Demystifying Digital Lending PDF

AC C I O N
INSIGHTS
Demystifying
Digital Lending
How Digital Transformation Can Help Financial Service
Providers Reach New Customers, Drive Engagement, and
Promote Financial Inclusion
AP RIL 2018
Accion Global Advisory Solutions Page 1

Contents
03 Foreword
05 Executive Summary
06 1.0 Introduction: What’s the Big Deal With Digital Lending?
07 What will I get from this paper?
09 2.0 What Does Digital Lending Really Mean?
11 1: Digital readiness (although important!) is not digital lending
11 2: There are many types of digital lenders
13 3: Any lending product can be ‘digital’
14 4: Underserved customers require the right support for effective
digital lending
17 3.0 The Digital Lending Process
18 Customer Acquisition
19 Approval & Analytics
20 Disbursement & Repayment
20 Collections
21 Customer Engagement
22 4.0 How ‘Digital’ Is Your Institution? The Digital Maturity Matrix
24 What is the end goal?
25 5.0 Where Do I Start?
25 Step 1: Assess and build your digital readiness
27 Step 2: Set your digital lending goals and objectives
28 Step 3: Define your ‘tech and touch’ or channel strategy
30 Step 4: Identify potential partners that can supplement your digital offering
33 Step 5: Prioritize and build a roadmap to digital maturity over time
34 Putting it all together: a case study
37 6.0 Looking Ahead
38 7.0 Appendices
38 A. Research methodology
38 B. Digital lending models
40 C. Regional trends
42 D. Consumer risks in digital lending
Page 2 Demystifying Digital Lending

AC C ION
IN S IG HT S
Foreword
In Accion’s more than 50 years working in financial inclusion, we’ve seen first-hand the challenges that financial
service providers face in their efforts to sustainably offer products and services that address the unique needs of
underserved customers. Time-intensive, manual processes and a labor-intensive business model have prevented
many from meeting the enormous demand that still exists in their markets.
In our experience, digital lending offers an unprecedented opportunity to address these challenges. Financial service
providers across the globe can now take advantage of improving connectivity, increasingly available customer data,
and new technologies to offer digital products at lower cost and increased scale. These products offer customers a
convenient, fast, and personalized experience that builds engagement and promotes financial capability. However, digital
lending also brings new risks and challenges, and it can have unanticipated negative effects on both institutions and
clients. Financial service providers must carefully and systematically approach digital product design and development,
with a deep understanding of client needs and market trends, and with the right systems and processes in place.
Digital lending has become a core area of focus for Accion’s Global Advisory Solutions team, and we’re excited to
share our insights and experiences through this publication. We hope that you find it a helpful guide to ‘demystify’
digital lending, as well as an inspiration to build the digital maturity of your institutions.
Victoria White
Managing Director, Global Advisory Solutions, Accion

Accion Authors
Amy Stewart, Senior Manager, Global Advisory Solutions

Kathleen Yaworsky, Senior Manager, Digital, Global Advisory Solutions
Paul Lamont, Director, Digital – Africa, Global Advisory Solutions

AC C ION
IN S IG HT S
Demystifying Digital Lending
E XE CUTIV E S UM M A RY
Digital lending can be a powerful force for financial inclusion. Innovations in digital lending are enabling financial
service providers (FSPs) to offer better products to more underserved clients in faster, more cost-efficient, and engaging
ways. Governments are increasingly incentivizing the growth of digital lending models as a way to promote greater
financial inclusion and extend high-quality financial services to underserved communities and businesses.
Digital lending offers too many competitive advantages for FSPs to ignore, and we believe that it will have a
permanent impact on the financial industry. Although integrating digital lending practices into an FSP’s operations
can be a challenging process, any FSP can find ways to do so successfully. Moreover, FSPs should find ways to do so:
digital lending, if done correctly, will help FSPs evolve, scale, and compete in a rapidly changing landscape. Conversely,
FSPs ignore digital lending at their own peril. Customers’ expectations are rapidly changing and are being shaped by
their experience with smartphone apps, fintechs, and social media. Importantly, digital lending presents one way
for FSPs to meet those changing expectations.
However, there is typically a gap between the vision of fully-integrated digital lending and the realities that traditional
lenders must effectively navigate to complete that institutional transformation. While challenging, FSPs should not be
overwhelmed by the prospect of developing a digital product. This guide addresses common concerns, shares insights
into new trends shaping digital lending, and distills emerging best practices into a framework that FSPs can use to
implement digital lending today. Collectively, these steps are intended to help FSPs plan strategically to navigate the
new and rapidly changing landscape of digital lending.
We are aware that not all the actions described in this guide will be relevant for every FSP. While our recommendations
are presented here in the most broadly applicable manner, each organization in the financial inclusion space faces
a unique set of challenges. The Digital Maturity Matrix, found on page 21 of this paper, can help FSPs select which
processes to prioritize based on their current and desired level of maturity.
Regardless of whether an FSP decides to develop its own digital lending capability, explore digital lending partnerships
with other organizations, or some combination of these, the recommendations outlined in this paper are intended to
encourage FSPs to start adopting the right mindset and processes that will position them for success. While the ‘right’
level of digitization may vary, our hope is that FSPs can use this framework to deepen their understanding of digital
lending, identify their own digital lending objectives and current digital lending maturity, and take the first steps to
implement digital lending. Doing so will enable FSPs to better respond to client needs, position themselves strategically
for the future, and continue to work toward a financially inclusive world.

AC C ION
1.0 IN S IG HT S
Introduction: What’s the Big Deal

With Digital Lending?
The market for lending is changing across the globe. competing for traditionally underserved, down-market
A new category of digital lenders has emerged that tap customers. No longer niche, these lenders are taking
into increasingly digitized and accessible customer data, advantage of improving connectivity and digital literacy
advances in analytics and machine learning, and lower-cost to scale customized products and increasingly larger loan
digital channels to design and remotely deliver digital sizes. The market opportunity is massive: a 2016 KPMG
products in seconds to an increasingly connected global report found alternative finance2 globally had become a
clientele. While most digital lenders initially focused on
1
US$145 billion industry, growing 264% in just one year,
developed markets and higher-income segments, today, from 2014-2015.3 In many cases, smaller fintech startups
many are turning their attention to emerging markets and have competed for this alternative lending space. But
FIGURE 1. DIGITAL LENDING CUSTOMER JOURNEY: AN ILLUSTRATIVE EXAMPLE
4. The loan is repaid

with the click of a button,
and followed up with a
customized offer.
2. Within minutes, the
customer downloads the 3. The loan is approved 5. Help is available
app and applies with within minutes and 24/7 through chat or
minimal documentation. disbursed into the call center.
1. The customer finds
out about the loan via an customer's mobile wallet.
SMS blast.
1. ‘Bridging the Small Business Credit Gap through Innovative Lending’ Accion, November 2016: http://blogs.accion.org/fin-tech/new-
report-msmes-small-business-credit-gap/
2. Alternative finance includes financial channels and instruments that have emerged outside of the traditional financial system (i.e.
regulated banks and capital markets). Examples of alternative channels are online ‘marketplaces’ such as equity- and reward-based
crowdfunding, peer-to-peer consumer/business lending, and third-party payment platforms. Alternative instruments include new
financial products and alternative currencies such as Bitcoin. http://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/
3. ‘Global insights from regional Alternative Finance studies’, KPMG, October 2016: http://home.kpmg.com/content/dam/kpmg/uk/
pdf/2016/10/global-alternative-finance-report-web.pdf

The market for lending is changing across the globe.
A new category of digital lenders has emerged
that tap into increasingly digitized and accessible
customer data, advances in analytics and machine
learning, and lower-cost digital channels to design
and remotely deliver digital products in seconds to
an increasingly connected global clientele.
the demand for digital credit cannot be met by fintech However, adopting a digital lending methodology is not
players alone, as they often face challenges with funding without risks and challenges: some digital lenders struggle
and licensing that limit their product offerings. with the changes required in risk management and
collections of digital loans, and many have yet to achieve
An FSP’s ability to digitize its product portfolio and offer
profitability. In some instances, digital lending has had
a similar or better customer experience than traditional
unanticipated effects on the end client, resulting in over-
methods is crucial to staying relevant in a changing
indebtedness, misunderstanding, and – in extreme cases –
financial landscape. Digital lending is also a valuable asset financial exclusion.4 FSPs seeking to offer responsible
in the global effort to create a financially inclusive world digital lending to the underserved need to be aware of
and provide the three billion people left out of or poorly these risks and design their products appropriately.
served by the formal financial sector with the tools they
need to build better lives. By extending more high-quality WHAT WIL L I G E T FR OM THIS PAP E R ?
services, inclusive digital lenders can foster greater social
and economic development, ensuring that people and Much has been written stressing the urgency for FSPs to
‘go digital.’ FSPs are aware of the competitive pressures
small businesses can create a better world.
and eager to capitalize on new tools that help reduce the
Adopting a digital lending methodology and mindset costs of acquisition, processing, and servicing loans.
can offer several important advantages – including lower
However, the industry has not yet developed a
operating expenses and faster turnaround time, lower
comprehensive, common baseline of what digital
delinquency due to better decision-making, improved
lending actually means and what it looks like in practice.
understanding of client behavior, and enhanced customer
Can all FSPs be digital lenders? How can they evaluate
engagement through personalized products. It can also
their options and get started? With this paper, we set
provide previously underserved clients with the high-
out to ‘demystify’ digital lending for FSPs, drawing upon
quality, affordable financial services they need to launch
discussions with over 100 digital lenders and our more
or expand businesses, purchase or improve their homes,
than 50 years of experience working with FSPs across
or send their children to school.
the globe.
4. Industry leaders, including the Center for Financial Inclusion and Microsave, have conducted important research highlighting some
of the client protection risks that can arise from digital lending. See ‘Tiny Loans, Big Questions’: http://smartcampaign.org/tools-
a-resources/1136 and ‘Where Credit is Due – Customer Experience of Digital Credit in Kenya’: http://www.microsave.net/resource/
where_credit_is_due_customer_experience_of_digital_credit_in_kenya to learn more.

With this paper, we set out to ‘demystify’
digital lending for FSPs, drawing upon
discussions with over 100 digital lenders
and our more than 50 years of experience
working with FSPs across the globe.
We review digital lending in five sections:
SECTION 1.0 SECTION 4.0
This introduction discusses the importance of digital “How ‘digital’ is your institution?” introduces
lending and why new techniques are helping to reach The Digital Maturity Matrix – a tool we developed
underserved communities, and lays out some of the to help lenders assess their current digital lending
basic questions FSPs have about digital lending. capabilities and identify the next steps they should
take to better integrate technology into their lending
operations. The Digital Maturity Matrix can help FSPs
select which processes to prioritize based on their
SECTION 2.0 current and desired level of maturity.
“What does digital lending really mean?” elaborates

on digital lending – what it is and what it isn’t – and SECTION 5.0
explores why digital lending is relevant for FSPs
targeting the base of the pyramid. It also describes
four key tenets of digital lending, and delves deeper “Where do I start?” offers FSPs a path from insights
into the nuances of the definition. to action – by distilling the trends and best practices
of lending in a digital age into a framework that
offers practical steps and challenges to consider.
While launching digital lending services is a complex,
SECTION 3.0 challenging process, FSPs should not be overwhelmed
by a sense of paralysis, not knowing how or where
to start.
“The digital lending process” breaks down each step
in the lending process and describes what a ‘digitized
lending process’ looks like, using industry examples.
While the ‘right’ level of digitization may vary, FSPs can use
this paper as a framework to deepen their understanding of
digital lending, identify their own digital lending objectives
and current status, and take the first steps to implement
digital lending. This will allow FSPs to better respond to
client needs and position themselves strategically in an
evolving industry.

