Rethinking financial products for the digital age: Insight of the Boulder Digital Transformation of MFIs programme – Week 4

Rethinking financial products for the digital age: Insight of the Boulder Digital Transformation of MFIs programme – Week 4

This week’s module was on “rethinking financial products for the digital age”. The module was presented by Anup Singh, Regional Head for Microsave Consulting, and consisted in videos, live discussions, and various readings.

Anup Singh introduced the module with the following claim: we have moved from a product-driven microfinance industry to a market-driven industry, with major trends such as the emergence of new customers, new players (Fintech), new innovative products, new opportunities on the use of data, but also exposure to new risks and increased competition.

This is what Gary Woller underlines as well in a paper [1] that was part of this week’s readings. In this paper, Gary Woller explains how the “product-oriented approach to microfinance” was initially driven by the main challenge the sector had to tackle: “how to deliver small loans in a cost-effective and sustainable manner to a poor and often hard-to-reach clientele, absent physical collateral, information asymmetries, and with relatively high per-units costs.” The answer, for many decades, has been MFIs offering standardised products, with a focus on productive loans, “forced savings, de-emphasis on voluntary savings, joint liability” and a “heavy emphasis on repayment discipline”. MFIs have often been assuming that poor customers had uniform needs, little business cyclicity, and primarily needed productive loans. Yet, there is growing evidence that poor customers have much more varied and complex financial needs. Simply put, according to Gary Woller, “MFIs have focused on the products they could produce rather than the products and services customers want them to produce; on institutional needs rather than on customer needs.”

With the emergence of new players in the market (Fintech, MNOs, payment service providers…), MFIs will need to transition quickly from a product orientation to a market orientation if they want to survive, and to offer products that truly answer their customers’ needs.
To do so, Anup Singh is proposing a five-step process to develop products that was detailed in the module:

1. Definition of a research issue / problem to solve
2. Market research
3. Concept and prototype development
4. Pilot test
5. Roll out

Here are some key intakes from the module:

Key questions to answer before new product development

Before embarking on the development of a new product, MFIs should analyse several elements, as outlined in one of the readings [2]:

1. Motivation: is the product truly developed to make the MFI more market-driven, or for other reasons? Are these reasons valid?
2. Commitment: is the MFI ready to commit to a demanding process to develop a new product? Launching a product without following the proper steps can lead to limited demand or poor profitability of the new product. 
3. Capacity: is the MFI able to handle the stresses of introducing a new product? Before embarking in a product development process, an MFI should make sure to understand the capacity issues in all relevant departments, have the will and full commitment of management and the Board, and have the capacity to train all relevant staff. 
4. Cost effectiveness and profitability: does the MFI fully understand the cost structure of its current and future products?
5. Simplicity: instead of launching a new product, is it possible to refine, repackage and re-launch existing product(s)?
6. Complexity and cannibalisation: is the MFI falling into the “product proliferation trap” by developing this product? Offering too many products can result in confusion for field staff and clients, and cannibalisation among products.

Key success factors for product development

Some key factors for product development, as stressed by Anup Singh, include:

• a clear definition of the research issue / what is the problem targeted through this product development;
• the presence of a product champion within the institution;
• institutional buy in at all levels;
• an internal assessment prior to product development to assess staff skills and time, skill building capacities to train the staff, financial resources, risk management resources, presence of the right channels to distribute the product;
• a proper market research, to take informed strategic and business decisions, as well as behavioural constraints for clients (present bias, society/peer pressure…);
• leverage on existing technologies /  agent networks for the delivery of products;
• a thorough pilot test before rolling out the product.

The importance of pilot testing

As underlined by Cheryl Frankiewicz [3], pilot tests are very useful in gauging real demand for a product, in assessing the internal capacity for roll out of the product; and to contain costs. It is indeed easier, cheaper and faster to identify and respond to problems in a limited and controlled environment of a pilot test, rather than after the product has been roll out in all the branches/ in the full institution. Pilot testing is also useful to manage change (staff is trained gradually) and to promote organisational buy-in.

[1] “Market Orientation As The Key To Deep Outreach”, Gary Woller

[2] “Key Questions That Should Precede New Product Development”, Graham A.N. Wright, Monica Brand, Zan Northrip, Monique Cohen, Michael McCord and Brigit Helms

[3] Cost and Benefits of Market Research for Product Development, Cheryl Frankiewicz

Article written by Violette Cubier, attending the Digital Transformation of MFIs programme thanks to an InFiNe.lu scholarship.