress in the overlapping sphere of microfinance and fintech.
Tala, founded in 2011 is a US based mobile technology company that aims to serve the unbanked. With offices in Kenya, Philippines, Tanzania, Mexico, and India, the company allows individuals to gain personalised loans based on alternate credit checks. Tala’s mobile app uses cellphone data including call logs, text messages, and other behavioural data to build a customer’s credit profile, leading to instant loans ranging from USD 10 to USD 500. Loans are approved within minutes and disbursed through mobile payment platforms. Tala also helps customers build their credit profile by sharing this information with local credit bureaus, allowing them to secure larger loans in the future.
Using a similar premise of alternate credit checks, China’s MYbank uses non traditional sources of data such as social network data, and payment transaction data to ascertain the ability of a business to repay its loans. Having loaned USD 290 billion to 16 million small companies over 4 years, this fintech backed by Alibaba is revolutionising lending in China. With an average loan size of USD 1,500, and a default rate of just 1 per cent, this FinTech is allowing many small entrepreneurs, who would have otherwise been unable to gain access to a loan, grow their business beyond what they could have ever imagined.
Talking about customising loans to the needs of the entrepreneur, Grab Financial, Southeast Asia’s leading fintech, has entered the lending space, offering drivers a suite of financial services. This includes loans, payment and insurance. By building an alternate credit scoring mechanism, Grab aims to tailor its product to the needs of a ride-sharing driver (unlike traditional car loans), and hopes to serve millions across Southeast Asia.
These are just a few companies that are using fintech to reach the unbanked and the small business owner. As fintech grows, it is clear that microfinance will grow alongside.