AC C ION
2.0 IN S IG HT S
What Does Digital Lending

Really Mean?
We spoke with industry experts, microfinance and fintech “We have seen a lot of businesses
executives, and investors to capture a range of perspectives
on what digital lending means. Responses primarily
that have a ‘digital mullet’ – they look
focused on characterizing the outputs of digital lending digital in the front, but have a lot of
– e.g. increased efficiency and faster turnaround times,
limited human interaction – rather than the mechanics of
labor-intensive work happening on the
the process itself. Many equated digital lending with the back end.”
product being offered: small, short term, (often) nano-loans
that are applied for, disbursed, and collected remotely,
frequently through the mobile phone. Those who did speak
to the process felt that digital lending encompassed a
spectrum of digitization, as one respondent noted: “digital Digital lending takes many shapes and
lending takes many shapes and forms – from automating
small pieces, to a fully digital lending process, from forms – from automating small pieces,
acquisition to renewal.” This lack of clarity on what to a fully digital lending process, from
characteristics are necessary and sufficient to constitute
digital lending underscores our experience that not all acquisition to renewal.
‘digital lenders’ are as fully automated, or ‘digital’, as they
might appear. As one respondent noted, “We have seen
a lot of businesses that have a ‘digital mullet’ – they look
digital in the front, but have a lot of labor-intensive work
happening on the back end.” The Digital Maturity Matrix can help
Digital lending is the process of offering loans that FSPs select which processes to prioritize
are applied for, disbursed, and managed through digital
based on their current and desired level
channels, in which lenders use digitized data to inform
credit decisions and build intelligent customer engagement. of maturity.

Digital lending is the process of offering
loans that are applied for, disbursed, and
managed through digital channels, in
which lenders use digitized data to inform
credit decisions and build intelligent
customer engagement.
This definition captures three components that are core to digital lending:
FIGURE 2. THREE CORE COMPONENTS OF DIGITAL LENDING
FOCUS ON CUSTOMER EXPERIENCE

USE OF DIGITAL CHANNELS USE OF DIGITIZED DATA
AND ENGAGEMENT
Digital lenders leverage digital In lieu of face-to-face, time- Digital lending from the
channels such as smartphone intensive evaluations, digital customer perspective focuses
apps and USSD (Unstructured lenders depend on digitized on how the customer
Supplementary Service Data) data to evaluate clients. experiences a digital product.
menus to reach new and existing A variety of data sources, Digital lenders use digital
customers where they are – at such as bank statements, bill channels and data to offer
home, at work, or on-the-go – so payment histories, e-commerce clients convenient access,
they can apply for credit, receive transactions, call data records, quicker approval, personalized
loan disbursements, obtain and credit bureau information, communication, and responsible
information on their accounts, are fed into algorithms and products and pricing.
and make payments remotely. An analyzed to predict willingness
effective digital channel allows and capacity to repay. Customer
customers to engage with the data is also used to build
product or service wherever and engagement tactics and improve
whenever is convenient for them. the customer experience –
Such channels also support the for example, by offering
collection of digital customer personalized communications
data by the FSP. or specially-designed product
offerings such as targeted
promotions based on customer
behavior. Over time, once digital
processes are in place, the credit
decision should be made in less
than 24 hours.

Digital lending isn’t just doing the same thing
better, but rather creating something new. It
implies an end-to-end process of developing
and delivering data-driven financial products
that are applied for, disbursed, and managed
through digital channels.
In addition to the three core components of digital lending This definition draws a useful ‘line in the sand’ for FSPs:
described above, we further characterized four key tenets digital lending isn’t just doing the same thing better,
of digital lending – the following statements refine the but rather creating something new. It implies an end-
definition and identify and explore the nuances implicit in to-end process of developing and delivering data-driven
the digital lending ecosystem. financial products that are applied for, disbursed, and
managed through digital channels. To FSPs embarking on
1: DIG ITAL R EAD I N E S S ( A LT HO U G H I MP O RTAN T! )
or in the midst of this digital transformation process, it
IS NOT D IGITAL L E N DI N G
may feel more like art than science, but it’s an important
At a conceptual level, what makes a lender ‘digital?’ distinction that underscores the shift in mindset and
There are countless ‘digital’ channels, tools, and products change management that is required for an institution
– including digital field applications (DFAs)5 and cloud- to truly embody digital lending.
based core banking systems – that FSPs can deploy,
2 : THE R E AR E M AN Y TY P E S OF
many of which help streamline operations, reduce
DIG ITAL L E N DE R S
costs, and increase scale. Their implementation is an
important step in building digital readiness – the core The digital lending ecosystem is complex and
processes, activities, and systems that will ultimately evolving. Around the world, digital lending models are
support the adoption of digital initiatives in any part of characterized by distinct market structures, regulatory
the lending process. However, digital readiness is not environments, and customer needs. Some players offer
sufficient on its own to constitute digital lending – what’s end-to-end digital solutions, while others focus on a
required instead is a comprehensive organizational specific component of the lending process and leverage
transformation to the point that an FSP is using these partnerships to supplement their models. Figure 3
tools to create an integrated digital product that offers categorizes some of the major models, and Appendix B
an improved customer experience. From the customer provides additional details and company examples.6
perspective, a well-designed digital product offers quicker
access to credit, reduced physical documentation,
convenient channels for disbursement and repayment,
and a more personalized and customized interaction
with the FSP. Section 3.0 dives deeper into the customer
experience in a digitized lending process.
5. ‘Digital Field Applications Case Study’ Accion, September 2015: http://www.accion.org/content/new-case-study-impact-digital-field-

applications
6. ‘Alternative Data: Transforming SME Finance’ IFC, May 2017: http://www.gpfi.org/sites/default/files/documents/GPFI%20Report%20
Alternative%20Data%20Transforming%20SME%20Finance.pdf

FIGURE 3. DIGITAL LENDING MODELS
FSPs that provide end-to-end digital lending products via a website or

Online Lender
mobile application.
Digital platforms that facilitate the provision of digital credit between many
P2P Lender borrowers and lenders, typically playing an ongoing central role in the relationship
between these parties.
Digital platforms wherein credit is not their core business, but that leverage their
e-Commerce and
digital distribution, strong brand, and rich customer data to offer credit products to
Social Platforms
their customer base.
Marketplace Digital platforms that originate and match one borrower with many lenders for an
Platforms origination fee; the lender and borrower then enter into a bilateral agreement.
Supply Chain Non-cash digital loans for specific asset financing, invoice financing, or pay-as-you-go
Lender asset purchase within a supply chain or distribution network.
Partnership model wherein lenders work with mobile network operators (MNOs) to
Mobile Money
offer mobile money loans to their customer base, leveraging mobile phone data for
Lender
scoring.
Tech-enabled Traditional FSPs that have digitized parts of the lending process, either in-house or
Lender through partnerships.
Adding to the complexity of the ecosystem is its dynamic of its involvement in the lending process. JUMO, a
nature, making strict categorization difficult. Key players digital lender in Kenya, started as an end-to-end mobile
continue to test, refine, and evolve their business models money lender, but is moving away from funding its
and value propositions based on customer needs and own portfolio toward a marketplace platform model.
market experience. For example, Creditas, a digital lender An ecosystem frequently in flux represents both an
in Brazil, started solely as an origination platform for opportunity and a threat: FSPs have time to find their
banks, but has subsequently moved into credit scoring, place and identify partners, but cannot be complacent
customer engagement, and financing solutions for about potential competition.
customers, seeing opportunities to expand the scope

3: A N Y LEND ING P R O DU C T CA N B E “ DI G I TAL” sourcing data for acquisition and underwriting, and
managing collections and customer engagement to
Regulations permitting, any loan (or, more broadly, any ensure a risk-adjusted approach. It is important to
financial product) can be designed and delivered digitally. differentiate between nano consumption loans
This includes loan products of all sizes, up to large (typically assessed on the basis of limited data, which
SME loans or even mortgages, providing that willingness consequently increases the risk premium) versus SME
and capacity to pay can be assessed credibly with data lending (which typically involves a more thorough
from digital sources. Delivering different types of loan assessment of the digital footprint of a potential customer).
products digitally requires variations in product design, We explore some of these digital product variations in the
risk management, and credit methodology; it also affects table below.
FIGURE 4. TYPICAL FEATURES OF DIFFERENT TYPES OF DIGITAL LENDING PRODUCTS
PRODUCT CREDIT POTENTIAL PENALTY OF IMPLICATIONS FOR IMPLICATIONS FOR

ASSESSMENT ADDITIONAL DATA NON-PAYMENT DIGITAL LENDER CUSTOMER
SOURCES
• Short term, • Focused on •M

obile phone Future access • Engagement with • Often a
small value willingness data • No further customer must fully digital
loans to pay – • Alternative data loans from be supportive experience,
(e.g. nano) behavioral that can assist provider through engagement with
assessment in assessing repayment institution via
• Blacklisting on
customer period to keep online channels
bureau
behavior interest high (SMS, mobile
and encourage or web-based
•B
ureau data (if
repayment applications)
available)
• Non-paying loans • Need to provide
of >60 days are access to
typically written personal data to
off, or selective support credit
legal action may assessment
be taken to set
precedent
• Longer • Focused on • ‘Digital footprint’ Immediate • Thorough • Application,

term, larger capacity to of customer’s financial loss assessment disbursement,
value loans pay – proof of monthly income, • Loss of of customer and repayment
(e.g. MSME income and cash flow, and collateral, affordability often via digital
working expenses and expenses (e.g. access to upfront important channels,
capital, sufficient digital invoices, inventory, etc. • Non-payment evaluation may
mortgages, cash flow tax returns) often involves include some
Future access
etc.) costly legal action physical checks
• Blacklisting on
to recover funds • Access limited
bureau
for those lacking
digitized records

Any customer can be digital if an FSP uses an effective ‘tech
and touch’ channel strategy that integrates both digital and
human elements based on three aspects of the customer
segment: the customer’s access to digital channels, comfort
and willingness to use digital financial services (DFS), and
whether they have a ‘digital footprint’ to provide digitized
data for acquisition and underwriting.
The credit assessment of nano loans today often focuses 4 : UN DE R SE RV E D CUSTOM E R S R E QUIRE T H E
on willingness to pay (whether the applicant intends to R IG HT SUP P ORT FOR E FFE CTIV E DIG ITAL
repay the loan), rather than capacity to pay (whether the L E N DIN G
applicant has the financial means to repay the loan). This is
Sometimes, FSP managers feel that digital lending
due to the lack of credible digitized data sources to assess
‘won't work for our customers.’ They believe that their
whether low-income customers have the capacity to pay.
customers lack comfort with digital channels, struggle
In the future, as transactions are increasingly digitized,
with inconsistent connectivity, or prefer face-to-face
data such as aggregated cash flows from mobile money
interactions with loan officers. Despite these challenges,
platforms could be used as a proxy for capacity to pay.
strong customer segmentation and customer understanding
This paper does not endorse or evaluate the effectiveness together with a differentiated approach can ensure that
of alternative sources of digital data for credit scoring – digital lending can reach all customers. The key is to offer
rather it highlights the typical challenges in scoring the right product to the right customer in the right way.
underserved customers in the environments in which FSPs FSPs can offer digital lending to any customer if they
operate. The increasing volume and variety of digital data use an effective ‘tech and touch’ channel strategy that
included in scoring processes by lenders suggests that integrates both digital and human elements, based on three
data currently regarded as “alternative” may be considered aspects of the customer segment: the customer’s access
“standard” in the future, underscoring the pace at which to digital channels, comfort and willingness to use digital
the landscape is changing. Ultimately, an FSP’s ability to financial services (DFS), and whether they have a ‘digital
source data to reliably evaluate capacity to pay for low- footprint’ to provide digitized data for acquisition and
income customers will drive its long-term success in underwriting. Key considerations for each aspect are
digital lending. outlined in the table below.

