RAF and FRP PartnerLearning WorkshopRural and Agricultural Finance Learning Lab October 19, 2016Kigali, Rwanda

Business case for digitally-enabled smallholder finance context and framing

PLENARY SESSION 1

Business case for digitally-enabled smallholder finance

Context and motivation

Selected findings

Conclusions and next steps

Why are we talking about digitalization?

• Key learning question: What is the business case for rural and agricultural finance – what are the keys to business model sustainability?

• Role of non-financial institutions: how can fintech (technology providers) unlock growth of smallholder finance?

• Inflection Point finds that few providers are generating market returns; recommends partnerships but also raises whether technology can be a game changer

What do we mean by digitalization across value chain?

• ManageSHFdata(e.g.interactions,repaymentrates)

• SendSMS/mobilenotifications

• Deliversupportservices

• AnalyzeSHFdata(includingexternaldata)

• Communicateloandecision

Client acquisition

Loan origination

Loan analysis approval

Loan servicing monitoring

Loan repayment

Abilityofdigitaltoovercomechallenges

• Facilitateloandisbursement

• Facilitateloanrepayment

Digitaltools

• Fieldstaffequippedwithtabletsfordatacollection

• Mobileregistrationanddatacollectionplatforms

• GPStools

• Facilitatemarketinganddissemination

• Mobilemoneyandpaymentplatforms

• Mobilewalletstodepositsavingsandmanageaccount

• Datamanagementplatforms

• GPStoolstomonitorfieldofficers

• DigitalTAandothervalueaddedservices

• SMS/mobilemarketing

• Up/Crosssellingplatforms

Loan disbursement

Loan workout & recovery

• Facilitatecustomerregistrationandloanapplication

• Facilitatefarmerdatacollection

• Facilitatefollowupofoutstandingloans

RAFchallenge

• HighcosttoreachSHFsinruralareas

• SHFslackproductawareness/literacy

• DifficultandcostlytoregisterandcollectdataonSHFinruralareas

• LimitedunderstandingofSHFforassessment

• SHFlackcredithistory/collateral

• Highcoststodistributeloanfundsinruralareas

• Cashrisks(risksofholdingandtransportingcash)

• DifficultandcostlytomonitorSHFdata

• Highcosttocollectloanpaymentsinruralareas

• Cashrisks(risksofholdingandtransportingcash)

• Highcostsfollowinguponoutstandingloansinruralareas

• Mobilemoneyandpaymentplatforms

• Mobilewalletstodepositsavingsandmanageaccount

• Creditscoringplatforms

• SMS/mobileapprovalcommunication

Digitalcustomerrelationshipmanagement,incl.digitalmarketingandnotificationsDigitaldatacollectionandmanagement

Digitaldecisionmaking

Digitalcashflows

Digitaldeliveryofsupportservices

Digitaluses

• SMS/mobilenotifications

• Laythegroundworktodeterminehowdigitalizationcanenableproviderstomoreprofitablyandsustainablyservesmallholderfarmers(SHFs)

Goal

Objectives

• BuildaninitialknowledgebaseofthecurrentandprojecteduseofdigitaltoolsbyFSPsservingSHFs

• BegintoexploretheimpactofdigitalizationonthefinancialperformanceofFSPs

• Identifykeyconstraintstodigitalizationandareasofopportunitytoacceleratedigitalintegration

• Identifyrequirementsforbuildingoutamorerobustbusinesscasefordigitalizationoverthecomingyears

Study objectives: understand how FSPs use digital tools to improve performance in serving SHFs

Surveyed23FinancialServiceProviders

InterviewedSHFExpertsandDigitalServiceProviders

SpokewithmultipleMCFPartners1 2

3

• 4commercialbanks• 4bankmicrofinanceinstitutions• 7non-bankmicrofinanceinstitutions• 4agribusinesses• 3nichenon-bankfinancialinstitutions• 1mobilenetworkoperator

Thankyoutothoseofyouwhoparticipated!

