The term “digital financial services” can describe a range of financial services, starting with payments and extending to digital credit, savings and insurance, delivered via digital infrastructure (mobile or Internet). Different business models are emerging globally including bank-led models, MNO-led models, and third-party models. This wider range of financial services providers and potential partners adds a layer of complexity for funders, since supporting digital financial services requires working with different types of actors and untested business models. Due diligence procedures are no longer neatly defined and standard performances indicators from the microfinance world don’t apply.
Development agencies are increasingly exploring how to harness the power of digital financial services. Funders who want to work with a bank, an MFI or mobile network operator (MNO) to develop digital financial services need to understand the incentives of these market actors, which may not always align with the social or development objectives of donor agencies. Funders also need to develop a clear theory of change that links what’s good for the providers to what’s good for the poor.
Launching digital financial services requires a significant up-front investment. MNOs who are launching mobile money services usually take at least three years to break even, according to GSMA, thus requiring patient funding and a significant risk appetite.
When asked about where they see the main barriers that hinder the development of digital financial services, funders most frequently point to weak or non-existent supporting functions and market infrastructure. Without internet connectivity and functioning retail payment systems, it’s hard to develop digital financial services.
Development agencies’ program implementation periods typically range from 3 to 5 years. While the number and types of digital finance business models grow each year, development agencies need to commit for the long term to ensure that digital ecosystems are evolving sustainably.
Advancing digital financial services requires a different approach to development compared to traditional microfinance. It requires an understanding of the incentive structures and capacities of a much broader set of market actors.