F I GURE 5. KEY ASPECTS TO CONSIDER WHEN DESIGNING A ‘ TECH AND TOUCH’ CHANNEL STRATEGY
ACCESS TO DIGITAL Access to digital channels is expanding across the globe and this positive trend will continue,
CHANNELS thanks to the proliferation of lower cost mobile phones and infrastructure developments
that promote better and cheaper connectivity. For example, more than half a billion Africans
are now subscribed to mobile services, and data traffic jumped 50% in 2015 alone.7
However, some customers, particularly those in rural areas, still struggle with inconsistent
network coverage, access to smart phones, and literacy.8
Additional barriers to access include the ability to pay for digital financial services, and the
cost of data required to execute digital transactions and engage remotely with FSPs.
COMFORT WITH DIGITAL Clients at the base of the pyramid are increasingly tech savvy, and comfortable
CHANNELS, E.G. communicating, sharing, and transacting over their mobile phones. In Indonesia, for
‘USAGE’ OF DFS example, a 2016 survey found that 51% of respondents are likely to make or receive
payments using their mobile phone, and 37% exclusively conduct banking transactions
via mobile.9
Exposure to top multinational brands like Amazon, Facebook, Uber, WeChat, and WhatsApp
has heightened customer expectations about digital product design and service.
However, some customers may simply prefer physical interactions. Recent research from
the Center for Financial Inclusion at Accion (CFI) found that these interactions are
particularly important during initial interactions (to establish the legitimacy of the product),
when gathering information and asking questions, and when resolving problems.10
Physical marketing and outreach in the early stages of a new digital lending product launch
supports a phased approach to digitization, providing the upfront education and support
necessary for customers to gain comfort and build trust in DFS.
AVAILABILITY OF Digitized data is a pre-requisite for digital lending. Historically, digital lenders – in particular
‘DIGITAL FOOTPRINT’ those offering nano loans – have relied heavily on data that assesses client identity and
character, such as social media data or call records. In recent years, as the global financial
ecosystem has moved towards digital payments, new data has become available that can
help FSPs assess client capacity, such as:
–E
-commerce transaction data, as more market-specific platforms emerge, and more small
and medium enterprises offer products and services online
–P
OS or mobile wallet transaction data, as merchants are increasingly able to accept
digital payments
–S
upply chain data, especially for distributors of fast moving consumer goods
–D
igitized tax invoices, supported by government initiatives in countries like Brazil
and Mexico
While overall more data provides better information and decision-making capability, the
predictive power of some sources, such as data generated by the use of social media sites
like Facebook and LinkedIn, remains unproven. Despite the risks of alternative data, more
data is generally better than less. FSPs should experiment by acquiring and integrating
supplementary data sources where available, then closely monitoring whether these new
scores are predictive and reliable. A strong risk team and a disciplined approach to data
analytics are critical to support this endeavor.
7. ‘The Mobile Economy: Sub-Saharan Africa 2017’ GSMA, 2017: http://www.gsmaintelligence.com/

research/?file=7bf3592e6d750144e58d9dcfac6adfab&download
8. ‘Can Fintech Really Deliver On Its Promise For Financial Inclusion?’ Microsave, November 2017: http://blog.microsave.net/can-
fintech-really-deliver-on-its-promise-for-financial-inclusion/
9. ‘Mobile Money: From shopping to banking to payments, how mobile is transforming commerce around the world’ Nielsen, October
2016: http://www.nielsen.com/content/dam/nielsenglobal/kr/docs/global-report/2016/nielsen_global_mobile_money_report_final.pdf
10. ‘Uniting Tech and Touch: Why centaur products are better for consumers and providers’ CFI, November 2017: http://www.
centerforfinancialinclusion.org/storage/Uniting_TechandTouch_Kenya_FINAL.pdf

Digital channels must be supplemented
with education and support from the start,
particularly at key moments in the customer
journey, such as during the initial interaction
and when resolving complaints.
While underserved customer segments will differ by – Financial exclusion: In extreme instances, digital lending
degrees in terms of digital access, comfort, and footprint, can actually promote financial exclusion, particularly
the general trend for all three is upward. Therefore, FSPs if clients are not informed of or do not understand the
must take a nuanced approach to tailor digital lending consequences of default. In Kenya, 2.7 million people
to their respective customer segments – by introducing have been blacklisted for non-repayment of digital credit
digital channels to engage with customers that qualify in loans (400,000 Kenyans have been blacklisted for loans of
new and different ways, while simultaneously leveraging less than US$2).12 These customers must actively invest
existing branch and staff networks to serve those that time and resources (including paying fines of up to
require a higher touch. Like any financial product, the US$20) to get off of a blacklist – and in the interim
ultimate impact of digital lending on the end client will lose access to any financial services.
depend heavily on its design and delivery.
It’s critical that FSPs ensure customers understand the
Just as important is anticipating and mitigating likely product features, their responsibilities as a borrower, and
risks that customers might face when using new DFS. Both the real consequences of nonpayment. FSPs should also
the Center for Financial Inclusion and Microsave have closely monitor client behavior and gather feedback on
conducted important research highlighting some of the product features and processes, particularly during the
client protection risks that can come with digital lending: early stages. Digital channels must be supplemented
with education and support from the start, particularly
– Over-indebtedness: Taking out multiple simultaneous
at key moments in the customer journey, such as during
loans due to ease of access, limited or no evaluation
the initial interaction and when resolving complaints.
of capacity to repay, limited customer understanding,
Appendix D contains additional information on consumer
and high interest rates (50% to 600% APR) could lead
protection risks in digital lending, and recommendations
to over-indebtedness. Many digital lenders depend on
by the Smart Campaign13 to ensure that FSPs incorporate
algorithms that strengthen over time, but in the short
its Client Protection Principles into digital lending product
term accept clients that ultimately cannot repay.
design and delivery.
– Aggressive (digital) collections: Collection efforts depend
on frequent SMS notifications, which can be stressful
for the customer. In Kenya, one provider included in
their terms and conditions that the provider has the
prerogative to post the names of defaulters to their
website, and to post directly to the social media walls
of defaulters.11
11. Sarah Ombija and Patrick Chege, 'Time to Take Data Privacy Concerns Seriously in Digital Lending,' CGAP, 2017: http://www.cgap.
org/blog/time-take-data-privacy-concerns-seriously-digital-lending
12. ‘Where Credit is Due – Customer Experience of Digital Credit in Kenya’: http://www.microsave.net/resource/where_credit_is_due_
customer_experience_of_digital_credit_in_kenya
13. The Smart Campaign is a global campaign to embed a set of client protection principles into the fabric of the financial inclusion
sector. http://www.smartcampaign.org.

AC C ION
3.0 IN S IG HT S
The Digital Lending Process
The lending process refers to the sequence of activities In its purest form, digital lending refers to the ‘digitization’
an FSP performs to provide credit – from acquiring and of the lending process by introducing digital channels for
onboarding a customer, to evaluating the customer and acquisition, disbursement, repayment, and engagement
disbursing the loan, to receiving repayments and following and by leveraging digitized data and advanced algorithms
up on past due loans. Throughout the lending process, for credit decisions, collections, and customer engagement.
the FSP builds customer engagement and loyalty through This section describes each step in the lending process
high-touch interactions that adapt to client needs for a typical digital lender, drawing examples from the
and preferences. digital lending business models listed in Section 2.2.
F I GURE 6. THE DIGITAL LENDING PROCESS
CUSTOMER APPROVAL & DISBURSEMENT &

COLLECTIONS
ACQUISITION ANALYTICS REPAYMENT
Improved efficiencies and More accurate decisioning, Instant, remote payments with More efficient customer
customer experience quicker turnaround times, audit trail and reduced costs management to proactively
access to new customer improve customer behavior
segments
CUSTOMER ENGAGEMENT
Improved customer experience, operational
efficiencies, increased cross-selling
opportunities

Digital acquisition channels increase efficiency
and provide a rich source of digitized data that
can be used to assess the customer and, in turn,
offer a whole range of customized products.
CUS TOM ER AC Q U I S I T I O N The type of channel (direct or indirect) through which the
customer is acquired will dictate the nature of user data
Digital lenders may acquire customers using a mix of available to the FSP and the type of relationship the FSP
digital marketing tools and digital onboarding channels, has with the customer. Direct acquisition can be difficult
enhanced by strategically designed physical touch and expensive, but it allows the lender full ownership of
points and referrals. Digital marketing tools include SMS customer data and direct access to the customer. Another
blasts, search engine optimization, online banners, Secure option is to partner with a ‘data-rich’ third-party (like an
Quick Response (SQR) codes, and social media advertising MNO or e-commerce player) to leverage their customer
campaigns. Direct digital marketing should be done databases, but this will require a well-planned and
responsibly, as aggressive push marketing can increase -resourced partnership strategy. Indirect acquisition via
impulse borrowing.14 Digital onboarding channels include partners provides an FSP with ‘prequalified’ customers,
USSD, SMS, and online applications via web or mobile but this often requires that they ‘buy’ the customer and
platforms. However, remote onboarding can also be enabled have access limited by the commercial terms of the
by centralized call centers with human agents or AI- contract. Before partnering, FSPs should weigh the pros
driven chatbots. An important aspect of acquisition is the and cons, while keeping in mind what data the potential
customer’s identification; digital lenders commonly make partner could offer to supplement the information the
use of innovations in digital identity and e-KYC (Know Your FSP already has on its customers. See Section 5 for more
Customer) regulations to access government or private information on partnerships.
sector verified records, triangulating customer-entered
information about their identity and eliminating the EXAMPLE
need for the customer to come to a physical location
to submit KYC documents for verification.
Capital Float is an online lender in India offering short
Digital acquisition channels increase efficiency and
term, flexible working capital loans for over 5,000 SMEs.
provide a rich source of digitized data that can be used
They have partnered with more than six e-commerce
to assess the customer and, in turn, offer a whole range
platforms – including Amazon, e-Bay, Flipkart, and
of customized products. They also offer cost-effective
PayTM – to offer quick, customized, short-term credit
ways to advertise and provide key product information
directly to their online retailers. These partnerships have
to prospective clients, which can bolster transparency.
been mutually beneficial: Capital Float gains access to
However, as noted above, physical marketing is still
thousands of potential customers with digitized payment
important to address questions and build trust in the
histories, retailers can access credit to manage seasonal
initial stages of customer acquisition, particularly in
spikes and grow their businesses, and e-commerce
markets with low financial or digital literacy. FSPs can
platforms benefit from increased sales and visibility, as
manage this transition and gain legitimacy in target
well as merchant loyalty. Capital Float has also partnered
markets by continuing familiar marketing techniques,
with travel and hospitality, retail, and taxi providers to
like door-to-door sales and market storms, to reinforce
offer credit to SMEs operating on those platforms.
early digital marketing efforts.
14. ‘Where Credit is Due – Customer Experience of Digital Credit in Kenya’ Microsave, March 2017: http://www.microsave.net/resource/
where_credit_is_due_customer_experience_of_digital_credit_in_kenya

At the heart of digital lending is the potential for
lenders to access and use digital data to make
quicker, automated, and more accurate underwriting
decisions. Digital lenders use both conventional and
alternative data sources and advanced algorithms
and analytics to quickly and remotely ‘score’ potential
clients and make credit decisions.
APPR OVAL & A NA LY T I C S

EXAMPLE
At the heart of digital lending is the potential for lenders

to access and use digital data to make quicker, automated, Konfio is a Mexico-based online lending platform that
and more accurate underwriting decisions. Digital lenders provides loans to those who are creditworthy but
use both conventional and alternative data sources and underrepresented in the current financial system. Konfio
advanced algorithms and analytics to quickly and remotely offers small, unsecured loans to small businesses, a sector
‘score’ potential clients and make credit decisions. Many that is vital to Mexico’s economy. To qualify potential
lenders supplement self-asserted and independent borrowers, Konfio uses a proprietary algorithm, which
bureau data with knowledge about the specific borrower incorporates more than 5,000 data points into its web-
collected in the past, as well as call data records, digital based platform, then triangulates this information into
transactions (e.g. supplier payments, e-commerce a single predictive measure of whether a prospective
payments, mobile money payments, etc.), and social media borrower will repay a loan. The five domains of traditional
information to better understand individual behavior and and innovative data sources the algorithm uses include:
expand access for ‘thin file’15 customers that may have demographic data, social network data, psychological
previously been rejected. Decisions are made in seconds, and psychometric profile data, transactional data, and
improving turn-around time and the customer experience. lending history data. This information comes from a variety
To score customers, the data is fed into algorithms that of sources including surveys, social media websites,
predict capacity and willingness to repay – the most information on how the customer interacts with Konfio’s
advanced of these algorithms use reiterative machine- website, and transactional data from the government.
learning techniques to improve their analysis over time.
Regardless of the complexity of the scoring tools, digital
lenders often accommodate for a greater level of initial
defaults, as the algorithms or risk analysts ‘learn’ from
the emerging patterns and adjust. This is done by allowing
almost anyone to borrow up to a low threshold limit, and
analyzing their repayment behavior and its corroboration
with the alternative data collected. These lenders should
also ethically weigh how to handle defaulters during this
early stage, particularly for small loans, so as not to overly
penalize early adopters who (unknowingly) were helping
to test and refine the algorithm.
15. ‘Thin file’ refers to customers who have limited credit history or digital records with which to score them and evaluate credit risk.

