Technology is part of the solution

How important is fintech in the financial inclusion sector, and how is it changing the way Oikocredit operates?

New technologies have significantly changed the financial industry in recent years.Fintech is such a hot topic nowadays, and there’s plenty happening in the sector. Fintech can make processes faster, more efficient and more customised.

Traditional microfinance organisations (the core of our financial inclusion portfolio) are starting to make use of more sophisticated technology to administer the loans they grant. In addition, they are increasingly offering their clients digital payment services such as Mobile Money which enable money transfers to be made by mobile phone, without the need for a traditional bank account.

The development of innovative technologies and highly digitalised processes in financial inclusion has been boosted by new fintech companies in emerging markets.

The personal contact between customers and staff is an important feature of traditional microfinance. Will the rise of financial technologies mean that we lose this?

When work processes are accelerated and facilitated, and individual staff members no longer have to visit so many small groups and travel to villages with stacks of paper forms and cash, they can use their time differently. Financial inclusion requires the interaction of technology and people. Fintech is not in itself a substitute for direct personal contact. Actually, the current trend in financial inclusion is towards ‘tech-and-touch’.

Furthermore, fintechs typically employ more people in technology development, marketing and customer service for instance. Nearly two billion people do not yet have access to financial services. To satisfy such enormous demand will require significant resources.

I’m extremely optimistic about the development of this technology and the positive socioeconomic effects it can generate. Responsible use of technology is part of the solution, as we strive to provide access to financial services for those individuals and communities who in the past were excluded or underserved.

What products and services do Oikocredit’s new fintech partners provide to make their customers’ day-to-day business easier?

Fintech is still a new area for Oikocredit. We currently finance five fintech companies that offer micro, small and medium enterprises (MSMEs) access to financial services.

Our partner Tienda Pago (operating in Mexico and Peru) offers short-term credit lines to micro entrepreneurs with small shops that sell daily necessities to their local communities. Such shops need to purchase their supplies but only generate income when these products are sold.

With little cash available, their product offering is small, and consequently sales and profits are low. They would get better prices if they bought certain minimum quantities from wholesalers but often they lack the capital to do so.

Tienda Pago has developed a system that enables small shops to place an order covering a longer time-period, leveraging mobile technology. As part of the shops’ credit line, Tienda Pago advances the relevant payment directly to the wholesaler.

The shops then pay off their loan with Tienda Pago as they sell their inventory. This makes the purchasing of goods more cost-efficient and less time-consuming. As a result, the shop owners generate more income and can build up a credit history which is backed up by digital data.

Our Colombian partner Sempli offers multi-year working capital loans from US$ 10,000 to US$ 100,000 to SMEs. SMEs typically account for the largest numbers of jobs created in most countries, and are thus highly relevant in a socioeconomic context.

However, (as is the case in many of the countries in which Oikocredit operates) Colombian SMEs face enormous difficulties in obtaining adequate financing which hinders their growth as a consequence. SMEs are typically too big for MFIs and too small for commercial banks, the so-called “missing middle.”

Sempli has quickly become the leading technology-driven financier of SMEs in Colombia, operating a tech-and-touch model. Clients can apply online for financing, but the assessment process consists of a combination of data-driven credit scoring and on-site face-to-face due diligence of every single client Sempli works with.

In contrast to obtaining a loan from a bank (assuming that the SME even qualifies for it), applying online to actually receiving the money is a process which can be completed within 72 hours (rather than several weeks).

What are the risks to Oikocredit when financing fintech companies?

Fintech companies are often young and fast-growing companies. Generally speaking, within the social impact industry we don’t yet have a lot of experience with fintech companies, but this is changing as we are learning quickly.

And yes, it might be risky to invest in a young company in a relatively new sector. But not investing in this sector is equally risky. Fintech is here to stay.

In 10 years’ time, these companies might not even be referred to as fintechs at all, because a clear trend emerging is that all financial institutions are becoming ever more digitalised, both in the way they work and their product and service offering. So, the challenge is to adapt to this new reality.  

How does Oikocredit minimise such risks?

Currently, fintech companies only account for a modest share of our financial inclusion portfolio. We carry out thorough checks and analysis before we invest, as we do with all other companies.

To share experience and knowledge, we also exchange information with other social investors. We also apply more than 40 years’ experience as a development finance provider to establish standards for the financing of fintech companies.

As with the financing of microfinance organisations, we are at the forefront of this development. For instance, in 2018 we co-initiated the Guidelines for Investing in Responsible Digital Financial Services.

Many socially oriented fintech companies wish to co-operate with us and to benefit from our many years of experience. As a next step, we would like to increasingly connect our established financial inclusion partners with fintech companies, so that they don’t just learn from each other but also work together in impactful ways.

We want innovative technologies to play a role in improving the quality of life of low-income people in emerging economies.

In your opinion, which innovative fintech solutions will drive change within the industry in the near future?

After the current wave of innovation in credit and payments, a lot will happen in the micro-insurance sector. I expect to see an increase in the number of technology platforms that link insurance companies to people who need insurance at only a few dollars per month.

I have already touched upon collaboration between fintechs and existing players. A fintech might have developed a highly innovative solution but does not yet have a large pool of clients, while an existing financial institution might already have many clients but does not have access to the best solutions in the market – if they work together they can leverage on each other’s relative strengths.

Another area is blockchain technology, although there has been a lot of hype around its use and we don’t yet see many practical applications that work at scale [editor’s note: blockchains enable transactions on the internet that are both anonymous and transparent, are validated by all parties involved authenticating them and are stored as inalterable data, which makes them highly tamper-proof]. We’re not sure yet where all this is heading, but we are keeping a very close eye on it. I am in the fortunate position that all this is part of my job.