Dagoberto Danton Cereceda González, is a Mechanical Civil Engineer, with postgraduate studies in Information Management and a Master’s Degree in Business Engineering with Information Technologies from the University of Chile (http://www.mbe.cl/). He has experience, research and trade from beginning to end, for more than 20 years in the field of Process and Systems Engineering. He has directed, coordinated and participated in the analysis, survey of processes, design and implementation of multiple administrative innovations and computer information systems that operate on the latest generation Internet platform. The implementation of these systems, which are currently operating in production at all BancoEstado branches, was directed directly under his orders. Likewise, he is the manager and executor of the strategic IT and business plans, from 1999 to the beginning of 2005, in BancoEstado’s Micro and Small Business Banking.

During 2005, it provided technological advice to the Ministry of Transportation. From 2006 to 2012, he has provided advice and directed different projects related to process modeling and microfinance. These include projects with the Bank of the Province of Buenos Aires, SONDA, the Government of Uruguay, the National Federation of Commerce of Bogotá and FINAMÉRICA, COOPEUCH, 5 reciprocal guarantee societies S.A.G.R. (out of a total of 11 in Chile), Project for the Banco Industrial de Guatemala that means the design and construction of the business platform of the MICROFINANCE Program. From 2017 to 2019 advisor to Banco Compartamos in Mexico D.F. Currently, KALLPA platform design advisor at Financiera Compartamos Peru.

 

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Digital transformation

The collective response among MFIs to the COVID-19 pandemic has generated one of the most pronounced trends in recent months, which has been to provide a sense of urgency for the digital transformation of microfinance institutions. All the initiatives that were already planned before the virus were accelerated and have already been implemented; and many more are being considered. Those who achieve a greater degree of digital transformation will be in a better position to face the future and to survive under these disruptive conditions. 

Digital transformation has at least 3 dimensions. First is the exponential growth of digital means of payment and the development of networks beyond the branch offices of microfinance institutions through the use of third-party networks, whereby clients can pay their credits, or, in some cases, deposit savings, pay bills, and send money. In some places, the digitization of payments has progressed to the point where digital transfers to through digital wallets associated with a clients’ accounts. For most microfinance institutions, this dimension of digital transformation consists in connecting to the networks developed nationwide by mobile phone operators or networks associated with banks. In some cases, it simply means developing an account associated with a digital wallet, that can be operated via credit card or mobile phone.

The second dimension is the digitization of back office administrative processes related to the origination, distribution, and collection of products. To lead the digital transformation of administrative processes, institutions should ideally take advantage of these circumstances to review and streamline both manual processes and their already digitized parts to ensure that they do not spend time and resources digitizing something that has become obsolete. Now is a good time to redesign these processes and put both end-client and loan officers at the center to achieve greater effectiveness and efficiency, and thus reduce the costs of the organization.

Finally, digital transformation has a third dimension which is the ability to manage the relationship with each client individually, with or without the participation of a credit officer, regardless of whether the client is part of a group, or an individual client of the institution. As a reference, let’s think about companies and diverse markets, such as Google, Amazon, AliExpress or airlines, where most of technological developments are oriented towards  classifying customers according to what they like, how they pay and how good of a user they are (UBER). This strategy has successfully transformed and reversed their approach from merely offering products to having a data-driven understanding of how to best serve customers and their needs. For example, in the face of  COVID-19, a microfinance institution might want to offer a new, supplementary credit to a member of the group facing a new opportunity, while another member of that same group needs to renegotiate repayment over a much longer term, or forgive his credit balance due to the collapse of his business.

From a product-centric to a customer-centric model of service

Microcredit is offered according to one of several ‘methodologies’ that operate around the world. Most of them offer credits to groups that are based on the principle of solidarity among their members. Among these methodologies are “solidarity groups”, communal banks, self-help groups, village savings and loan associations, and their variants. Groups mobilize new members (marketing), select their members, define the amounts to be lent and collect payments, especially in cases where difficulties arise. These ‘methodologies’ combine all the functions in the model to operate and manage groups as clients, in their databases and processes. In many instances, this means there is no easy way of knowing whether the individual client has multiple services – because their name is not necessarily linked with a unique ID in the different product databases managed by one institution. Therefore, developing a personal client profile ends up proving exceedingly difficult and is key to the process of fully taking advantage of digital transformation.

