While most commercial banks have made significant advances in digitizing their business models, the pace of digitization for Cooperative Financial Institutions (CFIs) is much slower. For CFIs to continue offering quality products to their members and remain competitive, digital transformation - both client and processes-oriented - is crucial. What are some of the key pre-conditions to digitize? What are the key challenges and opportunities to expect from digital transformation? CFI representatives, supervisors and donors from Latin America and Africa had an opportunity to discuss these issues during a webinar organized on September 9th by the World Bank CFI Center of Excellence in partnership with Rabobank Foundation. Here is a link to the recording of the event.
Why should CFIs digitize?
The first reason for CFIs to digitize is to become better institutions that can serve their current customers more effectively, offer more sophisticated products, deepen relationships with members, and expand to serve segments that previously were unviable to reach. In introductory remarks, Anderson Caputo of the World Bank emphasized the potential of digitization to gather information that reduce the transaction costs of credit decisions, and to improve governance. Albert Boogard of the Rabo Foundation indicated that there is a need for CFIs to digitize to face growing competition from a variety of providers that thanks to digitization can target rural areas. Such competitors may offer some services in rural areas, such as savings, but may not always re-invest these savings in rural areas. This is indeed the most common pattern of banks operating in rural areas, syphoning rural funds to urban users. In contrast, the member-based structure of CFIs makes it possible for rural clients to be on both sides of the CFI’s balance sheet, i.e., as depositors and as borrowers. Boogard translates this feature into CFIs being a “means to an end” rather than a goal in themselves, as they lend rural savings to rural clients.
Sicredi’s vision: Digitization as a way to empower relationships
Thiago Muller has spent eight years at SICREDI, the largest cooperatives network in Brazil, working on mostly on the digital transformation of this network. His view is that technology, instead of replacing human interactions, actually strengthens the connection with members. For instance, Sicredi’s digital banking allows its five million members to make transactions and withdraw money anytime without going to a branch, through mobile and internet banking, which has been particularly beneficial during the pandemic. Through another mobile app, members have also been able to advertise their products for free therefore creating a virtual marketplace among members. In addition, digitization is also beneficial to employees: during the pandemic, VPN connection has allowed Sicredi’s 25,000 employees to work remotely. Digitization also helps management with having better data, at the right time, to improve decision-making, and has the potential to improve CFI governance.
While crucial, the road to digitization faces several obstacles
Based on a recent study assessing digital readiness among 10 CFIs across the Latin American and Caribbean region led by the Inter-American Development Bank (IDB),Terence Gallagher (Head of Financial Inclusion, IDB Invest) highlighted five main challenges to digitization: (1) staffing, as it is often hard for CFIs to find professionals with the required competencies, (2) budget and costs, as many CFIs find it difficult to fully understand the economics behind their own digitalization process, (3) independence, as most CFIs rarely engage in dynamic cooperation and exchanges with other financial organizations and fintech companies, (4) client base, as CFIs commonly operate in semi-rural and/or semi-urban areas with members that may have limited digital skills[1] (more on this here), (5) regulation, as some conditions and requirements can make it difficult for CFIs to operate more competitively in the digital arena. In particular, regulatory challenges can emerge when CFIs are in a separate regime from the financial sector and are for instance supervised by the Solidarity Ministry. Such separation makes dialogue between CFIs and the rest of the financial sector more difficult and creates challenges for CFIs to access digital payment systems.
Peter Njuguna (Chief Manager - Savings and Credit Co-Operative Societies Regulatory Authority in Kenya, SASRA) highlighted that one of the key challenges to digitization is often the lack of willingness from CFIs themselves to digitize. With World Bank support, SASRA is currently putting in place a shared services platform among CFIs that will offer a number of services including liquidity pooling, payment channels, credit risk management and potentially deposit insurance. While these shared services will be beneficial to CFIs in the medium term, changes required in the short term raise concerns among CFIs. For instance, moving data to the cloud is one of the precondition for digitization, but many CFIs have security concerns and fears about who would lead and control this process.
