Banks cannot be everything for everyone. There are limitations within formal banking environments that make it difficult for these financial institutions to serve all customers. For example, many people seeking attractive loans or savings products find it difficult to provide collateral or pay fees that would meet the regulations and requirements governing a traditional financial institution.
These people often turn to alternatives, such as microfinance institutions (MFIs) and savings and credit cooperative societies (SACCOs). In fact, MFIs and SACCOs are very popular in the developing world, where Africa and Asia alone account for almost 90% of the total number of credit unions in the world. In 2019, there were approximately 39,600 credit unions in Africa and about 33,600 in Asia.
SACCOs and MFIs offer a compelling alternative to other traditional financial service providers. The customers of these groups benefit from advantages which they do not have access to in traditional banks, in particular in terms of credit. Many people do not meet a bank’s loan requirements, such as having a credit history “on file” or the correct personal documentation, and loan terms can be costly and inflexible. On the other hand, they don’t want to deal with unregulated loan sharks and loan sharks. SACCOs and MFIs are the trusted option for these clients.
SACCOs and MFIs are often embedded within their communities and in the case of a SACCO it is a non-profit, member-owned institution where the people who receive the service are often also shareholders. . They can provide micro-loans and operate on a much more personal level to offer flexible terms. These groups do not have the same Know Your Customer (KYC) requirements as traditional banks and they often serve informal sector customers who do not fit the profile required by incumbent financial services operators.
SACCOs are not only small rural operations, but some have also reached massive scale and popularity. For example, the SACCO Police based in Kenya currently has over 52,000 members. These organizations have helped many small businesses and entrepreneurs in informal economies get started through financing options.
The digitization gap
However, these organizations risk losing ground and customers. The aggressive digitization of banks, telecom operators and fintech start-ups is reducing barriers to financial services. This is not (yet) a drastic change, as many people still find their options very limited. However, customers can now benefit from greater access through the conveniences of digital services, such as remote mobile banking and lower fees from digitized processes. And MFIs and SACCOs, which operate on thinner margins, are starting to feel the pinch.
The slower adoption of digital services by these groups may have a long-term impact on their popularity. Many members who previously used these groups for most of their financial needs are beginning to turn to other providers for practical day-to-day transactions such as transfers and payments, and only use MFIs or SACCOs for specific needs such as loans.
Efficiency and access are at the heart of the issue, as most MFIs and SACCO groups still rely heavily on paper-based processes, costing them money and limiting their reach to clients. It also amplifies their risks: with limited liquidity, defaulting customers can quickly make it difficult to maintain operations. In addition, complying with regulations is much more difficult.
This, combined with a generally riskier customer base, can put a huge strain on their financial resources. And since many of their potential customers are in rural areas, it is expensive to recruit new ones.
Imagine what a SACCO or MFI agent can achieve if they could do all their customer onboarding on the go with a tablet?
Help with SaaS
Previously, traditional financial institutions could not affordably and effectively serve these peripheral customers. Yet now SACCOs and MFIs are struggling to digitize like banks are doing. Digitization can be very costly, especially in financial services. As SACCOs and MFIs often operate on a small scale, this prevents them from making such large up-front investments in technology. And today, they must compete with digitized banks, telecom operators and fintech rising stars who threaten to take many of their customers.
While many SACCOs and MFIs lack the resources to implement these digital solutions on their own, there is an alternative. The majority of these groups favor a revenue sharing model with an appropriate banking technology platform, using the ‘as a service‘ to limit their initial investment costs.
Rather than buying everything up-front, SACCOs and MFIs can subscribe to technology services – Software as a Service (SaaS) – to access digital platforms. They can then use these solutions to design and deploy loan and savings products tailored to their customers, such as flexible microloans or group savings accounts. They can also use the same platform for digital onboarding and mobile apps.
The advantage of accessing SaaS is not only from a cost perspective, but also from a resource perspective. Leveraging shared technology platforms eliminates the need for these groups to increase their technical expertise and investments in IT infrastructure, which promotes cost savings, but more importantly allows them to focus on the most important aspects. important to the company.
SaaS platforms offer SACCOs and MFIs a way to digitize without incurring huge costs. While many experts wonder how financial services will reach the estimated 1.4 billion unbanked people globally, SACCOs and MFIs are already leading the way. And they can continue that journey and reach more unbanked people if they can digitize.
If SACCOs and MFIs can leverage shared banking platforms through a subscription-based pricing or revenue-sharing model, they can once again take center stage in providing financial services where needed. other financial institutions cannot.