Empathy Drives a New Context for Microcredit
Today's realities demand new context for microcredit: A context in which people, communities & businesses need & give empathy to survive & prosper.
In the first part of this essay on microcredit, empathy & digital banking, I laid out the drivers for microcredit and covered the first two:
New small businesses starting
Multiple generations will suffer long term economic consequences of the pandemic/recession
Here, I’ll cover the last two drivers.
Acts of empathy for each other and local small businesses
Banks seeking true digital disruption need new products.
Acts of empathy for each other and local small businesses
While communities and countries were (and are) on various stages of lockdown and recovery from the pandemic, I’ve noticed acts of empathy emerging everywhere. A few examples:
Young people volunteer to help home-bound. While there are so many food delivery apps, young people organized to shop and deliver food to the elderly and home-bound in their communities.
Communities supporting local small businesses. In the communities outside Philadelphia, signs have gone up urging people to patronize local small businesses – starting of course with restaurants and other businesses as they re-open.
Shopping local even if it’s not a digital experience. Independent bookstores, some of whom did not offer any online ordering before March 2020, are a good example of local patronage. Many independent bookstores have seen local people and others seek to order and pick up books – much as they do their dinner. What is interesting to me is the desire to shop at these bookstores – despite the availability of cheaper, faster and much better digital experiences such as Amazon. (Again, I don’t want to paint a rosy picture here; independent bookstores are not “beating” Amazon. It’s still very hard to make a profit owning a bookstore.) My own local independent bookstore has a “sort of” online ordering system that includes emails to the bookstore. And despite the emails, I recently received the hardback versus the paperback version of a book I ordered. To tell you the truth, because it is such a personal and empathic relationship (apologies were exchanged), I have a lot more patience for the mistake from this bookstore than if it happened as the result of an Amazon order.
Large scale empathy. World Central Kitchen which already feeds people affected by disasters worldwide, set up shop to feed passengers on the Grand Princess, a cruise ship off the US West coast and the Diamond Princess off the coast of Japan. During the pandemic, WCF distributed (and continues to distribute) meals in in big and small cities around the world.
Banks seeking to disrupt need new products
Banks seeking true digital disruption need new products that address customers’ current situations. Digital banking solutions need to be able to deliver them. These customer situations, above all, require empathy.
A bridge between empathy and disruption is microcredit
While many of the adaptations people have made -- adjusting one’s spending, getting new skills, and moving in with your parents are great – they are not enough. Many people – and it’s not just young people - will continue to face extraordinary challenges. People have used savings to pay rent or mortgage, buy food and health insurance and health care. They are also experiencing the economic and emotional toll of suffering effects of having had COVID or having a family member(s) who had the virus or died from it. In the US in particular, Black Americans and other people of color, also face the ongoing stress of racism. They face bankruptcy, foreclosures, tight job market, need for capital to start a business or a new place to live. Or, if they lucky, grow the business they kept going or started during the pandemic.
Now is the opportunity for some financial institutions to leverage microcredit capabilities for customers – consumers and small businesses - in their communities. I am not suggesting that banks simply adopt microcredit as it is practiced in Bangladesh, India or elsewhere.
What I am suggesting is that banks, use the principles of microcredit – small loans and the communities of borrowers to support loan repayment – and adapt them to their customer needs.
Who are those customers? Everyone? Unbanked or underbanked? Poor people? Black Americas or people of color? If you’re thinking “hidden tribes,” you’re on the right track. Banks must have the tools to identify both hidden customer tribes and the products and services that can help them.
What microcredit can teach bankers & digital banking vendors
Banks and digital banking vendors must learn a few things from microcredit organizations and banks:
It’s never just about the money. Poverty - or “just” the loss of a job, home, savings - is connected to all aspects of the impoverished person’s life: family, health, education, children, food. A borrower isn’t just a borrower. She is a mother, spouse, sister, daughter, aunt, neighbor. All of these connections matter and are part of who she is and how she contributes to her community and family. Separating the borrower from her context and community means that the bank will not understand the true needs of the borrowers.
