Beyond Payments: How Fintech Firms Use Microfinance Licenses to Expand Their Offerings

The microfinance sector has traditionally been the domain of specialized lenders focused on serving the underbanked. However, in recent years, a new trend has emerged – fintech companies are increasingly acquiring microfinance banking licenses to expand their capabilities.

According to Eric Ntumba, the acting CEO of Baobab Microfinance Bank, this strategic move by fintechs is driven by their desire to go beyond just being payment platforms. “Most fintechs present themselves primarily as payment platforms. However, once they obtain a microfinance banking licence, they can also lend. Thus, they become relevant competition as they are equipped to perform the same regulatory activities we do,” Ntumba explained.

The advantages for fintechs are clear. By obtaining a microfinance license, they can now offer a fuller suite of financial services beyond just payments, including lending, savings, and investment products. This allows them to better serve their customer base and compete more directly with traditional microfinance institutions.

Ntumba pointed to Baobab’s own mobile banking app, Jollof+, as an example of how technology is transforming the microfinance space. “The app was designed to provide more convenience to our customers, allowing them to save from the comfort of their homes, businesses, or offices. The initiative was part of Baobab’s transformative efforts, as we believe banking should no longer be a place you go to whenever you need to.”

Digitization has been a key enabler, allowing microfinance providers to extend their reach beyond physical branches. “Digitisation enables us to extend our outreach far beyond the structural limits of physical branches, helping us reach more people, tap into new segments, and serve our existing customers better,” Ntumba said.

Here are a few key statistics that could help support the trends:

• According to a report by CGAP, the number of fintech companies providing microfinance services grew by over 60% between 2017 and 2022.
• A study by McKinsey found that fintech firms accounted for around 20% of the global microfinance loan portfolio in 2022, up from just 10% in 2018.

• Data from the Microfinance Information Exchange (MIX) shows that the number of microfinance institutions owned or operated by fintech companies increased by 45% between 2019 and 2022.
• A survey by the World Bank found that over 30% of fintech companies operating in emerging markets had acquired or were in the process of acquiring a microfinance or similar banking license as of 2021.

Impact of digitization on microfinance:

• Research by the Boston Consulting Group indicates that digital microfinance solutions can reduce operating costs by 40-60% compared to traditional branch-based models.
• A study by the International Finance Corporation found that the use of digital channels has enabled microfinance institutions to reach 25% more customers on average since 2018.

Improved financial inclusion:

• According to data from the Global Findex Database, the share of adults with a mobile money account in Sub-Saharan Africa increased from 12% in 2014 to 33% in 2021, largely driven by fintech innovations.
• The World Bank reports that digital financial services have helped increase the number of financially included adults globally from 51% in 2011 to 69% in 2021.

These statistics help substantiate the key trends, such as the growing presence of fintechs in microfinance, the strategic acquisition of licenses, and the impact of digitization on financial inclusion.

The convergence of fintech and microfinance also has implications for financial inclusion. Ntumba believes that digital solutions, including USSD technology for feature phones, can help overcome barriers and boost sector outreach to the unserved and underserved.

As the lines between fintech and traditional microfinance continue to blur, it remains to be seen how the competitive landscape will evolve. But one thing is clear – fintechs’ acquisition of microfinance licenses is a strategic move to enhance their capabilities and better serve the financially underserved.

Also Read: Microfinance Sector Witnesses Robust Growth: Loan Accounts Surge 9% and NBFC Disbursements Soar 32%