Sources: FSP surveys, desk research, expert interviews

Surveyed firms grouped into 4 “digitalization profiles”

Lessthan1,000farmersserved

1,000– 10,000Farmersserved

10,000– 25,000farmersserved

25,000– 100,000farmersserved

Over100,000farmersserved

Legend

Creditonly

Prod

ucto

fferin

g

Digitalintegrationalonglendingvaluechain

Low High

End-to-Endfinancialsolution1

TraditionalMFIs.TraditionalMFIsleveragingdigitalforloananalysis

Agribusinesses.Agribusinessesleveragingdigitalpaymentsanddigitalizingdatacollectionandloananalysistoevaluatefarmerrisk

HighTechBanks/NicheNBFIs.HightechcommercialbanksandnicheNBFIsofferingfullydigitalfinancialservices.

CommercialBanks/InnovativeMFIs.InnovativeMFIsandcommercialbanksequippingfieldagentswithmobiledevicesandpartneringwithB2Bdigitalservicesproviderstoofferpaperlessandcashlessendtoendsolutions

Business case for digitally-enabled smallholder finance

Context and motivation

Selected findings

Conclusions and next steps

Loan analysis the start of the digital journey and support services the final frontier?

1. Customer Relationship Management includes Sales & MarketingSource: RAFLL Business Case Survey & Dalberg analysis

HighTe

chBan

ks

/Niche

NBF

IsCo

mmercialBan

ks/

Inno

vativ

eMFIs

Trad

ition

al

MFIs

Agri-

busine

sses

CustomerRelationshipManagement1

CustomerRegistration

LoanAnalysis CashFlows Delivery ofSupportServices

Organization 1Organization 2Organization 3Organization 4Organization 5Organization 6Organization 7Organization 8 N/A

Organization 9Organization 10Organization 11Organization 12Organization 13 N/A

Organization 14Organization 15Organization 16Organization 17Organization 18Organization 19Organization 20Organization 21Organization 22Organization 23

FullydigitalizedLessdigitalized

Notdigitalized

N/A Nosupportservicesoffered

Revenues more likely to cover costs, when the provider is digitalized?

1. Program associated costs refers to cost of funds, direct field operation costs, direct costs of nonfinancial support services, direct marketing and sales costs, and all other overhead and allocated program supportSource: RAFLL Business Case Survey & Dalberg analysis

Numberofsurveyrespondentsbycostscoveredbyloanrepaymentandfeerevenueandbyprofiletype

9%

67%

91%

33%

75%

25%

3 11

HighTechBanks/Niche

NBFIs

CommercialBanks/

InnovativeMFIs

TraditionalMFIs

34

Agri-businesses

Loanrepaymentandfeerevenuecoversoroutweighsallprogramassociatedcosts,orisexpectedtointhenext2years1

Loanrepaymentandfeerevenuedoesnotcoverallprogramassociatedcosts,andisnotexpectedtointhenext2years

DegreeofDigitalIntegration

+ -

HighTechBanks/NicheNBFIs

respondentsexcludestwoorganizationswhohaveyetnotrolledoutlending

products

Organizationsbelieveitwilltakeonaverage5-10yearsfortheirSHFlendingunittobecomeprofitable

Obstacles to incorporating digital relate to high upfront costs and lack of internal capabilities

Numberofsurveyrespondents(outof23)byperceivedobstaclestodigitalimplementationandbyprofile