Building financial capability into product design can help
customers understand the long-lasting financial implications of
a negative credit score. This goes beyond standalone financial
literacy training, which is often ineffective. Instead, FSPs should
integrate the content and delivery of educational messages into
digital product design and rollout to minimize their collections
burden and the negative repercussions for customers.
D IS BUR S EME N T & R E PAY M E N T COL L E CTION S
Digital lenders disburse loans and collect repayments Digital lenders leverage data and algorithms to support
remotely through digital channels, such as bank accounts, their collections process. Some deploy delinquency
e-commerce accounts, or mobile wallets. These cashless scorecards that track customer behavior and propose
channels improve operational efficiency and reduce fraud customized recovery strategies. Delinquent customers
by providing a clear audit trail. They also allow for rapid, are blacklisted and lose access to future credit – which
sometimes instant, disbursement providing customers can be a powerful motivator. However, an effort to
with access to their funds in a matter of seconds. build financial capability16 into product design can
help customers understand the long-lasting financial
Repayment comes through the same channel, sometimes by
implications of a negative credit score. This goes beyond
auto-debiting the account. For example, some digital lenders
standalone financial literacy training, which is often
effectively manage risk by deducting repayment from future
ineffective. Instead, FSPs should integrate the content
sales. As with partnerships for acquisition, challenges
and delivery of educational messages into digital product
can emerge around who owns the relationship with the
design and rollout to minimize their collections burden
client and their data. FSPs’ fears of ‘losing their client’
and the negative repercussions for customers. One tactic
can be mitigated by offering a compelling digital lending
is to create short educational videos that explain key
value proposition that the partner alone cannot replicate.
messages on repayment, which field staff can show to
customers on their phones or tablets.
EXAMPLE
Partnerships can also support collections – from leveraging
third party collections infrastructure for late stage
Kopo Kopo is a mobile money lender working across East collections, to securing loans against future e-commerce
Africa in partnership with Safaricom. Their main product, or POS transactions (see the Tienda Pago example below).
Lipa na Mpesa, enables merchants to accept mobile money However, fintechs often build their own collections
payments from customers. Customers that have used Lipa na capability for early stage collections, given how important
Mpesa for more than 90 days are eligible for Grow, their an ‘adjust and learn’ approach is to manage portfolio
merchant cash advance product. performance, particularly after launching new products.
Once approved, Grow is electronically disbursed in 24

hours to the customer’s mobile money account. While
interest rates are fixed, monthly payments are flexible and
based on a customer-selected percentage of daily sales –
this way, customers pay more in good months and less in
bad months. The loan is repaid via direct debit from the
mobile money account. Customized repayment plans
are a valuable benefit digital lenders are able to offer
their customers.
16. ‘A Change in Behavior: Innovations in Financial Capability’ CFI, April 2016: http://www.centerforfinancialinclusion.org/fi2020/
roadmap-to-inclusion/innovations-in-financial-capability

Customer engagement must demonstrate the
lender’s desire to understand a customer’s
individual behavior and preferences, quickly
address their problems or concerns, and
create solutions that make sense to the
customer on a personal basis.
between the FSP and the client, it is important to protect

EXAMPLE
the client through responsible lending practices, for
example, by giving simple explanations of the terms and
Tienda Pago is a supply chain lender in Peru and Mexico conditions during acquisition, explaining the consequences
that partners with fast moving consumer goods (FMCG) of not making repayments on time when disbursing the
distributors to offer inventory credit to their retailers. Once loan, and ensuring accessibility of channels to address
approved, funding is paid to the distributor, who delivers customer complaints.
the corresponding inventory to the customer. Customers
can repay Tienda Pago from sales revenue via a mobile EXAMPLE
payment platform. Tienda Pago leverages the meaningful
relationship between customers and distributors to drive
better repayment behavior. Tala is an online lender in Kenya offering mobile-based
nanoloans via an Android application. After customers
opt-in, Tala’s proprietary algorithm scrapes approximately
10,000 data points from the phone (including SMS,
CUS TOM ER E N G AG E M E N T call records, locational data, etc.) to analyze and score
customers. Tala’s customer engagement is completely
Digital lenders use digital channels and customer data to digital – there are no physical branches or any in-person
build an intuitive, convenient, and customized customer engagement. However, Tala’s customer engagement
experience throughout the lending process. This involves leverages customer data to provide a personalized financial
both outbound (lender to customer) and inbound (customer experience via a sophisticated mobile application and
to lender) communication and account management. through social media channels like Facebook. Through
Lenders send customized communications, reminders, and the app, customers can manage all aspects of their
product offers based on customer behavior, and customers account, including checking balances, making payments,
are empowered to easily access and manage their accounts, or accessing support through an in-app messenger which
raise questions, or report issues or complaints. Channels promises a response within 24 hours. They can also track
can range from simple SMS, call center support, or their customized ‘Tala credit score’, set financial goals,
Interactive Voice Response (IVR) systems, to the use of self- and use personal financial management tools.
service online portals, chatbots, and in-app messaging.
At the heart of this is a lender’s desire to understand a

customer’s individual behavior and preferences, quickly
address their problems or concerns, and create solutions
that make sense to the customer on a personal basis. In
order to ensure a long-lasting, high-quality relationship

AC C ION
4.0 IN S IG HT S
How ‘Digital’ Is Your Institution?

The Digital Maturity Matrix
FSPs may be at different levels of digital maturity based on services. These lenders have best-in-class data
existing processes and activities, local market conditions, management that enable highly personalized products
and their strategic objectives. The Digital Maturity and experiences specific to the individual needs of new
Matrix helps FSPs assess their current digital lending and existing customers. What sets ‘Digital Plus’ lenders
capabilities and identify the next steps they should apart from the competition is a (often digitally native)
take to become more digital. Accion distinguishes three business model that fully aligns with the company’s
levels of digital maturity – Early Stage, Base, and Plus – strategy, workforce, culture, and technology to meet
characterized by which processes have been digitized, the digital expectations of customers and employees.
and to what extent. Each level implies a different strategic ‘Digital Plus’ lenders effectively function as ‘knowledge
objective to be achieved through digital lending: hubs’ in regard to their customers, and use the insights
they glean from customer data they collect to offer
• ‘Early Stage Digital’ lenders use digital lending to
curated services.
increase the access to and usage of financial services
by providing existing products and services over new The following framework helps FSPs self-assess and plan
channels. They focus on introducing digital channels further action by outlining the activities and functionality
for acquisition, disbursement, and repayment, which that should be in place at each stage of the lending process,
brings convenience to their current customer base and for each level of digital maturity. The blue boxes represent
allows the lender to access new customers. ‘Early Stage ‘gateways’ – the minimum required to have achieved a
Digital’ lenders empower customers to manage core certain level and to progress through the Matrix. For
components of their account through digital channels, example, while we expect ‘Early Stage Digital’ lenders
while significant in-person support continues through will leverage some analytics in scoring, these lenders
loan officers or agents. Typically, lenders at this stage at a minimum should introduce digital channels for
leverage new channels to deploy their existing products acquisition, disbursement, repayment, and basic account
and services. management.17 Keep in mind many lenders will be pre-
‘Early Stage’ – in that case, they should first focus on digital
• ‘Base Digital’ lenders move beyond access to
readiness activities, mentioned earlier and discussed in
customization of financial products. Additional
more detail in Section Five. Likewise, not all lenders will
digitization, particularly in scoring and channels,
fit neatly into one level of maturity; there is likely to
allows for data-driven decision-making and delivery.
be significant variation as lenders prioritize different
As a result, sophisticated analysis supports the
processes based on their institutional goals and market
development of new, more personalized digital
context. Furthermore, cultural preferences to the assisted
products, and intelligent scoring further enables
model, or regulatory requirements for physical KYC,
access for both new and existing customers, as
particularly in rural settings, are examples where even
product design can be specialized to meet their
a digitally mature lender (capable of delivering via more
specific needs and circumstances.
digital means) may implement more physical interventions
• ‘Digital Plus’ lenders deploy a fully digital business to deliver its business model.
model to enhance the overall experience of financial
17. Note that there are no minimum ‘gateway’ boxes in the Collections category, as this is primarily focused on driving lender
profitability and not customer experience.

F I GURE 7. DIGITAL MATURITY MATRIX
CUSTOMER APPROVAL & DISBURSEMENT & COLLECTIONS CUSTOMER

ACQUISITION ANALYTICS REPAYMENT ENGAGEMENT
• Acquisition process • Little or no use • Combination of • Limited data • Customer can

(including promotion of scorecards or digital and cash analytics in manage basic
and onboarding) is advanced analytics. disbursement and delinquency account functionality
partially digitized • Underwriting repayments. workflow through digital
(e.g. provision of process relies on • Where available, management. channels (e.g.
basic details in early manual checks to use of existing third • May deploy simple check loan balance,
EARLY STAGE DIGITAL
stages of application) verify information party agent networks processes to remind repayments history).
but still includes and confirm score. to support remote clients about • Strategic use of
many manual steps payments. repayment. existing physical
(e.g. physical KYC • Data for underwriting
derived primarily network to build
document provision). trust and address
from internal
•S trategic use of application process, concerns.
existing physical including application
network to raise form, interviews and/
visibility and or site visits.
educate clients is
common. • Credit decisioning
often determined by
simple rule-based
decision trees and
gating criteria.
• Lender capable of • Use of basic • Primarily digital • Data-driven • Customer manages

mostly digitized scorecards18 for disbursement and delinquency majority of account
acquisition application and repayments, via workflow functionality via
process, majority of renewal. mobile wallet or management digital channels
customers acquired • Underwriting bank account. with use of basic (e.g. issue resolution,
and applying via process requires analytics. edit account
digital channels minimal manual • Delinquency details, access all
BASE DIGITAL
(e.g. SMS, internet, checks to confirm scorecard developed documents). Physical

mobile applications). score (medium-high with basic internal assistance is possible
Physical interactions confidence in score). data points (e.g. if requested.
may still be a feature repayment time, • Outbound
here, if required by • Where available,
use of additional amount). communication by
regulators or per lender is data-driven
cultural preference. data sources for
underwriting – and customized to
both standardized individual behavior,
(e.g. credit bureau) and uses digital
and alternative channels.
(e.g. e-commerce
transactions).
•L
ender capable • Use of advanced, • Exclusively digital • Data-driven • Customer can
of fully digitized data-based disbursements and delinquency (and is expected to)
acquisition process. scorecards that repayments. Cash- workflow manage all account
•P
hysical interactions include sophisticated in and cash-out management with functionality and
may still be a feature data analytics or handled via partners use of advanced interact with the
here, if required by machine learning. and external to analytics (e.g. chat institution through
regulators or per • Underwriting process business model. bots or Artificial digital channels. No
DIGITAL PLUS
cultural preference. entirely automated Intelligence). need to come to a

with limited manual • Delinquency physical location.
interventions to scorecard developed • Data-driven
confirm score (high with multiple customer
confidence in score). complex data points interactions
• Use of multiple (e.g. linkage to throughout customer
alternative data other delinquent lifecycle, customized
sources common for customers). cross-selling and
underwriting and communication.
product offerings
tailored to specific
customer segments.
18. Accion’s Credit Risk Scoring Tool Guide has additional information on the distinctions between basic and advanced scorecards:
http://www.accion.org/sites/default/files/credit-scoring.pdf

Given market trends, there is a genuine threat to the
profitability of lenders that don’t embrace some form of
digital lending. Traditional lenders should strive to develop
their digital maturity to ‘Base Digital’ – with a focus on
the customization of financial services – to provide an
improved customer experience and ensure they can
remain competitive.
Regardless of these nuances, the Digital Maturity Matrix However, given market trends, there is a genuine threat
can help FSPs select which processes to prioritize based to the profitability of lenders that don’t embrace some
on their current and desired level of maturity. To use the form of digital lending. Traditional lenders should strive
Digital Maturity Matrix, consider your current lending to develop their digital maturity to ‘Base Digital’ – with
methodology, and tick the boxes that best describe how a focus on the customization of financial services – to
your institution operates today. Keep in mind the levels provide an improved customer experience and ensure
are cumulative – Base Digital activities should include they can remain competitive. This means moving beyond
and build upon Early Stage Digital activities, and so on. simply providing access – although that is an important
first step in advancing financial inclusion – and going
WHAT IS TH E END G OA L ?
further, to gathering and leveraging digital data to design
Should all FSPs seek to become fully digital lenders, and innovative products and build personalized experiences
achieve ‘Digital Plus’ maturity? Not necessarily! Digitally that meet the needs of all customers. Innovative product
native lenders have different business models than and process design will help FSPs compete in the market,
traditional FSPs, which often possess significant physical build customer satisfaction and loyalty, and ultimately
infrastructure, scale, brand, and market knowledge. In drive profitability and over time. By extending these high-
the end, the remit of any financial service provider is to quality services to typically underserved communities, FSPs
optimize financial intermediation (effectively channeling help to create a financial system that works for everyone
funds from lenders to borrowers) across multiple and provide the financial tools that families and small
dimensions: first and foremost, customer experience, but businesses need to build better lives. Some lenders may
also risk management, regulatory concerns, responsible even seek to incorporate elements of the ‘Digital Plus’ stage
finance considerations, and investor yield requirements. based on their own competencies and business goals.
The digital lending business models discussed above
attack this endgame from various angles. The right level
of digitization for a FSP will vary based on institutional
goals, client segments, market distribution, institutional
skill set, existing assets, and culture.

