Roberto Moro-Visconti - MicroFinTech: Expanding Financial Inclusion with Cost-Cutting Innovation

Microfinance is a renowned albeit controversial solution for giving financial access to the unbanked , even if micro-transactions increase costs, limiting outreach potential. The economic and financial sustainability of microfinance institutions (MFIs) is a prerequisite for widening a potentially unlimited client base. Automation decreases costs, expanding the outreach potential, and improving transparency and efficiency . Technological solutions range from branchless mobile banking to geo-localization of customers, digital/social networking for group lending , blockchain validation, big data , and artificial intelligence , up to MicroFinTech FinTech applications adapted to microfinance. This study examines these trendy solutions comprehensively, going beyond the existing literature and showing potential applications to the traditional sustainability versus outreach trade-off.

Microfinance is by now a consolidated and successful mean to provide credit to the neediest. Going beyond traditional banking , it helps the poor to sort out bank exclusion, which is one of the main misery traps (Collier, ) that prevents billions of underserved, especially women , from escaping atavistic poverty.

While the success of microfinance, since the pioneering intuition of Yunus , has gone beyond any expectation, its implementation is still typically subsidized and raises growing concerns. Self-sufficiency and economic sustainability represent, in most cases, a mighty goal, whose attainment would allow microfinance institutions (MFIs) to broaden their clientele (potentially unlimited, being represented by billions of unbanked poor).

Microfinance is a renowned solution for giving financial access to the unbanked , even if micro-transactions increase costs, limiting its outreach potential.

The economic and financial sustainability of microfinance institutions is a prerequisite for the capacity to widen their potentially unlimited client base.

Microfinance, however, suffers from a business model that is typically expensive and inefficient, with high operational fees that, unless subsidized by forward-looking donors , translate to interest rates, up to the boomerang point of promoting poverty, instead of eradicating it. Recent evidence suggests only modest social and economic impacts of microfinance. Favorable costbenefit ratios then depend on low costs (Morduch et al., ).

Consistently with this view, microfinance cannot be a silver bullet for development and profit-oriented MFIs are problematic (better unbanked that unable to repay loans). The business industry remains opaque, and mission drift ) are even more skeptical, arguing that microfinance constitutes a powerful institutional and political barrier to sustainable economic and social development, and so also to poverty reduction.

Technology , starting from electronic payments, may foster financial inclusion and availability/affordability of financial services in developing economies, softening the perverse effects of microcredit (Dos Santos & Kvangraven, ).

While there is an impressive literature on microfinance (for a comprehensive introduction, Armendariz De Aghion & Morduch, ).

This study represents an advance in the debate about the trendy opportunities of microfinance.

Consistently with this framework, the research question is the following: given the economic andorganizational bottlenecksthat prevent an optimal outreach of traditional microfinance, which is the impact onmicrofinance sustainabilityof technology-driven innovation?

Traditional banking systems are unfit for illiterate poor with no guarantees, while ad hoc products, tailored to suit the needs of potentially billions of peculiar and unconventional borrowers, might prove successful in widening financial access, with a positive side effect of reducing inequalities and fostering economic development. Financial innovation and flexibility are key solutions for forms of lending that are collateral , or cash flow -based only to a small extent.