2016 sep 9_workshop_business_case_digitally-enabled_shf_finance
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The Learning Lab is researching how digitalization affects the business case for smallholder finance, specifically: what role do digital tools play in successful business models for lending to smallholders? Here we provide early findings from the research, in the form of a presentation from a Sep. 2016 workshop where Dalberg and the Lab discussed the results of organization surveys and expert interviews with selected MasterCard Foundation partners, and financial and digital service providers. In addition to the presentation file, the blog below summarizes some of the key takeaways from the study to date.
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2016 sep 9_workshop_business_case_digitally-enabled_shf_finance
- 2. 2 Workshop overview • On Sept 9, 2016, the MasterCard Foundation (MCF) and the Rural Agriculture Finance Learning Lab organized a half-day workshop for an audience of ~30 MCF partners, sub-grantees, digital service providers, and other sector donors • The workshop featured a presentation of the findings of initial MCF/Learning Lab research, supported by Dalberg, on the role of digitalization in cost-effectively providing smallholder finance, with a focus on the impact of digitalization of SHF credit products and processes on financial service provider (FSP) profitability, based on extensive desk research, sector interviews, and a survey of a significant sample of MCF grantees and sub-grantees who are today involved in at least partly digitalized delivery of financial services to smallholders • The objectives of the ensuing discussion during the workshop were on (i) validating emerging findings with key sector stakeholders, (ii) sharing experience to date and more fully exploring the challenges for broader digitalization of smallholder finance, (iii) exploring the investment priorities of different types of sector players where digitalization is concerned, and (iv) collecting feedback on the support required by the sector to strengthen the business case for digitalization and relieve other bottlenecks to smallholder finance digitalization • The discussion validated the broad findings of the study, suggested that additional investment into understanding the ROI for digitalization could benefit the SHF financing community, and via a rich discussion surfaced a number of additional challenges and opportunities for digitalization. • This document included the workshop presentation and captures the key points and learnings from the workshop discussions. • Please contact the Lab for more information at: www.raflearning.org or on Twitter @raflearning Source: Workshop feedback; Dalberg analysis
- 3. 3 Workshop objectives and presentation contents Objectives • Share study findings • Facilitate sharing of lessons learned among key players in digitally-enabled smallholder finance • Identify further digitalization barriers and foster collective problem-solving to surmount them • Identify further research needed and next steps to build a robust business case both for serving SHF and for investing in digitalization to do so Contents (Sections of this document) • Readout of preliminary findings • Q&A and open discussion of findings • Breakout sessions with discussion summary – Session 1: Sharing experiences/lessons learned on digitalization (35 min) – Session 2: Group exercise on digitalization investment (30 min) – Plenary on path forward and wrap up (25 min) • Annex: Additional Data
- 5. 5 • Lay the groundwork to determine how digitalization can enable providers to more profitably and sustainably serve small holder farmers (SHFs) Goal Objectives • Build an initial knowledge base of the current and projected use of digital tools by FSPs serving SHFs • Begin to explore the impact of digitalization on the financial performance of FSPs • Identify key constraints to digitalization and areas of opportunity to accelerate digital integration • Identify requirements for building out a more robust business case for digitalization over the coming years The study objectives were to understand how FSPs use digital tools to serve SHF and explore how digitalization impacts their performance
- 6. 6 We have surveyed 23 financial service providers, as a sample of broader ecosystem, to build on insights from desk research and DSP, funder, and expert consultations Surveyed 23 Financial Service Providers Interviewed SHF Experts and Digital Service Providers Spoke with multiple MCF Partners 1 2 3 • 4 commercial banks • 4 bank microfinance institutions • 7 non-bank microfinance institutions • 4 agribusinesses • 3 niche non-bank financial institutions • 1 mobile network operator Thank you to those of you who participated!