2 13 2

21

1

21

11

6

7

8 7 6 4

2

13

11

1

8

Lackofcustomer

mobilephoneaccess

Highinitialinvestment

17

Lackofinternal

capabilities

11

Toodrasticofaprocesschange

11

Lackofknowledgeonbesttools

98

Lackofproofofvalue

Transactionfeestoohigh

9

HighTechBanks/NicheNBFIsCommercialBanks/InnovativeMFIs

AgribusinessesTraditionalMFIs

Cost-related InternalCapabilities CustomerEcosystem

Source:RAFLLBusinessCaseSurvey&Dalberganalysis

Business case for digitally-enabled smallholder finance

Context and motivation

Selected findings

Conclusions and next steps

Findings and partner feedback on FSP and DSP investment priorities

Taking digital further• Data analytics: to improve credit-scoring, increase reach, improve operational

efficiency, etc.• Broader and deeper use of alternative data in partnership with other data owners• Integration of internal and vendor systems• Using data, including user feedback loops, to increase understanding of farmer

needs• Creating customer-centric digital solutions that boost customer enrolment and

retention

Doing digital better• Track performance and financial returns, and build case for digital investment• Improved digital product/tool design: simpler interfaces for users and staff, more

flexible systems for FSPs• Innovative risk sharing between DSPs and FSPs.

Source: Workshop feedback; Dalberg analysis

Providerswanttoinvest…

Findings and partner feedback on barriers to growth and effectiveness of digitalization

…but facethesechallenges:

• Unclear ROI on investment in digitalization, especially given the high upfront costs, which hits smaller orgs particularly hard

• FSP internal challenges to adopting new technologies, from lack of technical proficiency requiring costly training and onboarding, to outright resistance by staff in some cases

• Enabling environment hurdles that cap the potential of some solutions, including regulatory limits on new uses of digital and underdevelopment of the mobile ecosystem

• Demand-side limitations including low digital literacy, and high cost of training end users

• Difficulty accessing or integrating data from external sources limiting innovation; reluctance to share data stems from uncertainty about: o Intellectual property rights, o Value of datao Data privacy best practiceso Iterative, trial-and-error technology development processes

Source: Workshop feedback; Dalberg analysis

Findings and partner recommendations on sector-level solutions

1. Investment orientation: An unbiased view of…a. What digital can and cannot dob. The landscape of technology vendors in key geographiesc. Pricing benchmarks on the cost of investment

2. Knowledge and tools to understand ROI, including a. Evidence base/quantitative data for where digitization has biggest bang for buckb. Models for measuring ROIc. Case studies of success/failure

3. Capability building and experimentation support:a. TA for DSPs and FSPs: building/using products and working togetherb. Digital literacy for end usersc. Policy-maker capability building around digitalizationd. R&D funding for innovations and risky technology investments

4. Industry-level guidelines or principles ona. Intellectual property rights for digital datab. Data privacy – balancing user protection and innovationc. Valuation of data (facilitated by specialist DSPs that can develop sustainable data

sharing models)

Sector-levelsolutions

Source: Workshop feedback; Dalberg analysis

More FSPs (6/7) who measured saw increased customers, than saw decrease in cost to serve (3/7)

Source: Survey of FSPs; Dalberg interviews with experts and DSPs

Digitalizationseentodrivevaluethrough

portfoliogrowth

Dataisthekeylevertoincreasing

FSPs’addressablemarketcostefficiently

Keylearnings

• Earlyevidencesuggestsportfoliogrowthisthekeyvaluedriverbehinddigitalinvestments

• PortfoliogrowthisparticularlyimportantforcommercialbanksandMNOswhichhavetighterinvestmenthorizons

• Alternativedataopensupnewmarketsbyunlockinginformationonborrowerspreviouslytoorisky/expensivetoserve

• However,thetypeofdatausedtodaycontinuestobelimitedandnotasrelevantforSHFlending

• Modelsthatown(oreffectivelyaccess)thedata tomakeSHFcreditsolutionsviablewillcapturethemostvalue

“Mostofthebenefitscomefromincreasingcustomerdeposits…foraleadingfinancial

institutionwehavebeenabletoincreaseactivecustomerbasedfrom12K-53Koveraperiodof18

months…Volumeiskeytorecoupingthedigitalinvestment”-DSP

“CommercialbanksandMNOstargetprimarilyportfoliogrowth”–DSP

“Dataopensnewmarkets..Weexpect[anMFI]toincreaseitsSHFportfoliofrom2%to8%byusing

ourdigitalcreditscoringservices”-DSP

“Data.Data.Data.Themoredataweareabletocapturethefurtherdownwecanget”–DSP

Summary

Digitaltechnologyserviceproviders(DSPs)reportonwhatthey’veseen:

