Friday, April 25, 2008

Why Microfinance Matters to Big Tech

Last week, Forbes published a comprehensive article delving into the recent growth and associated growing pains of microfinance institutions (MFIs). The explosion of small lenders and the entry of more established financial institutions have combined to increase competition, drive down margins, and shift the industry’s focus from local empowerment to corporate profitability. Such rapid growth may be creating a ripe environment for inefficiency or fraud. For example, with little communication between lending agencies, some loan recipients have borrowed multiple times against the same collateral. But so far the industry’s expansion has been healthy, and MFIs even seem to be insulated from the credit crunch in mature markets.

Why does the rapid expansion of microfinance institutions matter to technology companies? First, this exponential growth presents direct opportunities for more technology sales to this sector. The increased number of clients and services and the need to integrate data with other members of the financial services eco-system can stress the paper or spreadsheet-based systems commonly used by microfinance institutions that were originally designed for small community-based lending schemes. With profitability based on volume transactions, the need to cost-effectively and efficiently track and manage millions of small pieces of data is integral to continued growth and competitiveness. This is good news for IBM, SAP and others. These companies are in a good position to increase efficiencies and support greater demands for data tracking and management.

Improved access to financing presents indirect opportunities for other technology companies, as well. In many developing countries, lower-income consumers are now able to own previously unaffordable technology products such as a PC, mobile phone or Internet connection. These products and services have an advantage over “old technologies” such as TVs and radios because they could be used to expand a business and increase productivity (thereby contributing to the repayment of the loan). In this new financing environment, successful technology companies will market their devices to certain market segments as business tools in order to facilitate microfinance-funded purchases. The perceived utility of mobile phones and the potential for tapping into local lending schemes (i.e., MFIs, agricultural cooperatives, RoSCAs, and others) is explored more in Vital Wave Consulting’s recent report, Strategies to Accelerate Handset Financing in Emerging Markets.

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