Innovative digital technologies and services are enabling microfinance banks (MFBs) to scale up their activities in ways that were not possible before using the banks' traditional distribution model, a new report by Ericsson has revealed.
As their mobile money services generate more transaction data, some mobile operators are looking to team up with financial services specialists.
The Swedish multinational communication technology and services company, which stated this in a report titled: "Disrupting the Microfinance Market," noted that if they work together, mobile operators and MFBs should have a competitive edge. Specifically, it stated while mobile operators have access to a rich stream of behavioural data underpinned by robust authentication mechanisms, banks on the other hand have the expertise and the trust required to win regulators' confidence.
According to the 7-page report, mobile data analytics could bring microfinance to hundreds of millions of individuals and businesses in need of short-term credit. It pointed out that microfinance - the provision of small, short-term loans - is ripe for digital disruption, adding that as a labour-intensive business traditionally reliant on personal relationships between lenders and clients; microfinance has tended to be a local, small-scale activity.
It further noted that the growing use of mobile phones, digital services and mobile money accounts was beginning to fill a great vacuum as mobile operators in some parts of the world are now teaming up with banks, financial tech (fin-tech) companies, and data analytics specialists to use the data they have on customers to gauge their credit risk and offer microfinance products to some who would otherwise.
"Since they know how much consumers are spending on airtime and are able to infer other relevant information, such as whether a subscriber has a job, mobile operators can gauge how affluent an individual is and what size of loan they can afford. If the customer is a regular user of a mobile money transfer service, the operator may also be able to assess how much disposable income they have.
"In fact, mobile operators' data can be good enough to lower the lender's risk significantly, enabling interest rates to fall and making microfinance a more attractive proposition for small businesses and individuals alike," it added.
Furthermore, it stated that as post-paid mobile contracts are effectively a form of credit, some operators have already developed sophisticated risk management systems. For example, Oslo-based Telenor Group, which has operations in Europe and Asia, had built "predictive credit-scoring models" in-house to enable it to offer emergency airtime top ups and handset financing, as well as mobile money loans.
"The frequency of top ups can give indicators of income level, while location data could reveal job stability, how long a customer have had their phone, and how often they change, can provide insight to the likelihood of default," a Senior Analyst in Telenor, Catrin Bekker Dahle said.
At the Mobile World Congress held in Barcelona in 2015, Voyager Innovation, a digital financial and commerce unit of Smart Communications of the Philippines had announced a strategic partnership with Cash Credit, a Sofia-based fin-tech company, to roll out a mobile-based microfinance program.
The two companies plan to apply big data analytics to offer microcredit loans, airtime top-up credit, utility bill payments and credit for airtime resellers to smart's subscriber base of more than 75 million people in the Philippines.
"Mobile operators can provide more than just data. They can also help remove another obstacle that has traditionally held back microfinance: the cost and security implications of transporting cash to and from individuals.
"Rather than having to send an employee to a remote community with a briefcase full of banknotes, a lender can now use digital distribution channels," it added.