How FinTech solutions are reviving the microfinance sector

The use of technology for delivering financial services to customers is giving a new life to the high-risk sector of microfinance.


The use of technology for delivering financial services to customers is giving a new life to the high-risk sector of microfinance.

A market niche

The microfinance sector emerged as a response to the need of providing banking services to low-income individuals or people with limited resources. It allows them to take reasonable small loans under ethical and legal lending practices until they are able to gather the resources to return the money, and this loan model has been quite successful in the last years. However, despite the popularity of micro loans to borrowers, banks and big financial institutions have been avoiding them due to the high risks and the low profitability associated with the small size of the operations and the time it takes to get them regulated. As a result, companies spotted a niche in the market, and started delivering innovative financial services through technology, revolutionizing and giving a new life to the microfinance sector.

Traditional microfinance

Traditional banking loans usually involve an increased regulation due to the fact that other customers' money is involved, and because individual and small businesses are considered riskier than their larger counterparts. On the other hand, many times banks don't find financial sense in delivering micro loans, because it costs them the same to underwrite a bigger loan as it does a smaller one, so they aren't making much profit out of it.

New generation of personal micro loans

The emerging needs of the market gave place to a new generation of digital financial companies specialized in delivering micro credits to individuals. In Spain, a person can usually solicit a first loan for any sum between 50 EUR and 300 EUR, and the quantity can reach up to 1000 EUR once he has proven that he is eligible to repay. The maximum amount for a personal micro loan can vary between countries and companies, but it rarely exceeds 2000 EUR.

As opposed to the traditional microfinance sector, the new, digital generation of individual loans provides a much faster and comfortable service. Without having to provide any collateral, individuals are able to solicit a loan by only meeting a few basic legal requirements, such as verifying their identity and be a local cardholder in the corresponding country. By filling out a simple form that evaluates their capability to repay, borrowers are able to have their micro loan approved in a matter of minutes, from the comfort of their own home.

Additionally, many companies provide easy management of online credits, with the possibility to extend the due date or the solicited quantity. By using massive amount of data, they conduct risk assessments that determine how likely the borrower is to repay the loan, and they speed up the lending process in order to provide a faster and better service.

The role of FinTech in the microfinance sector

Despite the fact that customers are only able to see the end result of the digital payment process, which is the payment form and the payment orders, there is a whole lot more going on behind the scenes. Because digital payment solutions have a complex algorithm that should be protected by strict security standards, many microcredit platforms choose FinTech companies to deliver the necessary software. This software makes the delivery of solicited loans faster and easier, and provides an additional layer of security when handling credit card data.

The FinTech companies, more specifically the ones dedicated to the development of digital payment services, are playing a key role in the microfinance sector. They are a vital part of reshaping the traditional banking services by providing innovative ways to handle transactions, store and tokenize credit card data. Additionally, the amount of information they gather give them a better insight of the customer behavior, and allows for improvement in the overall service.

Moreover, one of the biggest concerns when it comes to handling and storing credit card data is security, and FinTech companies are well aware of that. And even though 80% of the organizations are still noncompliant with the official security standards PCI-DSS, some FinTech are strictly following the best practices to protect the customer data. These practices improve the microfinance ecosystem and create a secure environment where people can safely solicit microcredits completely online.

FinTech solutions for microcredit companies

As individual micro loans are gaining more and more popularity, the importance of implementing efficient and optimally functioning payment solutions is getting bigger. With a vast experience in the microfinance sector, MYMOID provides a payment gateway that adapts to its unique characteristics, delivers a high-quality experience to final customers, and it is fully compliant with the security standards PCI-DSS.

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