AC C ION
5.0 IN S IG HT S
Where Do I Start?
STEP 1: STEP 2: STEP 3: STEP 4: STEP 5:
Assess and Build Set your Digital Define your ‘Tech Identify Potential Prioritize and
Your Digital Lending Goals and and Touch’ Channel Partners that can Build a Roadmap
Readiness Objectives Strategy Supplement your to Digital Maturity
Digital Offering Over Time
Given the scope of digital lending, it can be difficult for Digital readiness can be broken down into three broad
interested lenders to know where to start. While digital categories – people, processes, and systems. To assess their
transformations won’t happen overnight, there are steps current state of digital readiness, FSPs’ senior management
any lender – regardless of market or maturity – can take should ask themselves the following questions within
today to advance along the continuum. each category:
We’ve developed the following guide to help FSPs plan • People – ensuring the business is ready for scale
their digital lending journey. Please note these steps are from an organizational culture and internal capacity
not necessarily sequential – many could be conducted in perspective. This includes reviewing the skills, capacity,
parallel, and the process is also iterative. and commitment of the institution at all levels, and
assessing organizational structure and incentives.
STE P 1: AS S ES S A N D B U I L D YO U R DI G I TA L
– Is there strong support and commitment from the
RE A DIN ES S
senior management team? Are we willing to commit
Implementing digital lending can be complex and the resources to make digital lending work? Have we
challenging, and it requires a strong structural and cultural identified why we need to change and articulated our
foundation to be successful. An important initial step vision for transformation?
is for lenders to assess their digital readiness. As noted
– Do staff possess the appropriate skills needed to
above, this includes the core processes, activities, and
execute the processes and manage the systems
systems that will support the adoption of digital initiatives required to support and scale digital initiatives?
across all parts of the lending process. Activities that build
readiness, like implementing a data warehouse to help – Do we have the capacity in house to operationalize
standardize data collection and visualization, play an digital products? How stretched is my current team?
important role in introducing operational efficiencies and – How are staff currently incentivized? What should
laying the groundwork necessary to design and deliver change to promote digital lending?
digital lending products in the future.19 A strong baseline
– Does our organizational culture support innovation
of digital readiness can help mitigate common digital
and new business models? Is the organizational
lending implementation challenges.
structure conducive to embracing technology-
enabled products at scale?
19. For a more detailed guide on planning and implementing the data infrastructure required for digital lending, refer to our 2017
publication, ‘Unlocking the Promise of Big Data to Promote Financial Inclusion’: http://www.accion.org/content/unlocking-promise-
big-data-promote-financial-inclusion.

Transforming institutional objectives into
a compelling customer value proposition
requires a deep understanding of and
empathy for the customer, which can help
avoid poorly designed products or a poor
customer experience.
• Processes – ensuring the business is ready for This includes an institution’s core banking system,
scale from an operational perspective. This includes electronic document management system (EDMS),
process reengineering, data and channels strategy, and data warehouse, middleware, and reporting
customer segmentation and understanding. FSPs should dashboards. In aggregate, one can view the systems
avoid merely digitizing existing processes, or they risk required to offer digital lending as comparable to a
compounding inefficiencies. CRM (customer relationship management) system in
which the institution has the capability to disaggregate
– Are our business processes clearly defined and customer-level information from the lending process
mapped? Are they well-designed and intuitive? and ultimately build a comprehensive, digital view of
individual customers over time.
– Are paper forms easily and quickly digitized? Have
we introduced automation wherever feasible to – Do we have systems in place to support organized,
increase efficiency? (For example, is application accurate, and accessible internal data management
data entered directly into a DFA in an agent-assisted (e.g. data warehouse)?
model?)20
– Are our systems (including our core banking system)
– Do we have a deep understanding of our current built to support scalability? Do the systems connect
and potential customer segments – including their in a way that permits a holistic view of operations
needs, priorities, preferences, digital literacy, and across the organization, or is reporting fragmented
expectations? Have our assumptions about our across systems? Is the overall design of our
customers been validated with research? What enterprise architecture consistent and coherent? Do
features can a digital product enable to offer we have an API strategy?
additional value? What support will customers
require to adopt a digital product? – Have we implemented an electronic document
management and workflow to centralize credit
– Have we conducted operational and fraud reviews? underwriting?
– Have we conducted cash management review? What if the answer to any of the above questions is no?
While FSPs don’t necessarily need to meet all the readiness
– Have we developed a plan on how the business will
requirements, it’s important to have at least considered
strategically source and use data to improve scoring,
the above questions, identified your current state, and
product design, and customer engagement?
noted potential risks and challenges that may arise with
• Systems – ensuring the core infrastructure and implementation. Proceed with caution, at a small scale,
enterprise architecture is in place to scale the and be prepared to address underlying issues as soon as
business, such that information flows smoothly they arise during implementation.
and is used effectively across the organization.
20. Accion has developed a number of tools and resources to help FSPs build their digital readiness through the use of DFAs, available
here: http://www.accion.org/content/new-case-study-impact-digital-field-applications

It may seem like an obvious point, but it’s critical to
differentiate between the lender’s objectives and the
customer value proposition. For example, an FSP may
decide a digital lending product will help to build a larger
loan book and increase operational efficiencies, but fail
to consider or articulate why their customers will want
this product in comparison to competing products.
but fail to consider or articulate why their customers will

CAUTION! POTENTIAL CHALLENGES
want this product in comparison to competing products.
Transforming institutional objectives into a compelling
Digital readiness itself is a common challenge for FSPs that customer value proposition requires a deep understanding
often seek to jump to implementing a digital product or of and empathy for the customer, which can help avoid
channel without proper planning, resourcing, systems, or poorly designed products or a poor customer experience.
capacity. FSPs should use the questions above to identify
It’s also important to differentiate between long term
potential challenges and plan proactively to mitigate risks
and pilot objectives. Even if the long term objectives are
and build digital readiness. FSPs should take the time to
profitability and efficiency, at the pilot stage, FSPs should
thoroughly assess their current operations, and use this
prioritize and track customer adoption as the primary
assessment to inform their objectives.
key performance indicator (KPI). The goal of a pilot is to
drive adoption, which requires a single-minded focus on
understanding how customers are engaging (or not) with
STE P 2: S ET YOUR DI G I TA L L E N DI N G G OA LS AN D the new product, and a willingness to learn and adapt
OBJE CTIV ES to the offering as necessary. The business model can be
Digital lending failures often derive from an assumption adjusted over time to drive sustainability. In building out
by the lender that ‘digital will simply be better than the their roadmap to digitization, FSPs should understand the
status quo.’ Before embarking on (or revisiting) their digital distinction between digital readiness (the ability to offer
lending journey, FSPs should take the time to define their existing products in a digital format, typically enabled by
overall objective for digital lending. Important questions to a number of digital tools) and a digital product proposition
consider include: (the launch of an end-to-end digital product). Many FSPs
plan to launch digital products without realizing the time
• What do you hope the end result will be – for your
required to build their digital readiness first – this often
institution and for your customers? This could include
involves multi-year planning to develop systems and skills
increased operational efficiency, driving scale with
to enable the delivery of digital products before actual
existing customers, reaching new customers, or
digital products are launched.
improving the customer experience.
The digital lending ecosystem in your market can provide
• How does this align with your overall mission and
reference points for what’s achievable. See Appendix C for
strategic objectives?
a high level overview of key regional trends.
• What state of maturity are you ultimately aiming to
achieve – and why?
It may seem like an obvious point, but it’s critical to

differentiate between the lender’s objectives and the
customer value proposition. For example, an FSP may
decide a digital lending product will help to build a
larger loan book and increase operational efficiencies,

The key is for customer engagement to
always remain human – that is, focused
on the needs of the end end customer.
Over time, this will involve a less physical
approach, even in emerging markets.
poor connectivity and low smartphone penetration

restrict advanced digital engagement or payment.
Market and cultural context also play an important
• Mission drift – Digital lending can sometimes be seen role: some customers, particularly those with lower
as mission drift for an FSP – particularly in industries financial or digital literacy, may have a limited
where digital credit is equated with low-touch, high- understanding of both the product and channel being
interest consumption lending. An FSP should reflect on used, or a strong preference for physical channels.
how digital lending aligns with their mission and target Customer understanding is critical: targeted face-to-
segment, ensure their approach is in line with their face interactions at the right times in the customer
strategic goals, and communicate accordingly to all journey can go a long way toward increasing adoption.
stakeholders. Agent-enabled mobile money programs, like EasyPaisa
in Pakistan or BKash in Bangladesh, can be particularly
• Regulatory environment – the regulatory
helpful when targeting unbanked, rural customers.
environment around digital lending is frequently shifting
as regulators seek to understand potential risks and • What is the type of credit?
impact. Regulator engagement pre- and post-piloting is Lenders may choose to strategically incorporate a
important in markets where there is no set framework physical evaluation based on the loan type, primarily
for digital lending. Open engagement with regulators to manage risk. For instance, larger loans with
can drive a more market-friendly approach to regulatory longer terms concentrate risk for the lender; in these
development and will help FSPs stay abreast of instances, lenders may benefit from additional in-
regulatory changes. person checks. Smaller loans need to scale to be
profitable, and, in those instances, physical checks
are not economical; they require a lower-touch model.
STE P 3: D EF INE YO U R ‘ T E C H A N D TO U C H’ OR The use of the loan also matters: for example, loans
CHAN NEL S TR ATE G Y used for fixed asset purchase and collateralized by that
asset can give lenders more confidence that customers
While physical interactions are generally reduced as will repay, because the borrower fears the loss of the
lenders advance along the Digital Maturity Matrix, there asset (versus working capital loans, with less-clearly
are situations where human touch can enhance the defined coercive mechanisms for collections). FSPs may
customer experience, build loyalty, and improve repayment be more comfortable offering a lower-touch model for
behavior. It can also assist the lender to make more asset-backed loans.
informed credit decisions, and can be particularly useful at
the early stages of piloting and scaling up a digital product. • How effective is our current distribution network?
There are three main areas that lenders should consider FSPs that currently have an existing, efficiently-run
when designing their ‘tech and touch’ strategy. branch network should leverage it. This existing
infrastructure can provide a competitive advantage
• Who is our target customer segment? in accessing customers in more rural locations, or
Not all customers require the same amount of human those that require a higher-touch engagement. It’s
touch. As discussed previously, the right level for your important to first determine whether these networks
customer segment will depend above all on their access are running efficiently, and then to deploy them
to digital channels and willingness and comfort to use strategically, supplemented by lower-cost digital
those channels. Many FSPs still work in regions where channels as appropriate.