Microcredit banks have personal relationships with their customers. Microcredit loans are very personal to the borrowers. Therefore, those financial institutions that have relationships with the communities in which they work and the people who live and work and own businesses in them are poised to be able to identify the hidden tribes in their community and the services that can help them, the customers, succeed. to be blunt: Head’s up, credit unions and community banks. You could lead here.
Takeaways for both bankers digital banking vendors:
Determine whether microcredit fits your mission. This is not a universal prescription for success.
This strategy is not just a “delivery” issue problem or solution. Bankers must take a harsh view of their back end systems, the core banking solutions, and assess, finally, whether they are up to the task of creating new products and services – not just replicating what banks have always sold – to serve customers during the pandemic and in the long tail of economic and health recovery ahead. Both bankers and vendors must be honest about how easily or difficult it is to connect their core banking solution to digital delivery solutions: If it’s so difficult to connect, is the core banking solution really up to the task? Is it obsolete?
Open banking technologies are essential to creating the infrastructure that can leverage microcredit capabilities – wherever they are and delivering them to customers – wherever they are.
Think twice before you build microcredit capabilities from scratch. Microcredit capabilities are well understood; find the expertise and/or technology that you can build on.
Revisit your small business loan products, process and capabilities: Can you support really small business loans – like $500 or $1500? Can you appropriately reward staff who make these loans? Can you incent staff to make these loans? How do you do this?
Revise account opening and other processes. Using microcredit to inspire new lending and other products will require you to revise your new account opening processes, credit risk analysis and origination processes to accommodate very small businesses & very small loans and to remain compliant with all regulations. This probably means being able to bring in data you’re not already using to assess credit risk or using a fintech.
Use digital capabilities, but know that this is a not a process without any human involvement. Microcredit banks – or rather branch staff and field bankers - know their customers. The customers may also know each other. Being able to combine digital with human relationships is a skill and a differentiator.
Evaluate (again) your ability to identify hidden tribes — remember, the people experiencing foreclosures do not fit pre-pandemic demographics, they are not just people of color, or middle class or working class or carpenters or, even bank staff.
New small businesses may be in unfamiliar places. Know where entrepreneurs are located. Many entrepreneurs sell “online,” but that might mean Instagram or TikTok or Etsy — They may not even have a website. If you don’t know this, go on Instagram and search for “#bakery. Or go to Etsy and search for “face masks.” These are places that bankers may not understand as commerce sites.
Supporting micro-borrowers is more than “customer service” or relationship management. Think: How can we or our digital banking solution leverage or facilitate local community support of these borrowers? What digital tools can help? Do we need new partnerships?
Support new payment methods. Many restaurants, for example, created Square sites to take online orders. Entrepreneurs who sell on Etsy or Instagram likely don’t receive paper checks. They aren’t going to want to adopt your payment methods.
Bring people together. Small business owners who have things in common may benefit and seek out support – not from you – but from each other. This is a common feature of microcredit in India, Bangladesh and elsewhere. The challenge is that the loan is much more than money – it’s about funding school for the recipient’s children, buying food as well as supplies for the business.
Caveat: Microfinance and microcredit professionals will likely view my take differently. COVID 19 has changed microcredit and models for distribution. They are right to disagree – in the traditional microcredit context.
What I propose is a new context for microcredit. A context in which financial institutions looking for new ways to identify hidden tribes, attract new customers and generate revenue use their digital banking infrastructure to meet the moment. A moment that requires empathy. And to do that by creating microcredit-inspired products.
Who publishes this newsletter?
I’m a former Gartner analyst. I’ve worked in and covered the banking industry for 27 years. I still think & write about digital banking — but also indulge my other interests, women in tech, startups - especially those in the US Midwest & South Eastern Europe), leadership & change, and AgTech.
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