October 23rd, 2017

Why some FSAs worry about the effects of replacing personal interaction with technology

This is the third blog in a series about Financial Service Associations (FSAs) and their potential for growth and customer value creation based on an FSD Kenya commissioned survey by BFA.  Read the first blog here: Financial services associations: an imperfect solution and the second blog here: FSA asset financing: when paying more yields more.

Like many individuals and institutions that depend on trust and social ties, FSAs are worried about the effects of replacing personal interactions with technology. Will these technological advances propel FSAs to the next level or destroy the social ties that have made them work?

FSAs are rural, community-level, member-based, semi-formal financial institutions. Membership is through purchase of shares.  They rely immensely on social ties to extend credit to members.  Group members guarantee each other’s loans and if one person doesn’t repay, everyone makes up the default from the group’s compulsory savings. The groups meet once or twice a month to gather savings, disburse loans, and collect loan repayments. For FSA’s credit operations, social pressure is key to repayment.

Driven by the current mobile money environment, FSAs are starting to add technology-based services to their offering.  Most of them provide MPESA services to their members – about of Kenyans use mobile money services.  Some FSAs have paybill numbers that customers can use to conduct business transactions with the FSA.

When BFA interviewed FSA members, there was widespread consensus that technology would improve their experience with FSAs.  One of the areas identified where use of digital financial services would add value was loans. “Let’s say they give you a loan. A person should be able to repay it using his phone,” said Maundu*.  Rebecca* added that receiving loans should be as easy as using MPESA and integrated with it.

However, like many technological advances, the threat that technology could affect group dynamics stirs up conflict and uncertainty for FSA members. They worry that guaranteeing loans would become a logistical challenge if members did not meet; “Now, sending money like that, you will not be sure who has sent [paid] and who hasn’t and there won’t be signing [guaranteeing loans] for one another”, said Sylvia*. “And now that will not be a group. That is when you will see people running away with the loans,” she added.

The mobile money technology has enabled introduction of mobile banking like MShwari in Kenya.  While the usage of such services is common, FSA members felt that FSAs would not be threatened by mobile banking because it doesn’t offer the same services that FSAs provide.  Joseph’s* view is that: “It’s being scared for nothing because if I have decided to save my money in the FSA, I understand them and they understand me. I don’t see why I should leave and join those other mobile accounts. Most of us don’t have that IQ of banking with mobile banks.”

The interviewers found evidence that even where FSAs offer mobile money services, some members don’t take advantage of them. Some reported that they were still would withdraw money from MPESA then deposit it into their accounts rather than transferring directly. Nevertheless, the core banking system that FSAs currently use is not sophisticated and hence may not allow a full integration of mobile money transactions into the FSA records.

Overall, members felt that social pressure for accountability would be lost if money was remitted electronically without group meetings. FSA members also worried that technology would rob them of social interactions and the opportunity to share ideas.  This suggests that FSAs, which offer services linked to the social values of the communities, are unlikely to be displaced by purely technology-based competitors.

Based on customer feedback, it seems that there are two easy steps that FSAs can take to integrate technology into their business without threatening group dynamics. The first is to incorporate short message services (SMS) to send messages to members and interactive SMS to allow members to query the system for real-time savings and credit updates. The second is to use MPESA to facilitate and increase savings deposits, loan disbursements, and repayments to increase efficiency.

One thing that FSAs need to pay close attention to is the adverse impact that technology might have on their credit operations and particularly the less literate segment of their membership.  Despite the efficiency that use of mobile money technology might provide, FSAs are likely to continue to use a mix of both cash and digital financial services for a long time.

* Pseudonym used to protect the identities of survey respondents.

1. Read the first blog in this 3-part series: Financial services associations: an imperfect solution

2. Read the second blog here: FSA asset financing: when paying more yields more. 

3. To learn, download the full FSA impact report and learn about how FSAs fit a niche that is not covered by formal providers, click here.

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