F I GURE 9. H
UMAN
TOUCH AT KEY MOMENTS IN A DIGITAL LENDING CUSTOMER JOURNEY:
REVISITING THE EXAMPLE
4. The loan is repaid

with the click of a button,
and followed up with a
customized offer.
2. Within minutes, the
customer downloads the 3. The loan is approved 5. Help is available
app and applies with within minutes and 24/7 through chat or
1. The customer finds minimal documentation. disbursed into the call center.
out about the loan via an customer's mobile wallet. When she calls with
SMS blast. a complaint, an
The customer visits a
An agent visits nearby agent to cash agent comes by to
the borrower in out, and to cash in for follow up.
her store to address repayment.
any questions and
help her download
the app.
The bottom line is that human touch is still important, the product level. It can be used to describe every stage
particularly in emerging markets, and can be a key in which a customer interacts with the FSP, i.e. how the
differentiator and competitive advantage for traditional customer learns about a new digital lending product, what
lenders. In many emerging markets where cash is still are the channels that can influence whether they decide to
preferred, FSPs must either build a proprietary network apply, what is the application process, how the customer
to facilitate cash-in and cash-out, or externalize these receives the disbursement and make the repayment,
functions from its business model by partnering with third what types of customer support are available, whether
parties (such as agent networks) that can help convert cash there is a loyalty program for repeat customers, etc. The
into digital currency. If there are no third parties in the customer journey map allows an FSP to visualize all
FSP's operating environment that can take this cash burden touchpoints (both physical and digital, and with internal
off of them, they are forced to drive industry-wide change. staff or with partners) at each stage, and it can help to
That can be an expensive responsibility for many FSPs, identify gaps or areas of significant drop-off, in order to
though those up-front costs could eventually create diagnose challenges and focus support and human touch
returns if they help the FSP become a first-mover. where needed most.
As digital financial infrastructure and literacy continue In the short term, FSPs should leverage the clear,
to advance, and as the usage of mobile wallets becomes competitive advantage of their existing distribution
more common, customers will likely be more willing networks, while ensuring branches and agents are
to use digital channels – and may even prefer the efficiently managed and commercially feasible. However,
convenience these channels offer. The key is for customer as usage of digital channels becomes more common in
engagement to always remain human – that is, focused the long term, there will be an increasing need to offer
on the needs of the end customer. Over time, this will human touch via low cost, digitally-enabled channels. FSPs,
involve a less physical approach, even in emerging markets. therefore, need to build a long-term strategy for 'tech and
A customer journey map is a useful framework from touch' and to consider investments into branch, call center,
which to develop a balanced ‘tech and touch’ strategy at and digital lending channels over the next decade.

Digital lending implementation involves new
and different skill-sets and competencies,
which traditional FSPs may lack. Partnerships
are an important way to supplement an FSP’s
lending model with specialized skill-sets and
in depth experience in a particular aspect
of the lending process.
STE P 4 : IDE N TIFY P OTE N TIAL PARTN ERS T H AT

CAN SUP P L E M E N T YOUR DIG ITAL OFFERING
Digital lending implementation involves new and different

• Customer preferences – Digital lending is not one
skill sets and competencies that additional FSPs may lack.
size fits all. FSPs need to assess their customer segments’
Partnerships are an important way to supplement an FSP’s
willingness and ability to engage with digital products,
lending model with specialized skill sets and in depth
and design their processes accordingly. This begins with
experience in a particular aspect of the lending process.21
understanding target customer needs (often during the
They can help FSPs gain access to new market segments,
Digital Readiness stage), designing the customer journey
create new offerings for existing customers, improve
to include a strategic mix of physical and digital touch
their competitive position and product efficiency, deepen
points, and developing products and services that build
customer engagement and product usage, and drastically
in effective human touch.
reduce time to market. The following chart describes what
• Data availability – As noted above, digital data types of partnerships an FSP could pursue to support core
drives digital lending. FSPs must carefully consider functionalities at specific stages of the lending process.
what additional data is available in their markets
that can support customer targeting, evaluation, and
communication, and plan accordingly. This data
should supplement existing institutional data to support
more informed decision-making. FSPs can start by
integrating alternative data into credit processes in a
manual manner (e.g. uploading and cross-referencing
the additional data, such as an applicant’s tax ID from
a national database, without developing APIs and
automated integration into internal systems).
21. For more information on how financial institutions and fintechs are partnering for financial inclusion, read the recent report by
the Center for Financial Inclusion, ‘How financial institutions and fintechs are partnering for financial inclusion’: http://www.
centerforfinancialinclusion.org/publications-a-resources/browse-publications/872-how-financial-institutions-and-fintechs-are-
partnering-for-inclusion

F I GURE 10. POTENTIAL PARTNERS FOR DIGITAL LENDING
CUSTOMER APPROVAL & DISBURSEMENT & COLLECTIONS CUSTOMER

ACQUISITION ANALYTICS REPAYMENT ENGAGEMENT
•M
NOs • Alternative data • Agency networks • Specialty collections • E-Commerce
scorers companies platforms
POTENTIAL PARTNERS
• Agency networks • Digital wallets

•E
-Commerce • Digital lenders w/ • MNOs • Score providers • Social platforms and
platforms advanced scoring • Suppliers to applications
• Payment aggregators
capabilities applicant, e.g. • Third-party call
•S
upply chain
distributors • Psychometric wholesalers to centers
assessment service retailers • Marketing specialists
• Payments businesses providers
• Retailers/FMCGs • Customer engagement
platforms
•L
ower cost of • Advanced, highly • Lower cost channels • Reduced labor for • Leverage social
acquisition – access specialized analytics – leverage existing collections – focused features to improve
to ‘prequalified’ that would be networks efforts customer experience
segments difficult to develop in • Relieves pressure • More effective • Drive increased
BENEFITS
•D
igitization of house on branch network, collections strategy remote account
application data • Opportunity to promotes rural management
leverage additional business
•E
nhanced and • Helps cross-selling
simplified customer data sources through • Quickly drives opportunities
experience fintech partnerships operational
• Can decrease time efficiencies
to market for digital
products
Capital Float is FINCA is partnering M-Shwari loans are True Accord operates Loan Frame offers
EXAMPLE
partnering with with First Access underwritten by CBA a data-driven debt a blog and loan
Flipkart in India for for support in data but disbursed and collection platform counseling to SMEs
customer acquisition maintenance and repaid via Safaricom’s powered by machine that it then connects to
scoring M-PESA mobile money learning and partner lenders
customized digital-
first communications
Some partnerships support digital readiness activities Finding and working with the right partner can be complex
across all stages of the lending process, and are, thus, and challenging. FSPs should conduct a market scan to
fundamental for institutional digital transformation, identify potential partners. FSPs should ask themselves:
e.g. companies that provide electronic document Which service providers are available in our region? Do
management, process automation services, agent they have experience in our market, with similar FSPs,
network management, mobile and web design and or with similar lending models? It’s important to select a
development, etc. partner with technical and regional experience that clearly
understands the FSP’s needs and is willing to work to make
FSPs should honestly review their competencies in
the partnership a success. Yet it can be difficult to find the
the digital lending process, specifically the systems
right partner for the right price. Striking the right balance
and skills required, and identify business-critical areas
requires a clear proposal outlining the FSP’s requirements
of strength versus competency gaps or activities that
and expectations, as well as a rigorous selection and
could be outsourced to a specialized partner or fintech
evaluation process by a multidisciplinary team to assess
to expedite delivery. An FSP’s strengths might include a
compatibility, competence, and competitive advantage.
good understanding of customer segments, a strong
brand, a wide range of product offerings, and a high-touch
physical distribution network, which is often important
in an emerging market context. Access to funding and
licensing are also big advantages, particularly as
compared to fintechs.

Partnerships involve commercial, cultural,
infrastructural, and legal considerations, and
can suffer from mismatched expectations,
insufficient internal resources, loss of control,
or lack of commercial clarity.
Partnerships involve commercial, cultural, infrastructural, and • Unclear roles can limit accountability, particularly
legal considerations, and they can suffer from mismatched for complaint resolution.
expectations, insufficient internal resources, loss of control, or
• Operational challenges, like reconciliation issues
lack of commercial clarity. Common examples of challenges
between the two institutions’ systems, can further
that FSPs may encounter include:
complicate the process.
• Limited partner availability in emerging markets
– particularly for acquisition. It can be difficult to find • Reputation issues – if the partner interacts poorly with
partners that have market knowledge and local context. customers, then their behavior can damage the FSP’s brand.
Often, available partners such as MNOs have monopolies,
• Cultural challenges – FSPs and fintechs often vary
which can make partnerships one-sided and expensive.
in terms of work culture, with many FSPs emphasizing
• Potential competition – as regulators continue to methodical execution according to well-defined processes
introduce new banking licenses, some FSPs worry that they that may have been developed and validated over time,
may lose customers if their partner starts offering credit – in contrast to the test-and-learn approach common to early
especially if the partner is the main acquirer and interface stage start-ups.
with the customer. Customers sometimes have confusion as
As noted above, clearly defining roles and developing
to who the actual provider is.
commercial agreements that incentivize both parties is crucial
• Loss of control/understanding of core functions to mitigating these challenges. FSPs should also apply a
that are outsourced to the partner can limit an FSP’s ability collaborative approach to build internal capacity and ensure
to make changes and foster dependency on the partner. they do not lose touch with core aspects of the business.

Digital lending represents a significant
cultural and operational change at every level
of an organization, which requires thoughtful,
comprehensive change management. This
includes clear C-suite support, appropriate
resourcing, and consistent and frequent
communication with all stakeholders.
STE P 5: PR IOR ITIZ E A N D B U I L D A R OA DM AP TO An ‘innovation SWAT team’ composed of high-achieving

DIG ITAL M ATUR IT Y OVE R T I ME and technically minded staff across commercial,
operational, and IT departments can be free to focus all
Once an FSP has built a strong foundation of digital
their effort on the one (enormous) task at hand and be
readiness, defined their digital lending goals and ‘tech and
allowed to ‘fail fast’ and iterate until they create a highly
touch’ channel strategy, and identified potential partners,
desirable and viable product. Required skill sets for this
they can take specific actions to improve their digital
team may vary, but they should include creative problem-
maturity at each stage of the lending process. This will
solving and analytical skills, in addition to cross-functional
not happen overnight: FSPs should build a clear roadmap
subject matter expertise. A separate unit can also serve to
that takes a phased approach, builds core competencies
align staff incentives, since other business verticals will
first, and works within the existing parameters of the
have competing KPIs, and contain costs. While incubating
organization and accounts for customer preferences. A
a separate unit can help foster innovation, integrating the
roadmap facilitates long-term, organization-wide planning,
group into the core business at a later stage can still be
strategic thinking beyond annual budgeting cycles and
a challenge and must be handled carefully.
departmental silos, and takes into consideration multi-year
dependencies between projects to achieve what may seem Each time an FSP advances in digital maturity, there
today as fairly ambitious goals for the FSP. It also allows is an important opportunity to revisit its digital lending
for better cross-functional alignment in achieving these objectives and further optimize processes. As FSPs continue
goals, which is crucial given the complexity of most the digital transformation process, they must remain
digital initiatives. Again, not all FSPs will aspire for the focused on delivering an enjoyable customer experience.
‘Digital Plus’ Maturity stage; every FSP's roadmap will
depend on their individual customer segments and CAUTION! POTENTIAL CHALLENGES
organizational goals.
One tactic that can be effective, especially in early stages,

• Change management – Digital lending represents
is to dedicate a separate unit within the FSP that has sole
a significant cultural and operational change at every
responsibility as a standalone business vertical to prepare
level of an organization, which requires thoughtful,
for, pilot, and implement digital lending – with the intent to
comprehensive change management. This includes clear
integrate the unit with the rest of the team at a later stage.
C-suite support, appropriate resourcing, and consistent
This approach addresses two specific challenges: 1) staff
and frequent communication with all stakeholders.
are often over-committed across different projects, whereas
designing and implementing a digital lending product • Pilot, pilot, pilot – Pilots are essential to test out
requires a single-minded focus; and 2) digital lending also processes and products with customers and staff, but
requires a different mindset from ‘business as usual,’ and are too often skipped or not properly resourced. Set
staff can find it difficult to operate in both ‘modes’ and monitor key metrics, and adjust product design
simultaneously. and delivery accordingly before full-scale roll out. A
major consideration is the manner in which to pilot –
whether enabling an autonomous, separate unit within
the corporate umbrella as discussed above, or driving
through existing teams and infrastructure.

