Southeast Asia’s consumer finance scene is an interesting beast. While formal banks serve the top 5-10% of working class, Non-Bank Financing Companies (NBFCs) or Micro-Finance Institutions (MFIs) takes care of the next 25-30% of rising under-banked. As a result, close to 150 million under-banked consumers in countries such as Indonesia and the Philippines are served much less meaningfully than their “banked” counterparts due to a gross lack of automation, digitization and ‘data-fication’ in the traditional workflows of NBFCs/MFIs.
While this huge group of consumers lose out on key aspects of financial services such as convenience of service, fast loan-turnaround time, and more inclusive financing offerings; NBFCs/MFIs are actually leaving a TON of potential business revenue on the table by underserving their target market.
While things look pretty grim currently for the shrinking traditional financing scene – the fact is, with all major financial institutions including banks around the world looking into digitizing and going data-driven, NBFCs and MFIs might just have an edge over traditional banks.
To understand how, let’s take a look at the three main challenges slowing banks down from going digital despite the urgency to change and their deep pockets:
1. Consumer Inertia – most banks have some form of digital customer management platform in place, while this can be great, it can be a bane as moving customers from 1 digital platform to another digital platform that is marginally better can be difficult. Oh, and the usual affluent bank customers = older customers who are more financially stable but way more resistant to change.
2. Legacy technology debt – banking technology are built over multiple decades in chunks, the amount of “technology debt” built up is no joke and totally out of sync with today’s Application-Programming-Interface (API) driven standards. In many instances, technology stack have to be built from the ground-up. And for those who might not know: core-banking vendors such as Silverlake Axis and Infosys can be pretty pricey.
3. Legacy regulatory frameworks – working with regulators have never been a swift process. Banks are highly regulated and any change in operations tends to require approvals by multiple bodies. With so many stakeholders to please, change is naturally slow.
Now, let’s contrast these points when NBFCs/MFIs embark on digitization and data-fication of their operations:
1. Consumer Inertia – NBFCs/MFIs serve primarily the under-banked/unbanked population, which usually consists of a much younger group of consumers receptive to change. More importantly, there is no inertia per se – any digital platform that makes their lives accessing financial services easier is at least 10 times better than the current non-existent platform.
2. Legacy technology debt – Compared to banks, most NBFCs and MFIs have at most a 3-5 men technology department. Therefore (ironically), because of the lack of technology in the first place, adopting new intuitive business/enterprise technology provided by more agile FinTech startups such as Oradian (European based offering user-centric core banking solutions for MFIs) or Mirador (US-based provider of small business lending platform) is way more straightforward. Fortunately too, with a leaner technology solution package, the price tag of adoption of their solutions is drastically reduced as compared to their full-fledged core-banking counterparts.
3. Legacy regulatory frameworks – most NBFCs and MFIs are subject to regulations too, but unlike full-fledged banks, there is a lot more leeway to operate without the need to obtain a million approvals for every single action performed.
As a result, the only thing standing between NBFCs/MFIs and their “unique unfair” Fintech advantage comes down to one single variable: the willingness and urgency to adapt to a time of great change where an unstoppable digital trend can bring with it plenty of mutual benefit for both supply and demand forces. NBFCs such as “Global Dominion” and “Asialink Finance” are some examples of forward thinking companies that are moving quickly to reap the benefits of digitization.
An old Chinese saying goes “Being on a boat against the current, you either progress, or you get left behind”
Will you be left behind?