- 8. 8 Survey respondents can be mapped into 4 different “digitalization profiles” based on number of different products they offer and their level of integration of digital tools Less than 1,000 farmers served 1,000 – 10,000 Farmers served 10,000 – 25,000 farmers served 25,000 – 100,000 farmers served Over 100,000 farmers served Legend Credit only Product offering Digital integration along lending value chain Low High End-to- End financial solution1 Traditional MFIs. Traditional MFIs leveraging digital for loan analysis Agribusinesses. Agribusinesses leveraging digital payments and digitalizing data collection and loan analysis to evaluate farmer risk High Tech Banks / Niche NBFIs. High tech commercial banks and niche NBFIs offering fully digital financial services . Commercial Banks / Innovative MFIs. Innovative MFIs and commercial banks equipping field agents with mobile devices and partnering with B2B digital services providers to offer paperless and cashless end to end solutions WhoWhatHowBusiness caseChallengesOpportunities
- 9. 9 High Tech Banks / Niche NBFIs and Commercial Banks / Innovative MFIs have fully digitalized value chains, while other profiles have primarily digitalized loan analysis High Tech Banks / Niche NBFIs Commercial Banks / Innovative MFIs Traditional MFIsAgribusinesses Customer Relationship Management1 Customer Registration Loan Analysis Cash Flows Delivery of Support Services Organization 1 Organization 2 Organization 3 Organization 4 Organization 5 Organization 6 Organization 7 Organization 8 N/A Organization 9 Organization 10 Organization 11 Organization 12 Organization 13 N/A Organization 14 Organization 15 Organization 16 Organization 17 Organization 18 Organization 19 Organization 20 Organization 21 Organization 22 Organization 23 Fully digitalized Less digitalized Not digitalized N/A No support services offered 1. Customer Relationship Management includes Sales & Marketing Source: RAFLL Business Case Survey & Dalberg analysis WhoWhatHowBusiness caseChallengesOpportunities
- 12. 12 There is a consensus among organizations that integrating digital tools will increase profitability Organizations believe increasing digitalization will improve profitability... Degree of Digital Integration + - 1. Respondent who already has a fully digitalized lending value chain Source: RAFLL Business Case Survey & Dalberg analysis 20% 30% 67% 60% 70% 33% 50% 50% Traditional MFIs 3 Commercial Banks / Innovative MFIs 11 High Tech Banks / Niche NBFIs 20%1 5 Agribusinesses 4 Neither Agree nor DisaggreeStrongly Agree Agree • 83% of all respondents claimed digitalization will reduce the cost to serve and / or increase portfolio quality • Only 17% mentioned revenue benefits “Digital tools can help us identify, classify, and assess farmers better prior to lending. This will reduce our credit risk” -Commercial bank “Digital tools will reduce transportation costs, recovery fees, input costs, analysis costs, and reduce risks linked to credit analysis” -Bank MFI … primarily by decreasing costs and / or reducing risk WhoWhatHowBusiness caseChallengesOpportunities
- 13. 13 Surprisingly, FSPs who have measured the impact of integrating digital tools see more value from increasing the addressable market than from reducing the cost to serve Number of survey respondents by impact of integrating digital tools and by profile Source: RAFLL Business Case Survey & Dalberg analysis 1 1 1 3 1 1 11 Increase portfolio qualityIncrease in loan officer caseload 2 Decrease loan disbursal cost 2 Increase in customer portfolio 4 Decrease customer acquisition cost AgribusinessesCommercial Banks / Innovative MFIs Traditional MFIsHigh Tech Banks / Niche NBFIs Increased revenue Decreased cost Reduced risk • 6/7 saw an increase in revenue • Customer portfolio grew between 25-50% • Loan officer case load increased between 30- 60% • 3/7 saw a decrease in the cost to serve • Customer acquisition cost dropped by 25-40% • Cost of disbursing loans dropped by up to 80% WhoWhatHowBusiness caseChallengesOpportunities
- 14. 14 This is consistent with what experts and DSPs have experienced (1/2) Digitalization seen to drive value through portfolio growth Data is the key lever to increasing FSPs’ addressable market cost efficiently Source: Dalberg interviews with experts and DSPs Key learnings • Early evidence suggests portfolio growth is the key value driver behind digital investments • Portfolio growth is particularly important for commercial banks and MNOs which have tighter investment horizons • Alternative data opens up new markets by unlocking information on borrowers previously considered too risky/expensive to serve • However, the type of data used today continues to be limited and not as relevant for SHF lending • Models that own (or effectively access) the data needed to make SHF credit solutions viable will capture the most value “Most of the benefits come from increasing customer