P U TTING IT ALL TO G E T HE R : A CA S E S T U DY
This next section presents a representative case study of a pilot launch of a digital lending product at a traditional FSP,
synthesizing recommendations and lessons learned from the typical challenges encountered in this process, outlined in
steps one through five above.
DIGITAL LENDING CASE STUDY: MIRACLE MICROFINANCE INSTITUTION
Miracle is a mature microfinance institution (MFI) with STE P 1 : ASSE SS AN D BUIL D YOUR DIG ITAL
more than ten years of experience in their market, over R E ADIN E SS
40,000 borrowers and more than 100,000 savers. They
There wasn’t a coordinated effort to assess Miracle’s
provide a number of products and services, including
institutional readiness to support the development of a
five loan products and three savings products, offered
digital lending product or its roll out. This manifested as:
through 60 branches across the country and accessible
via an ATM network. Recognized as an industry leader • Inconsistent support of senior management: While
in their country, they are constantly looking for Miracle’s senior management team was enthusiastic
opportunities to innovate further. about the product idea, they were ultimately unable
to commit dedicated resources or sufficient budget
Miracle MFI recently rolled out a mobile savings-based
to its execution.
credit product aimed specifically at low income
entrepreneurs. The outcome of several years of • Insufficient staff capacity and skills: Miracle
discussions at Miracle to launch a digitally enabled leveraged existing staff to support the product
product, it had two key business objectives: roll out, but didn’t reduce their current workload
or adjust incentives. Staff were overloaded, with
• To attract new, lower-income customers, who are too
no motivation to prioritize work on the new
expensive to serve with Miracle’s standard credit
product, leading to challenges in alignment and
methodology
accountability. In addition, the staff assigned to
• To attract new deposits for the bank in a cost- the core project team rotated frequently due to
effective way competing priorities. There was a significant gap in
key skills required to make the product a success,
While originally envisioned as a pure savings product,
particularly marketing and project management skills.
Miracle ultimately designed a saving-led credit product,
with the assumption that the credit-proposition would • Legacy organizational culture and structure: While
be more attractive to customers than just savings. open to innovation, the Miracle management team
The product was developed in partnership with a local tended to be results-oriented and risk-averse. This is
MNO, whose network was used to identify and reach important to efficiently grow the business, but can
out to potential customers via targeted SMS broadcasts. make it difficult to take some of the short term risks
Customers were identified based on airtime usage and required to test a new product. In addition, Miracle’s
were then prompted to register via USSD and save a leadership didn’t create an organizational structure
minimum amount (on average equivalent to USD $50) to support full cross-functional collaboration and
over a period of three months. Successful completion enable a quick turnaround time, which had an
of the three-month savings goal entitled customers to impact on product delivery.
a loan of up to twice the amount saved.
• Process mapping and systems review were conducted
Initial results have been disappointing. Over the course retroactively after the launch of the product, and took
of two months across the two pilot regions, 20,000 much longer than expected. While the product’s
customers have been contacted, 350 accounts were overall systems were sufficient, there were some
opened, and 15 savings plans started. Categorizing the challenges with API integration.
key challenges faced according to the five-step process
outlined above yields several lessons learned.

DIGITAL LENDING CASE STUDY: MIRACLE MICROFINANCE INSTITUTION cont.
STE P 2: S ET YOU R DI G I TA L L E N DI N G G OAL S STE P 3 : DE FIN E YOUR ‘ TE CH AN D TOU C H ’ OR

A ND OBJ ECTIV E S CHAN N E L STR ATE G Y
While specific product objectives were set, neither While Miracle MFI did deploy a mix of ‘tech and touch’
leadership nor staff had a clear understanding of the channels to reach clients, customers encountered
digital lending product’s overall strategic goal for the significant friction when using the product that reduced
institution, how it aligned with the mission, and how acquisition and led to drop-off. The graphic below
the product would affect Miracle’s current culture and depicts key challenges, with sample conversion rates
working environment. As noted above, it’s critical to at each step for the digital lending product:
differentiate 1) between the lender’s objectives and the
customer value proposition, and 2) between long term 2. Attempt USSD Registration 4. Receive Call 6. Sign Savings Plan 8. Get Loan
and pilot objectives.

1. Receive SMS 3. Register TIER 1 5. Visit Branch 7. Save for 3 Months
For example, Miracle’s management team was very
focused on product profitability, which drove financial
projections and informed crucial pilot decisions.
Last-minute decisions were made to cut marketing
expenditure and increase the interest rate to prevent
losses: this limited Miracle’s ability to attract customers 100% 0.03% 27% 53% 3% 40% 40% 50%
and test the product proposition. Furthermore, the shift

in product objectives (from savings- to credit- led) also
• Limited ‘touch’ at the acquisition stage: Product
contributed to confusion around the product’s ultimate
marketing relied heavily on SMS notifications to a
business goals.
broad spectrum of potential clients via the MNO
Combined, these issues contributed to an overall partner. This proved to be an ineffective strategy for
customer value proposition that was unclear and the target segment, due to cultural preferences for
lacked sufficient customer incentives to drive usage. in-person sales combined with low digital and
This compounded communication and conversion financial literacy. While eight marketing storms were
challenges at each stage of the processes; the dual planned, half were cut due to budget. The marketing
savings/credit value offer was difficult to communicate storms that were executed were outsourced, and led
to customers and proved to be less attractive to clients to low levels of conversion (see Step 4).
than anticipated. While the Miracle team had a general
• Branch visits created friction in the customer
sense of the type of client the product should target,
journey: Customers were required to physically
limited market research was done to validate the needs,
visit branches to submit KYC documents and sign
priorities, and preferences of this new segment.
a savings plan. This step was inconvenient for
customers, and led to a high drop-off rate.
• Physical branch infrastructure was centralized in

the capital, and Miracle MFI had no agent network.
The physical touchpoints required by this digital
lending product’s customer journey would make it
difficult for the product to scale.

DIGITAL LENDING CASE STUDY: MIRACLE MICROFINANCE INSTITUTION cont.
STEP 4: IDENTIFY POTENTIAL PARTNERS THAT STE P 5 : P R IOR ITIZ E AN D BUIL D A R OAD MAP
CAN SUPPLEMENT YOUR DIGITAL OFFERING TO DIG ITAL M ATUR ITY OV E R TIM E
Miracle MFI relied on a number of partnerships to Miracle MFI was able to ‘fail fast’ and quickly decided
design and roll out the digital lending product. This it would use the pilot to identify key learnings in
included an MNO, a marketing vendor to lead market order to pivot the product offering. Concurrently,
storms, a call center for sales, and a technology it revisited its strategy and conducted a deeper
developer who designed the USSD solution. These customer segmentation to develop a cross-functional
commercial agreements lacked clear structure to roadmap identifying key gaps and dependencies.
ensure quality deliverables from partners, with the This allowed Miracle to prioritize and sequence the
following results: activities required to deliver on its long term strategy
for digital lending. It is now on the path to achieving
• Incentives were often misaligned or poorly
its ambitious goals with a better understanding of
designed. For example, the marketing vendor
the complexity inherent in a successful digital
and the sales call center had contracts based
transformation.
around activity completion (making calls, leading
marketing storms), rather than conversion. As such,
their services resulted in little to no conversion.
• The end client experienced brand confusion and

inconsistent service. Miracle’s partners provided
an inconsistent customer experience that had an
impact on Miracle’s reputation. Limited training
was provided to partner agents, which led to
mixed messages and sometimes poor service.
• Many of Miracle’s partners were delayed in their

deliverables. Reporting parameters weren’t
included in initial contracts, making it difficult
to get information about progress to date.

AC C ION
6.0 IN S IG HT S
Looking Ahead
Considering how dynamic digital lending is, how quickly contributing and competing technologies arise, the
unforeseen ways that those technologies interact with one another, and broader changes to regulations and
economies, predicting what’s next for digital lending is a difficult – if not impossible – challenge.
The on-the-ground realities of implementing digital lending can be even more challenging than predicting its future. We
want to be up front about those challenges, and find and share solutions whenever possible. There is a way forward!
Despite the challenges, we are confident that digital lending is here to stay, that it will help FSPs streamline operations
and create better products, and that it will ultimately help many FSPs extend high-quality financial services to underserved
communities. With three billion people left out of or poorly served by the formal financial sector, digital lending
represents a powerful new solution for helping to create a financially inclusive world and for creating a financial
system that works for everyone.

AC C ION
7.0 IN S IG HT S
Appendices
A. RESEARCH METHODOLOGY
To generate the insights and analysis included in this report, we conducted the following activities:
• Literature review of key publications and secondary research on trends in digital lending in emerging markets,
including ‘How FIs and Fintechs are partnering for Inclusion’ (CFI), ‘Introduction to Digital Credit’ (CGAP),
‘Alternative Data Transforming SME Finance’ (IFC), ‘Data Analytics and Digital Financial Services’ (IFC).
• Primary qualitative research interviews with more than 35 MFI executives, fintech executives, experts in
microfinance research and consulting, experts in providing technology assistance to FSPs, investors, risk and
compliance experts in emerging markets, and Accion staff
• Desk research into more than 30 digital lending business models
• Survey of 41 senior and mid-level managers at MFIs
B. DIGITAL LENDING MODELS
EXAMPLES
DIGITAL LENDING MODEL
SME CONSUMER
Online lenders provide end-to-end digital lending products directly to the customer Capital Float Branch
online or via a mobile app. Customer acquisition, disbursement, and account
management processes are usually fully digital, and underwriting is conducted using Konfio Tala
advanced scoring and alternative data provided by the customer. This model is heavily Lidya
reliant on the quality of scoring and is specifically designed such that there is no need
for face-to-face contact or even for customers to call into a call center. Lulalend
P2P platforms facilitate the provision of digital credit between many borrowers CreditEase
and institutional or individual lenders, and play a central role in managing their
relationship. The P2P lender usually designs the product, scores the borrower, and KwikCash
may support the repayment and collection processes. Funding is provided by the lender,
with the platform taking an origination fee or a cut of the interest income. Some P2P
platforms take the risk of nonpayment and bear the loss; others build a loss reserve
fund for the portfolio, from fees taken at loan disbursement, etc.
While the core business of e-Commerce and Social Platforms is not the provision of Amazon Alipay
credit, they leverage their digital distribution, strong brand, and rich customer data
to offer credit products to qualified borrowers from their customer base. While some Flipkart WeChat
simply act as an origination platform for a third-party lender, others offer end-to-end
solutions, including funding. For these platforms, the pressure for the customer to repay
comes from a desire to continue using the platform’s primary services. Poor repayment
habits will show up on the customer’s record and lead to exclusion from the platform
for purchases or activity.