 In addition, microcredit as a product has not evolved much in 40 years because of the way it was conceived and offered as a product to support marginalized sectors with a subsidy from the state and international institutions. In its genetic structure, microcredit does not bear the impulse for constant innovation aiming to maintain or grow its market position, and therefore, over time, it ends up being quite rigid in its processes and methodology. Because of this, software developed to support microfinance is designed with a high degree of rigidity and central control, based on the model of product centricity, not around the profiles of individual clients  [1] .

There are extraordinarily strong advantages to venturing into the modification of management and analysis models to base them on the individual client instead of on products, even though clients may still organized in groups, depending on the methodology the MFI uses. By changing the center, or axis, of management from a focus on the credit product, towards putting the customer at the center will allow:

  • Personalized treatment of group members who, because of their circumstances, need to restructure their payment schedule, or receive fresh refinancing because of a new opportunity arising.
  • Efficient segmentation where each segment (transport, artisanal fishing, agriculture, urban trades, services, etc.) can receive products that are tailored to their financial flows and seasonality.
  • Management of each specific segment by mobilizing specialized loan officers in those cases where professional training related to the sector is required. For example, it allows an agricultural credit specialist to supervise credits in the geographic area of a non-specialist.
  • Generation of credit committees made up of specialists who can approve loans online which makes their intra office or regional management more efficient, as in the case mentioned in the previous point.
  • Target marketing campaigns based on customer segment preferences and their needs.

Ideal Technology Ecosystem for the most Personalized Micro Finance

How should we shape a flexible technology ecosystem that allows for the needed adjustments and adaptations to the changes required by the market, in the customer segments, products, processes and offers that customers are looking for? Practice has shown us that this can be achieved by decentralizing the various digital functions needed as much as possible into their respective software systems, with their own, easily-reprogrammable rules, which in turn are articulated in an integrative system that allows for customer relationship management. That way, it is possible to change the ‘ruleset’ of different processes more easily without affecting ‘core banking’, i.e. the systems that maintain the record and control of financial transactions. In the end, reorganized in this way software systems can be set up at a low cost to be as flexible as necessary in order to respond to the changes in products, processes, and communication between customers and staff that are needed in times of COVID. However, the transformation from a product-based software system to a customer-centric system can be long and costly – therefore, it is justified only if there is a substantial commitment to individualize the attention to clients to a far greater extent.

Ideally, the digital ecosystem of a microfinance institution should be composed of a series of internal and external systems, each with different objectives and specializations, which are integrated and articulated through what we have called a “Management System.”

In the following conceptual diagram, we can appreciate the digital ecosystem, where the Management System is represented at the center and has two major components, with Operations on the one hand and on the other, Management Tools.

  • In the Operations part you will find functions such as: evaluation of customers by segments, customer digital files, and electronic credit committees.
  • The Management Tools for credit advisors and their layers of supervisors have functionalities such as Control Panel of key Indicators (delinquency, risk, goals, balance, etc.), alerts (notification of urgent actions), calendars for pre-programmed tasks, and management of marketing campaigns.

Integration involves the daily and monthly delivery of information to the online management system, from corporate or external systems in order to organize the work in the field and with clients. Also, the management system delivers information to corporate systems as seen in the diagram below.

The management system receives and delivers information to all components of the ecosystem, such as:

External Systems: these systems are generally an addition aimed at receiving inputs on the client’s commercial background from credit bureaus. But also, in some countries, there are connections with the country’s tax agencies, finance and legal systems.

Core Banking: Many formal definitions of a product system or Banking Core place it at the center of a bank’s operation, but in the case of microfinance, although it is an important part, it cannot be deemed central to the operation. Gartner defines a Core Banking system as a back-end system that processes daily banking transactions, account updates, and other financial records. These systems typically include deposit, loan, and credit processing capabilities, with interfaces to general accounting systems and reporting tools. The strategic focus on these systems is based on a combination of service-oriented architecture and supporting technologies that create extensible architectures.