Should digital infrastructure be considered a public good, and if so who should take the lead in digital transformation?
Given the information asymmetry between technology providers and CFIs, and the fact that there are economies of scale and scope in using only one digital platform among CFIs, investing in a common digital infrastructure for CFIs can be considered as a public or semi-public good. SASRA in Kenya is taking the lead in putting in place such a platform. Alternatively, such a role can also be played by apexes, which federate individual retail entities, as long as (a) the apex formally has the requisite central function to act on behalf of and in the interest of its member CFIs, and (b) it is equipped with the professional capabilities to design and operate a shared digital platform. As a leading example, the SICREDI network supported 108 credit unions across Brazil in their digital transformation.
Digital transformation through outsourcing or hiring? A matter of objectives and capabilities
The optimal way to digitize depends on the objectives of digitization, the current digital capabilities and the available financial resources. According to Thiago Muller, small CFIs can outsource capabilities at a low cost through partnering with a technology start-up and potentially with other CFIs. For larger projects, CFIs may need to hire new IT staff with digital capabilities. The modern digital enablement checklist provides some guidance on how approach such transformation.
And finally, what can donors do?
Half-jokingly, Terence Gallagher answers: “I have spent all my career trying to answer this question”. He views the recent IDB survey as a good starting point to better understand the needs of CFIs and generate a debate. In addition, a mix of technical assistance and financing is often required. Complementing this view, we believe at the World Bank’s Center of Excellence on Cooperative Financial Institutions (CFIs) that fostering the exchange of concrete experiences, research and resources between CFI professionals is also a valuable role for donors to play to support the digitization of CFIs.
[1] Examples of financial inequality affecting digital participation abound, as reported, for example in this article by FSD Kenya: here
Blog » Digitization of CFIs, why and how? Comparing experiences from Latin America and Africa
Digitization of CFIs, why and how? Comparing experiences from Latin America and Africa
by Rachel Sberro-Kessler and Carlos E. Cuevas
While most commercial banks have made significant advances in digitizing their business models, the pace of digitization for Cooperative Financial Institutions (CFIs) is much slower. For CFIs to continue offering quality products to their members and remain competitive, digital transformation - both client and processes-oriented - is crucial. What are some of the key pre-conditions to digitize? What are the key challenges and opportunities to expect from digital transformation? CFI representatives, supervisors and donors from Latin America and Africa had an opportunity to discuss these issues during a webinar organized on September 9th by the World Bank CFI Center of Excellence in partnership with Rabobank Foundation. Here is a link to the recording of the event.
Why should CFIs digitize?
The first reason for CFIs to digitize is to become better institutions that can serve their current customers more effectively, offer more sophisticated products, deepen relationships with members, and expand to serve segments that previously were unviable to reach. In introductory remarks, Anderson Caputo of the World Bank emphasized the potential of digitization to gather information that reduce the transaction costs of credit decisions, and to improve governance. Albert Boogard of the Rabo Foundation indicated that there is a need for CFIs to digitize to face growing competition from a variety of providers that thanks to digitization can target rural areas. Such competitors may offer some services in rural areas, such as savings, but may not always re-invest these savings in rural areas. This is indeed the most common pattern of banks operating in rural areas, syphoning rural funds to urban users. In contrast, the member-based structure of CFIs makes it possible for rural clients to be on both sides of the CFI’s balance sheet, i.e., as depositors and as borrowers. Boogard translates this feature into CFIs being a “means to an end” rather than a goal in themselves, as they lend rural savings to rural clients.