EXAMPLES
DIGITAL LENDING MODEL
SME CONSUMER
Marketplace Platforms originate and match one borrower with many, often Loan Frame Creditas
institutional, lenders. Lenders use the platform as an acquisition channel, whereas
borrowers use it to access a wide range of lending products at competitive pricing.
Many marketplace platforms offer independent credit and risk assessments that
leverage non-traditional data, whereas lenders control product design and provide
funding. These platforms take an origination fee; after the disbursement of funds,
the customer relationship is directly with the lender.
Supply Chain Lenders provide digital loans for specific asset financing, invoice Tienda Pago M-Kopa Solar
financing, or pay-as-you-go asset purchase within a supply chain or distribution
network. These firms typically offer closed-loop lending products, where they partner
with players within the supply chain or distribution network to acquire customers,
access data, and make loan decisions. Repayment is often enforced through penalties
exerted by the distribution network; for example, the wholesaler or distributor may
withhold inventory or asset suppliers may turn off utility functionality.
Mobile Money Lenders partner with mobile network operators (MNOs) to offer credit Kopo Kopo Airtel
to their customer base. These lenders acquire customers from the MNO network, use
transactional or phone data for scoring, and disburse to a mobile wallet. The digital Safaricom Jumo
interface is supplemented by a physical agency network for cash-in and cash-out.
Loan sizes often start small, due to limited data points on the customer, but increase
dramatically as the customer repays and builds credit history with the lender.
Tech-Enabled Lenders are legacy financial services providers that have embraced Accion Equity Bank
technology to digitize parts of the lending process, either in-house or through Microfinance Kenya
partnerships. This could include adding digital acquisition channels, digital Bank
disbursement and repayment via bank account or mobile wallet, and digital account
management. This is supported by a physical distribution network for a blended AYE Finance
approach of technology and human touch. FINCA

C. REGIONAL TRENDS
Structural factors within different regions and individual countries play a significant role in the ability of FSPs to
develop digital lending solutions. Some noteworthy regional trends are highlighted below:
Latin America
In Latin America, the current enabling environment is ripe for digital innovation.
Policies mandating electronic invoicing have been implemented throughout the
region, substantially increasing access to digital transactions and detailing vendors’
cash-flows and repayments. Peru and Ecuador have seen successful launches of
government initiated interoperable mobile money platforms. In addition, there has
been an increasing number of non-exclusive agent networks that serve multiple
FSPs in Latin America. Nearly 40% of fintech services are focused on serving un/
underbanked MSMEs, and merchant lending and payment models that cater to
retailers is on the rise (e.g. Tienda Pago in Peru). Finally, non-cash payments volume22
and, in particular, the usage of mobile financial services are both growing: there are
currently 17.3 million mobile money accounts with 47% active. As of December 2014,
over one quarter of all mobile money transaction volumes in Latin America involved
third parties, such as bill payments and merchant payments, up from 14 percent in
2012.23 This growth has been supported by the proliferation of ‘cuentas basicas’ (basic
accounts) that have low KYC requirements and can be opened via mobile channels.
Africa
MNOs are strong players in Africa’s financial inclusion market and have buoyed the
evolution of mobile payments throughout the region. Because of this, Africa has seen a
new wave of partnerships between MNOs and FSPs (e.g. MTN Mobile Money, Safaricom,
and CBA from mShwari), but revenue sharing agreements can be a source of tension
between large MNOs with strong negotiating power and fintech startups or small FSPs.
Further enabling more digital lending activities, most digital products are designed
for USSD. However, even though there is a push to develop tools and support for
financial services, the growth of digital lending in Africa will likely be hampered
as digital financial literacy remains low. In addition, the aggressive use of SMS
marketing for nanoloans has been linked to rising defaults in the region. Finally,
Microsave studies in Kenya have revealed the importance of human intervention
in repayment and collections, emphasizing again the need for responsible lending
and a blended ‘tech and touch’ approach when appropriate.
22. 'Non-cash Payments Volume' Capgemini, February, 2018: http://www.worldpaymentsreport.com/#non-cash-payments-content

23. 'New GSMA Report Finds that Latin America and the Caribbean Have Fastest Growth in Mobile Financial Services Globally' GSMA,
May, 2015: http://www.gsma.com/newsroom/press-release/gsma-report-latin-america-caribbean-fastest-growth-in-mobile-financial-
services-globally/

India
India Stack is a powerful public digital identity, payments, and documentation

infrastructure that is highly conducive to digital lending. It was created by the
government in 2010 and is creating a new age of paperless, frictionless, and low cost
financial transactions. The root of this system is Aadhaar, which uses biometric data
for unique identification and will soon be linked to secure document verification
for e-KYC and e-signatures.
The Aadhaar Enabled Payments System (AEPS) supports online transactions through
any bank. There is also high smartphone penetration and a focus on design for
digital financial services which adds to and complements India’s enabling regulation.
Increasing rates of DFS usage indicates an advancing digital maturity of users. Finally,
collaboration between banks and fintechs is on the rise, as is an increasing application
of artificial intelligence, machine learning, and blockchain in the lending space.
China
China’s e-commerce and social platforms, namely Alibaba and WeChat, leverage
deep data that has transformed digital banking. They use this data to originate, score,
lend, and create a seamless online experience, backed by recently acquired banking
licenses. These non-bank giants dominate lending – Alibaba and WeChat’s total
number of clients match or exceed China’s top banks. Elsewhere, traditional retailers
often collaborate with financial institutions to offer digital credit. In China there is a
high cultural willingness to share personal information and adopt mobile technology.
New fintechs are taking advantage of this trend and targeting niche markets like rural
SMEs, agricultural supply chains, or specialized consumption (education or salary).
This has led to near universal merchant acceptance of mobile payments (using QR
codes) which can support a cashless economy. ‘Right touch’ regulation policy is
conducive to new business models.

D. CONSUMER RISKS IN DIGITAL LENDING
The transition to digital lending brings out new risks for consumers and ongoing risks may manifest themselves in new
ways. Digital lenders will want to prevent or mitigate such risks as they design their products and consumer interfaces.
This table notes a few salient risks, with suggestions for addressing them, based on the Client Protection Principles
promoted by the Smart Campaign.24
CLIENT PROTECTION PRINCIPLE RISKS IN DIGITAL LENDING AND SUGGESTED PREVENTION MEASURES
Appropriate Product Design and Digital lending can be easy and fast, and borrowers are susceptible to “push”
Delivery marketing and fraud. Lenders are advised to give customers time to reconsider
borrowing decisions, e.g. “cooling off periods”.
Careful customer segmentation may reduce the drive towards aggressive marketing.
Clear communication with borrowers can help them differentiate fraudsters from
legitimate lenders.
Prevention of Over-Indebtedness Where possible, lenders engaged in refining new credit algorithms should consider
not penalizing or reporting early defaulters to credit bureaus for small infractions.
When offering small, short-term loans, lenders can protect customers from debt
traps by mandating a “resting” period with no outstanding loans every few cycles.
Algorithms should take into account repayment capacity.
Transparency It is very important, though often especially challenging, for lenders to present prices,
terms, and conditions clearly on digital interfaces. However, well-designed interfaces
can increase uptake.
Small digital surveys offer simple ways to confirm customer understanding.
Responsible Pricing As technology brings down the cost to serve, lenders should look for opportunities to
pass on those savings to consumers.
Fair and Respectful Treatment Algorithms are intended to avoid human biases, but biases can appear. Algorithms
should be reviewed from time to time to see whether they introduce unwanted
discrimination.
Data Privacy Lenders are advised to seek consent from consumers for the use and sharing of their
data. Given the security vulnerabilities that researchers have noted,25 lenders are also
advised to perform thorough data security audits.
Complaint Resolution Problem resolution systems need to be available to consumers, preferably including
some ability to speak directly to a person.
Lenders are advised to inform customers frequently about how to resolve problems.
24. The Smart Campaign is a global campaign to embed a set of client protection principles into the fabric of the financial inclusion
sector. http://www.smartcampaign.org. For more details, see “Tiny Loans, Big Questions: Client Protection in Mobile Consumer Credit,”
Smart Campaign Brief #1, 2017.
25. Patrick Traynor, “Digital Credit and Data Security,” Center for Financial Inclusion. Forthcoming, 2018.

Accion would like to thank the Citi Foundation for supporting this paper. The
Citi Foundation works to promote economic progress and improve the lives
of people in low-income communities around the world. The Citi Foundation
invests in efforts that increase financial inclusion, catalyze job opportunities
for youth, and reimagine approaches to building economically vibrant cities.
The project team would also like to thank the many others who provided
guidance and editorial insights for the creation of this report, particularly
Accion Global Advisory Solutions team members Priya Punatar and Chrissy
Charlton, for their contributions and expertise.
This paper was written by Accion’s Global Advisory Solutions team, which
provides experienced operational and management support to strengthen
our partners and maximize their impact. We leverage innovations to increase
the quality and lower the cost of financial services, and thus help to build
sustainable and scalable institutions focused on serving the financial needs
of underserved individuals and small businesses.

Accion
10 Fawcett Street, Suite 204
Cambridge, MA 02138
Tel: +1 617.625.7080
Toll Free: 800.931.9951
Fax: +1 617.625.7020
accion.org
Accion is a global nonprofit committed to creating a

financially inclusive world, with a pioneering legacy in
microfinance and fintech impact investing. We catalyze
financial service providers to deliver high-quality,
affordable solutions at scale for the three billion people
who are left out of – or poorly served by – the financial
sector. For more than 50 years, Accion has helped tens
of millions of people through its work with more than 90
partners in 40 countries. More at http://www.accion.org.
The suggested citation for this paper is: Amy Stewart, Please share this with your colleagues.
Kathleen Yaworsky, Paul Lamont: “Demystifying
Accion welcomes your comments on this paper.
Digital Lending: How Digital Transformation Can Help
Financial Service Providers Reach New Customers, All Accion publications are available on the
Drive Engagement, and Promote Financial Inclusion” Accion website: http://www.accion.org
Accion. Cambridge, MA: April, 2018.

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AC C I O N

Accion Global Advisory Solutions Page 1

Page 2 Demystifying Digital Lending

Accion Global Advisory Solutions Page 3

Amy Stewart, Senior Manager, Global Advisory Solutions

Page 4 Demystifying Digital Lending

Demystifying Digital Lending

Accion Global Advisory Solutions Page 5

Introduction: What’s the Big Deal

FIGURE 1. DIGITAL LENDING CUSTOMER JOURNEY: AN ILLUSTRATIVE EXAMPLE

4. The loan is repaid

Page 6 Demystifying Digital Lending

Accion Global Advisory Solutions Page 7

We review digital lending in five sections:

SECTION 1.0 SECTION 4.0

“What does digital lending really mean?” elaborates

Page 8 Demystifying Digital Lending

What Does Digital Lending

Accion Global Advisory Solutions Page 9

FIGURE 2. THREE CORE COMPONENTS OF DIGITAL LENDING

FOCUS ON CUSTOMER EXPERIENCE

Page 10 Demystifying Digital Lending

5. ‘Digital Field Applications Case Study’ Accion, September 2015: http://www.accion.org/content/new-case-study-impact-digital-field-

Accion Global Advisory Solutions Page 11

FSPs that provide end-to-end digital lending products via a website or

Page 12 Demystifying Digital Lending

FIGURE 4. TYPICAL FEATURES OF DIFFERENT TYPES OF DIGITAL LENDING PRODUCTS

PRODUCT CREDIT POTENTIAL PENALTY OF IMPLICATIONS FOR IMPLICATIONS FOR

• Short term, • Focused on •M

• Longer • Focused on • ‘Digital footprint’ Immediate • Thorough • Application,

Accion Global Advisory Solutions Page 13

Page 14 Demystifying Digital Lending

7. ‘The Mobile Economy: Sub-Saharan Africa 2017’ GSMA, 2017: http://www.gsmaintelligence.com/

Accion Global Advisory Solutions Page 15

Page 16 Demystifying Digital Lending

The Digital Lending Process

F I GURE 6. THE DIGITAL LENDING PROCESS

CUSTOMER APPROVAL & DISBURSEMENT &

Accion Global Advisory Solutions Page 17

Page 18 Demystifying Digital Lending

APPR OVAL & A NA LY T I C S

At the heart of digital lending is the potential for lenders

Accion Global Advisory Solutions Page 19

D IS BUR S EME N T & R E PAY M E N T COL L E CTION S

Once approved, Grow is electronically disbursed in 24

Page 20 Demystifying Digital Lending

between the FSP and the client, it is important to protect

At the heart of this is a lender’s desire to understand a

Accion Global Advisory Solutions Page 21

How ‘Digital’ Is Your Institution?

Page 22 Demystifying Digital Lending

CUSTOMER APPROVAL & DISBURSEMENT & COLLECTIONS CUSTOMER

• Acquisition process • Little or no use • Combination of • Limited data • Customer can

• Lender capable of • Use of basic • Primarily digital • Data-driven • Customer manages

(e.g. SMS, internet, checks to confirm scorecard developed documents). Physical

cultural preference. entirely automated Intelligence). need to come to a

Accion Global Advisory Solutions Page 23

Page 24 Demystifying Digital Lending

STEP 1: STEP 2: STEP 3: STEP 4: STEP 5:

5. ‘Digital Field Applications Case Study’ Accion, September 2015: http://www.accion.org/content/new-case-study-impact-digital-field-

• Short term, • Focused on •M

• Longer • Focused on • ‘Digital footprint’ Immediate • Thorough • Application,

7. ‘The Mobile Economy: Sub-Saharan Africa 2017’ GSMA, 2017: http://www.gsmaintelligence.com/

• Acquisition process • Little or no use • Combination of • Limited data • Customer can

• Lender capable of • Use of basic • Primarily digital • Data-driven • Customer manages

• Agency networks • Digital wallets