For microfinance institutions (MFIs), there are many pitfalls on the road to digitization, but one of the most common mistakes is embarking on the journey without listening to the customer. In our last blog, which kicked off our series on MFI digitization, we discussed the importance of setting out with a strong understanding of your goals and business case for digitization. But customer-centricity is also essential from the start to ensure an organization’s digital solutions actually meet customers’ needs and generate a return on investment.
The business case for customer centricity
Microfinance customers are increasingly using mobile phones, gaining exposure to a wider array of digital products and becoming more technologically savvy. As MFIs conceptualize, design and prototype digital solutions, they must listen to their customers, especially vulnerable female segments, and learn about their changing preferences and needs.
There is ample evidence that this is good for business. For example, Ranjay Gulati of Harvard Business School demonstrated that, in general, customer-centric firms saw shareholder returns of 150 percent between 2001 and 2007. There is also evidence that a customer-centric approach to digitization bolsters acquisition, retention and expansion in use across a microfinance institution’s offerings. According to Bain & Company and Harvard Business School, increasing customer retention rates by 5% increases profits by 25% to 85%. This is true across industries, and financial institutions are at the higher end of this profit range. Research by Emmett Murphy and Mark Murphy in Western markets has shown that a 2 percent increase in customer retention leads to a 10 percent decrease in cost.
By contrast, when MFIs attempt to digitize without listening to customers, it can result in a mismatch between the institution’s goals and the needs and expectations of its customers. Mismatches are visible through poor adoption and usage of products and services. For example, in the case of mobile money, according to the GSMA, three-quarters of registered mobile money customers use their services less than once in 30 days. An unused or under-utilized product or service represents both a direct and opportunity cost to the business.
How does a lack of customer centricity manifest?
Focusing on the technology over the needs and wants of the customer is one way for MFIs to stumble. Sometimes, institutions seek out expensive suites of digital solutions because they sound right or because vendors insist it’s what they need. In reality, such solutions are not always necessary to meet customers’ needs. MFIs do not necessarily have to spend scarce resources to acquire complete suites or the most expensive versions of digital solutions. In fact, CGAP research (to be published in the coming weeks) shows that many organizations that have digitized successfully have done it with a minimum viable product approach instead of “gold-plated” solutions that can do many things but do not necessarily align with customers’ needs.
Another common misstep is pushing technology in an environment where customers are unable to use it. For example, this happens when MFIs develop apps in markets where customers predominantly use feature phones or lack access to affordable mobile data packages. The assumption that technology is the answer to every challenge can underlie this mistake. One strength of the microfinance model has been its reliance on face-to-face customer relationships, which works exceptionally well in specific contexts. Introducing technology in some aspects of the business cycle without offering customers face-to-face alternatives may alienate customers or leave them unable to access services and affect the bottom line.
What does an MFI need to focus on to make digitization customer-centric?
The first and most crucial step is to learn from customers. Digicel, a mobile payments provider in Haiti, offers a good example of why customer research is so valuable. Through interviews in 2015 with its 40,000 mobile money customers, the company learned that its mobile money menu was confusing, that its training approach was not working for customers, and that its agents often could not serve customers due to liquidity challenges. After addressing these issues, Digicel increased its customer base 20-fold in just two years.
The second step is to develop an agile product development culture that enables teams to take insights from customers and design solutions. Digicel improved its menu design to start with one option, the option that most customers used. It moved to community training rather than hurried one-on-one training by agents. In a trained community, members retrain each other as they use the product. It improved the liquidity of its agents and changed its pricing strategy. Digicel understood that agents are also customers who need to be understood and served.
The third step is managing change in the organization to ensure effective implementation of a better customer experience. Digicel used experienced employees from its core telecom business to support and serve the mobile money unit. This fostered better understanding and less resistance to change, along with better relationships between the telecom and mobile money units.
By 2017, Digicel had over 800 000 customers, with more than 500 000 active users. Listening to, learning from and designing for customers makes sense in the digitization journey.
Not listening to customers is a common pitfall in MFI digitization, but it's not the only one. To learn about other common yet avoidable issues, see the other posts in our ongoing blog series, "Pitfalls in MFI Digitization: What They Are and How to Avoid Them." Also keep an eye out for our upcoming publication, “Digitization in Microfinance: Case Studies of Success,” which will offer an in-depth look at the journeys of several MFIs that have digitized successfully.