Microfinance Institutions have played a pivotal role in offering financial services to the under-privileged populations particularly in the developing countries like India. However, these institutions often face several challenges such as high operational costs, operational costs, inefficiencies in lending procedure and disbursement and others such as limited reach. The advent of FinTech has revolutionised the microfinance sector by providing innovative solutions that enhance efficiency, reduce the costs and expand access to the financial services.

The role of Fintech in Microfinance:

1.     Digital On-Boarding and KYC Process:

·       Streamlined Customer On-Boarding: FinTech has allowed microfinance institutions to digitalize their on-boarding processes while making it easier and faster to bring new customers into the system. Digital Know Your Customer (KYC) processes reduces the need for physical paperwork that allows the micro-finance institutions to onborad clients or users remotely and securely.

·       Improved Customer Experience: With digital on-borading, the clients or the users can complete the process at their convenience that leads to higher satisfaction and retention rates.

2.     Automated Loan Procedure:

·       Reduced Processing Time: The traditional loan procedure in the microfinance institutions generally involves lengthy manual process that is time consuming. Fintech solutions automate these procesdures while reducing the time taken to assess creditworthiness, approve loans and disburse funds.

·                           Lower operational Costs: The automatation loan procedure minimizes the need for extensive human intervention while leading to significant cost savings for micro-finance institutions. This in turn, allows them to provide more competitive interest rates to borrowers.

3.    Enhanced credit Scoring Models:

·       Alternative Origin of Data: The Fintech companies leverage alternative data sources such as mobile phone usage, activity in the social media and utility bill payments to create a more accurate credit scoring models. This allows and enables the microfinance institutions to assess the creditworthiness of clients who might not have a traditional credit history.

·       Increased Access to Credit: With the improved credit scoring models, microfinance institutions can extend credit to a larger segment of the population that includes those who were previously considered under-privileged.

4.    Digital Payments and Collections:

·       Seamless Payment Solution: Fintech has introduced digital payment solutions that allows borrowers to make loan payments easily by the way of any electronic devices through mobile wallets, online banking and payment applications.

·       Real-Time Monitoring: The digital payment platforms provide real time data on loan payment to the microfinance institutions that allows them to monitor, regulate and manage their portfolios more effectively.

5.    Financial Inclusion and Outreach:

·       Building-up Reach: Fintech allows microfinance institutions to reach the under-privileged and remote populations through mobile and internet-based platforms. This geographical expansion allows them to serve more users and grow their customer base.

·       Tailored Financial Products: By using data analytics, Fintech allows microfinance institutions to develop personalised financial products that serve the specific needs of various customer segments while enhancing customer satisfaction and loyalty.

Case Study: Empower Bank’s Digital Transformation with UnPay’s FinTech Solutions

Background:

Empower Bank Microfinance Institution had been a pivotal player in providing financial services to under-privileged rural communities in India. However, as the institution grew, it faced several functional challenges that limited its potential to expand and serve more clients effectively and efficiently. Manual processes, high operational costs and limited outreach were some significant barriers to growth. Thus seeking a solution, Empower Bank Microfinance Institution approached UnPay specializing in digital financial services to help them to overcome the barriers and challenges resulting in transforming their operation.

Challenges Faced by Empower Bank:           

·       Lengthy Loan Procedure: The traditional procedure of loan approval at Empower Bank was labour-intensive and time-consuming that involved verification of documents and multiple in-person interaction. This did not only slow down the entire loan disbursement process but also increased the risk of errors and fraud.

·       High Operational Costs: Empower Bank’s reliance on paper-based documentation and physical cash handling led to high operational costs. These costs were unsustainable in the long run, specifically as the institution started expanding its services to more remote areas.

·       Limited Reach and Accessibility: The microfinance institution struggled to extend its services across its existing geographical footprint due to its high operational costs that was associated with establishing new branches and hiring field officers. Thus, many potential consumers in the remote areas remained under-privileged.

The Partnership with UnPay:

Recognizing the potential of digital transformation, Empower Bank partnered with UnPay to address its operational challenges. UnPay provided a comprehensive suite of digital services tailored to the needs and necessities of microfinance institution.

1.    Digital On-Boarding and KYC Solutions:

·       UnPay introduced a digital on-boarding platform that enabled Empower Bank to simplify and expedite the customer acquisition process. This platform utilized AI-based identity verification aid to conduct real-time KYC checks while eliminating the need for physical documentation and in-person verification.

·       With digital on-boarding, Empower Bank was able to on-board new customers quickly and securely, even in remote areas. This not only expanded their customer base but also strengthen customer experience by offering a seamless on-boarding process.

2.    Automated Loan Procedure System:

·       To address the inefficiencies in the lending procedure, UnPay implemented an automated loan management system for Empower bank. This system utilized advanced algorithms to assess creditworthiness based on both traditional data such as credit history and alternative data such as mobile phone usage and social media activity.

·       The automated system streamlined the entire lending application from submission to approval and disbursement. It significantly reduced the time required to process loans and mitigate the chances of human error, thereby increasing the institution’s overall efficiency.

3.    Digital Payment and Collection Solutions:

·       UnPay additionally provided a digital payment platform that enabled Empower Bank to make lending repayments through different channels that includes mobile wallets, online banking and payment applications. This reduced the reliance on physical cash transactions and lowered the operational risks associated with cash handling.

·       This digital payment system offered real-time tracking of loan repayments that allowed Empower Bank to monitor their portfolio more effectively and take timely action to prevent defaults.

Outcomes of the Digital Transformation:

1.    Faster and efficient Lending Procedure: With the automated lending management system, Empower Bank saw a dramatic reduction in the time required to process and disburse loans. The work which once took weeks to complete is now accomplished in a matter of days, resulting in a more active and responsive operation.

2.    Cost reduction and Increased Sustainability: The adoption of digital solutions led to significant savings of cost by reducing the need for physical infrastructure, paperwork and manual labour. These savings allowed Empower Bank to operate more sustainably and offer more competitive loan products to their customers.

3.    Expanded Reach and Financial Inclusion: Empower Bank expanded its services to previously unreachable areas geographically with the partnership of UnPay’s developed digital on-boarding and payment solutions. This expansion helped to offer its services to the under-privileged populations, furthering the institution’s mission of financial inclusion.

4.    Improved Customer Satisfaction and Retention: The enhanced customer experience, characterized by faster loan approvals, easy payment options and streamlined on-boarding process has led to higher levels of customer satisfaction. This, in turn, improved customer retention and assisted to generate new clients through positive referrals.

The partnership of Empower Bank and UnPay is a prime example of how FinTech can revolutionize the micro-finance sector. By using the expertise and digital tools or aids provided by UnPay, Empower Bank was able to recover its functional or operational challenges by reducing costs and expanding its reach. This successful digital transformation not only improved the efficiency of Empower Bank but also assisted them to be more empowered to serve more clients by improving their goal of financial inclusion in rural India.