deposits… for a leading financial institution we have been able to increase active customer based from 12K-53K over a period of 18 months… Volume is key to recouping the digital investment” -DSP “Commercial banks and MNOs target primarily portfolio growth” –DSP “Data opens new markets.. We expect [an MFI] to increase its SHF portfolio from 2% to 8% by using our digital credit scoring services” -DSP “Currently, [airtime] data is owned by MNOs and that is why they have the ability to extend credit cheaply…however they are yet to have the right data to properly understand the credit risk of lending to smallholder farmers ” -Digital finance expert “Data. Data. Data. The more data we are able to capture the further down we can get” –DSP Summary WhoWhatHowBusiness caseChallengesOpportunities
- 15. 15 This is consistent with what experts and DSPs have experienced (2/2) Digital tools deliver additional revenue benefits by enabling customer- centric products Cost savings and portfolio quality are more significant for higher touch/smaller organizations Source: Dalberg interviews with experts and DSPs • Digital tools allow FSPs to meet customer needs effectively and improve the customer experience • Customer centric products increase user engagement and product “stickiness”, driving loan repayment rates, repeat borrowing, upselling/cross-selling and ultimately customer lifetime value • Hooking customers is key: SHFs who borrow their first loan with an FSP are highly likely to continue to borrow with the same FSP • Highest cost savings come from reduced customer acquisition costs • Reducing costs and farmer risks is particularly significant for higher touch institutions operating in tight margins and serving higher risk farmers “Financial services, if done right, can be extremely sticky. You have to look at the first financial product as marketing, and think in terms of customer lifetime value. If you start the relationship off right, the customers are more likely to repay and come back.” - DSP “Juhudi had previously tried SMS repayment reminders that didn’t work. Using our platform to add targeted informational content increased customer engagement. We build affinity for the company which actually drives usage and repayment.” -DSP “We had a customer who had an 11 day identity verification process; we took it down to 22 seconds without having to send people out to the village” -DSP “MFIs are more open to using our technology because they are being pushed for profitability and want to reduce costs and have a bigger impact.” -DSP SummaryKey learnings WhoWhatHowBusiness caseChallengesOpportunities
- 16. 16 Going forward, players intend to increase digital uses across the lending value chain, with a slight preference for digitalization of cash flows and loan analysis Number of survey respondents by intended digital tool implementation and by digitalization profile 1. Digital customer relationship management includes Sales & Marketing Source: RAFLL Business Case Survey & Dalberg analysis 4 2 2 2 3 3 2 3 1 10 11 10 10 9 4 4 4 3 3 1 Digital cash flows 14 Digital loan analysis Digital delivery of support services Digital customer registration Digital customer relationship management1 18 20 18 21 Agribusinesses Traditional MFIs High Tech Banks / Niche NBFIs Commercial Banks / Innovative MFIs WhoWhatHowBusiness caseChallengesOpportunities
- 18. 18 Organizations’ obstacles mirror challenges encountered by DSPs to close partnerships with Financial Service Providers (1/2) High upfront costs Source: Dalberg interviews with experts and DSPs “We are facing a cost problem. It’s quite expensive to get a bank to set up the platform. It costs $16k-$70k to setup, and $300 monthly per branch ” -DSP “The relative cost of digital varies substantially for different actors. MNO-led models already have the infrastructure in place while banks have to pay to set up this infrastructure.” –Digital finance expert Summary Lack of internal capabilities “MFIs are open to using technology because they want to reduce costs but they lack the capabilities.” -DSP “Out technology is the underwriting but to use it you need the whole digital lending stack in place. The smaller players need integrated offerings… you really need to work hand-in-hand with them. That’s a constraining factor, we just can’t afford it” -DSP • Traditional MFIs and less tech-savvy organizations lack the internal capabilities and capacity to implement, integrate and manage digital tools • These organizations require integrators who can work closely with them to digitalize their core banking systems before digitalizing other functions along the lending value chain • The high upfront cost challenges the DSPs’ ability to sell their products to FSPs • This cost burden is highest for lower volume players / those that do not already have digital processes in place as it requires organizations to create entirely new infrastructure and processes to adopt new tools Key barriers WhoWhatHowBusiness caseChallengesOpportunities