DSP experience cont’d: cost savings for higher-touch business models, higher-risk farmers

Source: Dalberg interviews with experts and DSPs

Digitaltoolsdeliver

additionalrevenue

benefitsbyenablingcustomer-centricproducts

Costsavingsandportfolioqualitymoresignificantfor

highertouch/smallerorganizations

• DigitaltoolsallowFSPstomeetcustomerneedseffectivelyandimprovethecustomerexperience

• Customercentricproductsincreaseuserengagementandproduct“stickiness”,drivingrepaymentrates,repeatborrowing,cross-sellingandultimatelycustomerlifetimevalue

• Hookingcustomersiskey:SHFswhotakefirstloanwithanFSParelikelytocontinuetoborrowwiththesameFSP

• Highestcostsavingscomefromreducedcustomeracquisitioncosts

• Reducingcostsandfarmerrisksisparticularlysignificantforhighertouchinstitutionsoperatingintightmarginsorservinghigherriskfarmers

“Financialservices,ifdoneright,canbeextremelysticky.Youhavetolookatthefirstfinancialproduct

asmarketing,and thinkintermsofcustomerlifetimevalue.”

“[FSP]previouslytriedSMSrepaymentremindersthatdidn’twork.Usingourplatformtoadd

targetedinformationalcontentincreasedcustomerengagement.Webuildaffinityforthecompanywhichactuallydrivesusageandrepayment.”

“Wehadacustomerwhohadan11dayidentityverificationprocess;wetookitdownto22secondswithouthavingtosendpeopleouttothevillage”

“MFIsaremoreopentousingourtechnologybecausetheyarebeingpushedforprofitabilityand

wanttoreducecostsandhaveabiggerimpact.”

SummaryKeylearnings

Obstacles corroborated by DSP reports on challenges to close partnerships with FSPs

Highupfrontcosts

“Wearefacingacostproblem.It’squiteexpensivetogetabanktosetuptheplatform.Itcosts$16k-$70ktosetup,and$300monthlyperbranch”-DSP

Summary

Lackofinternal

capabilities

“Ourtechnologyistheunderwritingbuttouseityouneedthewholedigitallendingstackinplace.The

smallerplayersneedintegratedofferings…youreallyneedtoworkhand-in-handwiththem.That’saconstrainingfactor,wejustcan’taffordit”-DSP

• TraditionalMFIsandlesstech-savvyorganizationslacktheinternalcapabilitiestoimplement,integrateandmanagedigitaltools,andrequireintegratorstodigitalizetheircorebankingsystemsfirst

• ThehighupfrontcostchallengestheDSPs’abilitytoselltheirproductstoFSPs;highestforlowervolumeplayers/withoutdigitalprocessesinplace

Keybarriers

Lackofdigitalliteracy

• Risk-aversecommercialbanksrequireproofofimpact,butprovingthebusinesscaseischallenginginanascentfieldwhereprofitabilitydatahasyettobecollected

• Valueofdigitaltoolsdependentondigitalliteracyoftheendcustomer;digitalsupportservicesrequirehumaninteraction

• Goingcashlessrequiresmajorbehaviorchangeinnascentmobilemoneyecosystems

“Forfinancialliteracytraining,therehastobeahumancomponentsomewhere.Digitalizing

everythingisunrealisticgivenourtargetcustomer.”-DSP

Moreproofofvaluerequired

“CommercialBanksendupsaying‘let’sseemorenumbers,let’sseeatrackrecord.’Theywanttoseeatestedmodel.Thechallengeisbuildingthatmodel

cantakeyears.”-DSP

Source: Dalberg interviews with experts and DSPs