Corporate Enterprise Resource Planning (ERP): Enterprise resource planning (ERP) systems are the management information systems that integrate and manage many of the businesses associated with the production operations and distribution aspects of a company’s production of goods or services. ERPs are used extensively in corporations. Among their most common modules, manufacturing, or production planning, warehouse management, logistics and information technology, but they also include treasury, as well as a human resources management system, and marketing and strategic management tools. In the case of microfinance companies that have it, it typically takes care of payroll, accounting, inventory, etc.

Collections System The aim of collection systems is to recover the amounts loaned to clients. They consist of a variety of software implemented by companies for their collection operations with the objective of gathering all information related to collection in one place, facilitating access in an efficient, reliable, and accurate manner. In addition, they allow the exchange of information in the organization and its various areas.

The management system is a technological platform that manages an institution’s relationship with the client, articulating the interaction between other corporate systems (Core Banking, Collections, ERP, and others, based on a model specifically designed for microfinance. A management system has two parts, one dedicated to management and the other one for operational aspects, the latter articulating processes and information with other systems at different times:

A Management System’s Operational part includes:

A. Evaluation templates by segment: this is done in the field. Microentrepreneurs do not have much documentation to support their sales and purchases. The development of technologies for evaluating one’s willingness and ability to pay, by segment (agricultural, trade, services, production, etc.), is a central aspect to guiding the model of customer service and their needs

B. Operation of specialized microenterprise products manages the payment schedules available in CORE with flexibility for each segment. This means using and grace periods, which accommodate the business cycles of microentrepreneurs.

C. Electronic credit committee allows the committee to analyze loans, attach backups, and support for the evaluations, and to approve or reject the operations at a distance. In this sense, it can include ratings for the advisors and approvers that allow only the best performers or most experienced to participate in the committees.

D. Ranking of Advisors: mechanism that allows, based on the results, to give or take away autonomy for individual loan officers according to their performance indicators, to make loans which in turn makes the credit committee faster and more efficient.

E. Digital customer file: consolidate all client information which eliminate or reduce paperwork in the lending process.

F. The management rules: for how to treat difference clients are developed or implemented in the management system or a BRMS system, no client management rules are in the Banking CORE, only those of products and operations.

The Tools for Loan officers’ part of the Management System includes:

A. Management of alerts and prioritization of an loan officer’s activities: allows for their guidance in their day-to-day, advising them to carry out important or urgent tasks, such as: on-time credit renewals, preventive collection, or pre-approved and extended product offers, with indicators like:

    1. Loan officer productivity: number of clients served per L.O. per month
    2. Product crossover: how many products a customer has on average.
    3. Cost per Risk: how much money is lost through uncollectable loans.

B. Administration and control of marketing campaign results: you can control the results of all types of campaigns for prospects and customers, through the records in the management system.

Thus, given the integrative model of this ecosystem, we can exploit the native functionalities of each system, achieving specific adaptation to the microenterprise segment in the management system without deforming standard software systems in the marketplace for our needs.  This implies saving a lot in operational terms (e.g. modifications outside the standard CORE), gaining flexibility and improving in terms of customer service.

This articulation and integration ensures that all the necessary information is available in order to execute the model of specialized attention adequately, and in addition, a transactional history can be generated, which will eventually allow the construction of a specialized microfinance CORE suited specifically to the size of an MFI.

In summary, the above conditions define a technological ecosystem that has many components (Core Banking, collection systems, remote channels, remuneration systems, ERP, etc.) which are integrated or articulated around the implementation of a customer-centric service model, whose articulator is the customer management system.

Being able to redesign the digital technological ecosystem around customers, rather than around products, is the key to increasing the efficiency of the organization while increasing customization in the management of its customers, although in some cases they remain as members of a solidarity group. This transformation is essential to build future competitiveness of MFIs in a world where clients have more and more options, and not only those offered by microfinance institutions.

 * The author gratefully acknowledges the substantial comments and suggestions on prior drafts of this paper by Robert Christen and Consuelo Munoz.

[1] In addition to group loans, many MFIs offer individual loans with various marketing, risk assessment, and collection methods, and these do store information on a per-person basis. This difference becomes especially important when it comes to customizing and digitizing credit offers because data management systems are already based on individuals rather than groups.