SPECIAL REPORT: Digital Financial Services: Providing a “Ladder” Out of Poverty or Creating “Financial Exclusion”?

At European Microfinance PlatformFriday’s closing session of European Microfinance Week, representatives of Luxembourg-based MyBucks, US-based Opportunity International and India-based MicroSave argued about the risks and rewards of digital finance services. Vicki Escarra, the CEO of Opportunity International, said, “What we’ve done over the past five years to get to very rural areas is to use these digital channels.… To focus on women in Africa – not just women, but women living in rural areas – is very, very important.”

MyBucks CEO Dave van Niekerk said, “What digital financial services allow us to do is deliver the full suite of products…. We were asking poor people to run the marathon out of poverty on one leg, credit…. It’s not just about credit. It’s about transparency and customer experience…. It’s more than just a delivery channel; it’s a whole approach” including savings and insurance. Ms Escarra agreed, “It’s not one size fits all. It’s that suite of services that provides a ladder for people in poverty.”

Graham Wright, the Managing Director of MicroSave, said, “72 percent of electronic payments are person-to-person, and most of the rest are bill-pay…. Let’s not pretend it’s financial inclusion.” He said that most digital loans are for about a month at annualized rates of 49 percent to over 640 percent. “They just started offering loan rates of 9 percent per month in Uganda….” He also reported that 400,000 people have been blacklisted in Kenya for unpaid loans of under USD 2. “This is creating financial exclusion.”

Mr van Niekerk described his firm’s rollout in Kenya of Haraka, a product that uses social media and financial transaction history from users’ phones to offer enterprise loans starting around the equivalent of USD 25 with an annual interest rate of 36 percent and a collection rate of 65 percent. Mr Wright argued that these “high” interest rates cannot be calculated based on risk, which he implied might be acceptable, because digital lenders does not reduce the rate for compliant customers as they borrow subsequent, larger loans. Mr van Niekerk explained that his firm has few options for assessing risk. “The trick there is that the person is not listed on a credit bureau. Many countries have no national ID number,” necessitating innovation in on-boarding clients. MyBucks uses data from websites like FaceBook more to establish identity than to assess credit risk. “These people go right into FaceBook as soon as they get internet access. FaceBook has almost become a fundamental human right.”

Mr Wright said, “I’m really worried that if we assume we can remove the [loan officers] from this equation and leave it to digital that we will increase the digital divide, leaving 30 percent of people as credit untouchables.” Mr van Niekerk said that because half of transactions through the mobile money service M-Pesa are still in-person, “It’s important that we maintain a hybrid model while things evolve over time. You need a team on the ground and digital.” Despite his optimism, however, Mr van Niekerk did predict that “We’re going to have one or two fantastic fintech blow-ups.”

Looking for common ground, Mr Wright said, “I think we can agree…as smart phones penetrate, so grows the opportunity for effective, meaningful digital financial services…. But we’ve got five to ten years during which I think we need to be very careful about client protection.”

This story is the final online installment of a sponsored series on European Microfinance Week, which was held from November 16 through November 18 by the European Microfinance Platform (e-MFP), a 124-member network located in Luxembourg. MicroCapital was engaged to cover the event on-site.

Additional Resources

MicroCapital Coverage of European Microfinance Week

NextBillion Coverage of European Microfinance Week

European Microfinance Platform (e-MFP) Coverage of European Microfinance Week

European Microfinance Platform Action Group: Digital Innovations for Financial Empowerment

Controversy Brews as For-Profit Fintech Provider MyBucks Buys 6 African Microfinance Organizations from Nonprofit Opportunity International

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