It's a new day for how we interact with money. You can pay for your morning latte without reaching for a credit card, let alone cash, and reimburse a friend for dinner in a few taps.
But as the tech world continues to develop sleeker financial technology, let's not forget about the potential for sustainable progress and pervasive change in microfinance, for the people who need it most.
What is microfinance?
Microfinance aims to provide banking services to those who don't have access to traditional financial services--particularly the world's poorest, many of whom survive on less than $2 a day and don't qualify for traditional banking.
A microfinance institution (MFI) is any organization, ranging from small non-profits to large commercial banks, that provides microfinance services. There are currently 10,000 MFIs globally--possibly as many as 100,000 when you add credit unions, co-ops, and other informal institutions to the mix--serving 150 million people worldwide.
By expanding access to financial services, microfinance works to lift people out of poverty. Traditional banks generally can't afford to serve the poor because of the associated maintenance costs. Small loans are inconsequential for banks, which also aren't incentivized to design products for small savers. But for low-income people struggling in the developing world, a loan of $50 can be the means to start a business and climb out of poverty.
Building human networks
It takes patience and persistence to build the human networks on which successful microfinance hinges. Trust is won or lost one transaction or loan at a time.
The thousands of discrete MFIs working all over the globe have painstakingly cultivated these networks--they're closer to their clients and know them better than most traditional institutions could ever hope to.
The isolated and disconnected nature of MFIs means that they've been able to focus on building trust in local networks, but it also means that they don't always have ways to talk to each other. Connecting these dots is a huge opportunity.
While the final impact of individual MFIs on communities vary, one thing is abundantly clear: MFIs have the potential to act as experimentation hubs around financial services for the poor, especially if we start linking those hubs together.
Better software, harder questions
MFIs know how to provide financial services to their communities. They're less familiar with building software and databases.
Luckily, more organizations are starting to develop banking software for MFIs--modern, flexible, out-of-the-box solutions that handle customer accounts and internal transactions. With this kind of software, an MFI can focus on what it knows best.
Increasingly, however, the communities that MFIs serve are as mobile as the phones in their hands, which brings up a host of challenging new questions:
How does an MFI handle a transfer from someone in the capital city to someone in a rural area? How does a family receive an overseas remittance from a parent or sibling or child working abroad?
The answers to these questions have a lot to do with--you guessed it--software applications.
Most of the recent buzz around financial tech--or fintech--has focused on apps such as Square, Venmo, and Transferwise. These apps and other services do amazing things, but their solutions are frequently siloed. National boundaries and relationships between financial institutions recreate, to a lesser degree, the same access problems that we see in traditional banking.
To truly solve the problems that MFIs are tackling, we must think about bigger change. It's time to look beyond apps towards infrastructure solutions.
Solving the infrastructure problem for MFIs
When we talk about infrastructure, we mean the back-end, database-system piece of software, which stores information you submit, serves it back up to you when you want it again, and does all of the other dirty work involved in actions initiated through an interface.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a massive, not-for-profit system that allows financial institutions to trade transaction information. Presently, no such infrastructure equivalent exists for microfinance in the developing world.
Any system used for transactions between MFIs would need features that SWIFT doesn't offer:
- Immediate clearing. Many MFI customers require immediate access to funds since personal emergencies--sickness, catastrophic weather, injury--are often sudden.
- Microtransactions. Low-income people rely on flexibility to manage money, making daily financial decisions that often require small transactions to stretch their budgets and cover immediate needs.
- Digital financial history. Lack of credit history is a huge challenge for both lenders, who don't have enough data, and borrowers, who would love to prove their reliability.
- Low-cost or no-cost transfers. The developing world is mobile. If someone leaves home to work for $5 a day, they might pay $1 just to send that money back. Large transaction fees can block families from pulling themselves out of poverty.
Imagine the possibilities
Infrastructure for the developing world needs to be shared, flexible, and open to connect MFIs to wider markets and greater capital flow. Those institutions, in turn, could not only improve existing services but also unlock new products and business models that go beyond lending credit.
Remittances, payments services, and savings accounts could become standard for people who don't currently have access to any financial services at all.
Perhaps best of all: MFIs know their clients better than those of us who worry about paying easily for our lattes ever will. With infrastructure connecting MFIs together, apps and services can come in at the local level, designed by developing communities. And those communities can build the products they need most.
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