- 19. 19 Organizations’ obstacles mirror challenges encountered by DSPs to close partnerships with Financial Service Providers (2/2) Lack of digital literacy Source: Dalberg interviews with experts and DSPs • Risk-averse commercial banks require proof of impact on profitability/portfolio quality before investing • Proving the business case is particularly challenging in a nascent field where profitability data has yet to be collected • Value of digital tools is likely correlated with digital literacy of the end customer • Going cashless is particularly expensive in underdeveloped mobile money ecosystems; customer education is key • Digitalization of support services is particularly challenging with less tech savvy customers and will continue to require human interaction “Customers are much more comfortable giving cash to agents than using mobile money. We’ve invested a lot in changing customer behavior but digital repayments are not growing as much as we expected. Customer training is expensive and takes a lot of time.” -DSP “For financial literacy training, there has to be a human component somewhere. Digitalizing everything is unrealistic given our target customer.” - DSP Summary More proof of value required “Commercial Banks end up saying ‘let’s see more numbers, let’s see a track record.’ They want to see a tested model. The challenge is building that model can take years.” -DSP “Understanding the impact on profitability is vital. Banks what the ROI is, we need to make the business case for them” -DSP “There are a lot of early stage interventions that are still in the data capture stage. FSPs might not trust the data yet or know what to do with it.” -Digital finance expert Key barriers WhoWhatHowBusiness caseChallengesOpportunities
- 20. 20 These findings suggest opportunities for FSPs, donors, and DSPs to catalyze progress in the space • Design customer centric products that can reduce cost of serve and increase loyalty, usage, and ultimately customer life time value • Partner with non-traditional actors to incorporate additional sources of alternative data in credit underwriting to assess farmer risk that can expand an institution’s addressable market • Track the performance and financial return of digital investments WhoWhatHowBusiness caseChallengesOpportunities FSPs Donors, capital providers, and market platforms DSPs • Support the “digitizers”, or support partnerships between “digitizers” and FSPs • Build SHF digitalization/digital literacy, particularly with regards to the uptake of digital support services and digital repayments in lagging rural ecosystems • Build the sector’s institutional capacity for digitalization and nurture digital savvy talent • Consider investing in the digitalization of low tech models, particularly those reaching a much larger segment of SHF (e.g. VSLAs, SACCOs, smaller scale agribusinesses) • Find innovative ways of sharing risk with FSPs • Invest in making the case for digital services to FSPs • Create customized and flexible products adaptable to the changing needs of FSPs • Partner with other DSPs to provide integrated digital offerings across the value chain
- 22. 22 For discussion • What overall questions, reactions, or feedback do you have on our preliminary findings? • Is the emerging typology of digital smallholder FSP models useful? • Have we correctly captured the major trends in sector digitalization and how they differ by FSP type? • Do our early conclusions re: profitability from digitalization resonate (i.e., positive correlation and perhaps causation, market expansion being greater pathway than cost reduction)? • What do these findings imply about potential opportunities for key actors to catalyze progress in this space? Contact us: raflearning.org | @RAFlearning
- 24. 24 Summary of breakout discussions and group recommendations on digitalization FSPs, with DSP support, want to invest in digitalization. Immediate priorities: • Data analytics: to improve credit-scoring, increase reach, improve operational efficiency, etc. • Broader and deeper use of alternative data • Integration of internal and vendor systems • Using data and digital solutions to increase understanding of farmer needs, and to boost customer enrolment and retention • Improved product design: better and new digital solutions for end users, more flexible systems for FSPs, simpler interfaces across the board Providers want to invest… Sector-level solutions…but face these challenges: • ROI on investment in digitalization is not clear, especially given the high upfront costs, which hits smaller orgs particularly hard • FSPs face internal challenges to adopting new technologies, from the cost of training and onboarding (which may include training end users) to outright resistance by staff in some cases • Regulatory and enabling environment (mobile