Sicredi’s vision: Digitization as a way to empower relationships
Thiago Muller has spent eight years at SICREDI, the largest cooperatives network in Brazil, working on mostly on the digital transformation of this network. His view is that technology, instead of replacing human interactions, actually strengthens the connection with members. For instance, Sicredi’s digital banking allows its five million members to make transactions and withdraw money anytime without going to a branch, through mobile and internet banking, which has been particularly beneficial during the pandemic. Through another mobile app, members have also been able to advertise their products for free therefore creating a virtual marketplace among members. In addition, digitization is also beneficial to employees: during the pandemic, VPN connection has allowed Sicredi’s 25,000 employees to work remotely. Digitization also helps management with having better data, at the right time, to improve decision-making, and has the potential to improve CFI governance.
While crucial, the road to digitization faces several obstacles
Based on a recent study assessing digital readiness among 10 CFIs across the Latin American and Caribbean region led by the Inter-American Development Bank (IDB),Terence Gallagher (Head of Financial Inclusion, IDB Invest) highlighted five main challenges to digitization: (1) staffing, as it is often hard for CFIs to find professionals with the required competencies, (2) budget and costs, as many CFIs find it difficult to fully understand the economics behind their own digitalization process, (3) independence, as most CFIs rarely engage in dynamic cooperation and exchanges with other financial organizations and fintech companies, (4) client base, as CFIs commonly operate in semi-rural and/or semi-urban areas with members that may have limited digital skills[1] (more on this here), (5) regulation, as some conditions and requirements can make it difficult for CFIs to operate more competitively in the digital arena. In particular, regulatory challenges can emerge when CFIs are in a separate regime from the financial sector and are for instance supervised by the Solidarity Ministry. Such separation makes dialogue between CFIs and the rest of the financial sector more difficult and creates challenges for CFIs to access digital payment systems.
Peter Njuguna (Chief Manager - Savings and Credit Co-Operative Societies Regulatory Authority in Kenya, SASRA) highlighted that one of the key challenges to digitization is often the lack of willingness from CFIs themselves to digitize. With World Bank support, SASRA is currently putting in place a shared services platform among CFIs that will offer a number of services including liquidity pooling, payment channels, credit risk management and potentially deposit insurance. While these shared services will be beneficial to CFIs in the medium term, changes required in the short term raise concerns among CFIs. For instance, moving data to the cloud is one of the precondition for digitization, but many CFIs have security concerns and fears about who would lead and control this process.
Should digital infrastructure be considered a public good, and if so who should take the lead in digital transformation?
Given the information asymmetry between technology providers and CFIs, and the fact that there are economies of scale and scope in using only one digital platform among CFIs, investing in a common digital infrastructure for CFIs can be considered as a public or semi-public good. SASRA in Kenya is taking the lead in putting in place such a platform. Alternatively, such a role can also be played by apexes, which federate individual retail entities, as long as (a) the apex formally has the requisite central function to act on behalf of and in the interest of its member CFIs, and (b) it is equipped with the professional capabilities to design and operate a shared digital platform. As a leading example, the SICREDI network supported 108 credit unions across Brazil in their digital transformation.
Digital transformation through outsourcing or hiring? A matter of objectives and capabilities
The optimal way to digitize depends on the objectives of digitization, the current digital capabilities and the available financial resources. According to Thiago Muller, small CFIs can outsource capabilities at a low cost through partnering with a technology start-up and potentially with other CFIs. For larger projects, CFIs may need to hire new IT staff with digital capabilities. The modern digital enablement checklist provides some guidance on how approach such transformation.
And finally, what can donors do?
Half-jokingly, Terence Gallagher answers: “I have spent all my career trying to answer this question”. He views the recent IDB survey as a good starting point to better understand the needs of CFIs and generate a debate. In addition, a mix of technical assistance and financing is often required. Complementing this view, we believe at the World Bank’s Center of Excellence on Cooperative Financial Institutions (CFIs) that fostering the exchange of concrete experiences, research and resources between CFI professionals is also a valuable role for donors to play to support the digitization of CFIs.
[1] Examples of financial inequality affecting digital participation abound, as reported, for example in this article by FSD Kenya: here