ecosystem) hurdles limit the potential of some digital solutions • Difficulty accessing or integrating data from external sources limits innovation; reluctance to share data stems from uncertainty about: intellectual property rights, the value of data, and data privacy best practices Source: Workshop feedback; Dalberg analysis Below is a one-slide summary of the results of the facilitated discussions that followed presentation of the above findings. Participant feedback sometime echoed study findings, but also highlighted new issues and provided greater nuance. Following this slide are fuller notes from the discussions, organized according the 3 successive breakout sessions. FSPs and DSPs see a need for: • An unbiased view of what digital can and cannot do, the landscape of technology vendors in key geographies, and pricing benchmarks on the cost of investment • Knowledge and tools to understand ROI, including a quantitative case/evidence base on where digitization has the biggest bang for buck, models for measuring ROI, and case studies of success/failure • Donor support for FSP, DSP and policy- maker capability building around digital- ization, and funding for innovations and technology investments • Industry-level guidelines on IP and norms for data privacy; gauges of value of data, facilitated by specialist DSPs that can develop sustainable data sharing models
- 25. Breakout 1: Sharing lessons learned on path to digitalization – early results, obstacles, opportunities 35 min • What impact on financial performance have you seen from digitalization – quantified or directional? • What are the barriers that your have faced in digitalizing the credit value chain? • What has helped or might help to mitigate these barriers? • What kinds of partnerships or vendors have helped you on your path to digitalization? • How do you think about digitalization system integrators vs. building digital platforms internally? I.e., where is going to third parties for support valuable and/or essential?
- 26. 26 The discussion confirmed several widely noted challenges for FSPs to digitalization including ROI, costs, internal capabilities, staff incentives, and enabling environment Source: Workshop feedback; Dalberg analysis Key learnings Summary Staff resistance to digitalization Digitalization brings in efficiency and transparency, exposing FSP staff to additional operational scrutiny and, in some cases, restraining poor compliance, unsanctioned activity, or outright fraud. As a result, some staff have strong incentives to resist any effort to digitalize; others are afraid of change due to perceived threats to their jobs. Upfront costs High upfront costs of setting and integrating digital platforms act as an important barrier for FSPs. Initial shift to digitalization lowers operating costs. However, it raises the capex significantly (through acquisition of digital equipment, training, etc.). Overall, digitalization becomes an expensive undertaking and sometimes prohibitively expensive for smaller FSPs. Internal capabilities Training and technology on-boarding (for both staff and end users) is done in person – this is costly and time-inefficient. Senior and middle management lack familiarity with what digitalization entails, how to digitalize (e.g., vendors?), and lack of technical staff that can interface effectively with DSPs Clarity on ROI for digitaliz- ation The business case for digitalizing smallholder finance processes and products is today weakly defined; everyone in this sector understands that digitalization is the future, but most players are uncertain on how to prioritize digitalization relative to other investments in a resource constrained environment, and – critically – what results to expect within what time frame (i.e., ROI on digitalization?) Enabling environment Lack of robust rural mobile ecosystems prevent successful digitalization (e.g., limited access by SHFs to reliable mobile connectivity, insufficient coverage of mobile money agent networks, low interoperability, and low digital literacy). Underdeveloped or overly restrictive regulatory environments (e.g., digital solutions vs. KYC) delay the digitalization process while making it costlier.
- 28. Breakout 2: Group exercise on digitalization investment • 5 min. Individually think about this hypothetical situation: If you had $500k to invest in digitalization to better support your clients/partners/grantees, what would you spend it on and why? • 20 min: Individuals share out the individual opinions with the rest of the group with particular on following questions: ─ What types of digitalization investments (and where) will generate the biggest “bang for the buck”? (e.g., bringing in alternative data, building out digital customer acquisition channels, digital marketing, digital VAS delivered in parallel to fin product?) ─ What are the main differences in terms of priorities between Funders-DSPs-FSPs?
- 29. 29 Ex-ante perspective before discussion- generated recommendations Investment priorities: different ecosystem players have different priorities on what they want to invest in • Data analytics: across the board, FSPs are keen on investing in better data analytics; this is intended to improve their credit- scoring algorithm, inform the design of new and more appropriate products, increase the number of clients served, increase access to higher levels of funding, shorten turn-around times, etc. • Integration: FSPs are keen on integrating their internal systems with those of their vendors. E.g., Kiva works with over 250 vendors, each with their own systems • Product design: FSPs want to design better digital solutions to better serve their clients needs • Customer enrollment and retention: these indicators determine an organization’s sustainability; digitalization solutions that expand market or grow customer loyalty are a priority for most FSPs Donors, capital providers, and market platforms DSPs • Enabling environment: working with regulators to create favourable ecosystems to allow digital tools e.g., digital KYC • Capacity building: building FSP capacity to understand and effectively use digitalization systems; build DSP capacity to have at-scale products; build capacity of policy makers and regulators to create a more enabling environment • Understanding the farmer: i) using data to better understand the farmers, hence design more appropriate products, ii) understanding farmer cash flows to automate loan repayment process iii) increasing farmers’ access to markets, information and finance • Closing the loop: ensuring service providers receive feedback from the end users and using this information to improve the services. • Product design: i) creating a simpler user interface for all users, ii) designing a more efficient, flexible and responsive system that suits FSP and end user needs • Understanding farmers’ needs and creating credit portfolios based on data such as household income and farming activities • New products: e.g., USSD system for customer acquisition and registration • Deepening and broadening use of alternative data. Using risk profiles to determine appropriate products, i.e. taking alternative data further to inform product redesign, development, and ongoing portfolio monitoring and management Source: Workshop feedback; Dalberg analysis
- 30. Breakout 3: What do we need to move forward Identify top answers as a group, for sharing back: ─ Where are the greatest outstanding questions and knowledge gaps for making digitalization investments? ─ What tools are needed/useful for FSPs adopting digital ─ Business model toolkit ─ guides for DSP vendor options, ─ toolkit/model for measuring impact of digitalization on profitability/ROI ─ What additional support does the sector need from intermediaries, investors, and funders to move the digitalization agenda forward?
- 31. 31 Moving forward: recommendations for advancing digitalization (1/2) • FSPs need DSP/vendor landscaping and benchmarking to help them identify potential digitalization vendors and understand their relative strengths/weaknesses for specific use cases • FSPs have varying expectations of what digital can/cannot do. In order to manage their expectations, they need a clarification on what digital can/can’t do. • DSPs would like to benchmark pricing and develop pricing models for different FSPs based on their business models and ability to pay • Strong needs for a more quantitative and robust business case for digitalization, with better indication of where and how digitalization creates benefits; clarity on what impact to expect and within what timeline • Create comprehensive ROIs to gauge impact of digitalization e.g., benchmarking capex; building a toolkit/model for measuring such impact • Build an evidence base on cost and impact of digitizing different steps of the value chain, including assessment of impact on the end user • Granular mapping of KPIs for digitalization in order to standardize impact assessment • Alongside building a business case, there is a need to develop case studies of failures in digitalization Sector needsOpportunities Clarity on ROI for digitalization Technology vendor landscaping and benchmarking Source: Workshop feedback; Dalberg analysis
- 32. 32 Moving forward: recommendations for advancing digitalization (2/2) • Capacity building for FSPs to enable usage of digital tools • Capacity building for DSPs to create at-scale products • Capacity building for policy makers to create a more enabling ecosystem, e.g., adapting KYC requirements to the digital finance opportunity • Funding support for start-up DSPs to bring more innovation to the market • Funding support for FSPs when digitalization becomes prohibitively expensive • Convening forums for connecting DSPs and FSPs • A more opened sharing environment will give DSPs the data they need to innovate and improve their offerings • Clarity on IP rights for digital data useful for smallholder finance • Robust data privacy norms and rules to help guide FSP and DSP behavior, without erring on side of excessive data privacy protection that would stymie innovation • Investment into data analytics specialist DSPs that can help alternative data holders and FSPs better explore and realize the value of data with sustainable, market driven data sharing models Data sharing Support for institutions/ orgs in the digitalization process Source: Workshop feedback; Dalberg analysis Sector needsOpportunities