World Bank's Center of Excellence on Cooperative Financial Institutions (CoE-CFI)

Blog » Neo-Cooperatives as the next disruptors in the financial sector? A conceptual experiment (PortalFindev by CGAP)

Neo-Cooperatives as the next disruptors in the financial sector? A conceptual experiment (PortalFindev by CGAP)

Created Dec 08 2020, 11:34 AM by Baloko Makala

Did the Neo-Cooperatives come to Mexico to stay? The model combines the membership-based strength and affordable prices offered by cooperatives with the speed and data prowess of fintech.

Original article in Spanish can be accessed here. (Associated graphics have been omitted)

During the COVID-19 pandemic, Mexican financial cooperatives have continued to provide their services to almost 8 million members, mainly through physical branches. Since few had invested in digital interfaces and capabilities prior to the pandemic, serving their partners in a restricted mobility environment presented operational challenges and exposed the limitations of the traditional branch model for some of them.

Given the imperative to go digital today, many cooperatives are trying to carry out a "transformation in flight", that is, to adopt some technological measures with the aim of complementing or replacing some existing products and channels with digital alternatives gradually. Unfortunately, this approach is often difficult, costly and time consuming, due to legacy systems and processes, and the absence of a proven digitization path.

Observing the growing number of “neo” players in Mexico - in the form of banking as a service ( Banking-as-a-Service, BaaS ), software as a service ( Software-as-a-Service, SaaS ) and “ neobanks ” models ”(Digital wallets) - motivated us to contemplate the possibility of a" Neo-Cooperative "model, capable of combining the strength based on members and affordable prices offered by cooperatives with the speed and data prowess of fintech. A neocooperative could be a type of financial cooperative that operates predominantly (or only!) In the digital realm offering a wide range of services.But what form should it take? And what role could it play in today's financial sector environment? After developing an initial concept, we spoke with several co-op industry experts, practitioners, fintech ecosystem specialists, and regulators to discuss the concept and the pathways that could lead to a digital-first value proposition for co-op partners.

The cooperative and fintech sectors during COVID-19

Since the COVID-19 crisis hit Mexico, the FinnSalud program , supported by the MetLife Foundation , has been helping the cooperative financial sector in Mexico respond and strategize, given the vital role cooperatives play in providing financial services. low and moderate income people. At the beginning of the pandemic, we conducted rapid measurement surveys with individuals and small businesses that allowed us to share an early reading on the economic impact of the pandemic on Mexicans. We also implemented an online tool to help cooperatives test their finances (through stress tests) and prepare for the challenges ahead. Both initiatives were carried out digitally and, therefore, were not affected by the mobility limitations caused by the pandemic.

Observing the urgent need for the digitization of cooperatives, we began an investigation into the 'Digital State' of the 40 largest regulated cooperatives, which together serve more than 6 million people. Preliminary results showed that the digital offerings of these cooperatives were very scarce; only a third offered web services (five of them only for balance inquiries) and less than a quarter had an application (only six of them allowing transactions).

In contrast, the new challenger banks or neobanks in Mexico have been taking advantage of technology to create improved value propositions for clients, offering a purely digital experience as an alternative to traditional banks and their branches. Neobanks have raised significant amounts of funding and captured millions of customers around the world. Mexico has seen a significant increase in activity in this space, as shown by the ALLVP graph (already somewhat outdated) below. However, most of these efforts focus on the underserved middle class, particularly its young segments, some already banked and all knowledgeable about digital technologies.

The "neo" value proposition in Mexico

The "neo" players enter the market with a value proposition that is very easily accessible to consumers, offering greater convenience and lower costs / fees. Unhampered by legacy systems, they can offer capabilities such as easy digital onboarding and customization that today's systems find difficult to replicate. Fintech players can also evolve their value proposition more quickly, iterating as they learn from their data what their users prefer. As an example, BFA Global's Catalyst Fund program has accelerated more than 35 inclusive fintech startups over the past five years and witnessed how 'user centricity' can be leveraged alongside data to develop powerful value propositions for low and moderate income populations.

In summary, these are the advantages of a startup that uses the latest technologies and user-centered management:

  • Stronger adaptation to a particular market.
  • Ability to experiment and iterate faster.
  • Lower cost per unit.

It is clear that the commercial sector is undergoing a profound transformation . The massive investments are exploring new business models and approaches and will also create powerful tech stacks . While the COVID-19 crisis has slowed the venture capital investments that feed these neobanks, the technological revolution in customer experience is here to stay.

Cooperatives in Mexico, as in other countries, have reacted slowly to the fintech revolution. The reasons for this delay are varied, starting with bank cores, some already outdated, of which there are more than 30. In general, management has not prioritized digital offerings to its partners and, as a result, is lagging behind in the digital race. They also often lack a well-designed digitization strategy and many have failed to attract enough and appropriate digital talent. Given the current panorama of the financial sector, which we allow ourselves to divide in a very simplistic way between institutions that emphasize the performance of their shareholders versus those that emphasize the impact on the user and those that use pre-2000 technology versus those that use technology 2020,

The time for neo-cooperatives has come

Although a surge of creative activity in commercial and inclusive fintech spaces is testing exciting models and developing cheaper technology, established players dominate the financial cooperative sector in Mexico, with almost no new cooperative creation in the past two decades. The FinnSalud program chose to work with financial cooperatives because of its large member base, its comprehensive suite of products, and its focus on the well-being of its members. We also know that cooperatives have been innovative in the past, pioneering online banking in the United States and the European Union .

The economic crisis is anticipating the future and could also trigger a wave of market exits. Therefore, it is not difficult to imagine more creative disruption in the financial sector. One way to channel this disruption would be to launch new players with modern value propositions and with a cooperative structure and spirit: Neo-Cooperatives. These neo-cooperatives would combine the innovations in user experience and data analysis promoted by other neo-actors, with the ownership and participation scheme that the members have and the lower prices that the cooperatives already offer. Given the ability of new models to scale rapidly and widely, a neocooperative could provide fair services to many more people,

Taking a page from the neobanks manual, we can imagine three main types of neocooperative:

  1. Digital satellites.   These would be launched by existing cooperatives to drive a modern value proposition while still leveraging the branch network. This is the model followed by the only neo-operative that we found during our investigation: the Civic Federal Credit Union in North Carolina, USA.
  2. Cooperatives 'from zero'. These new cooperatives would independently begin to develop a digital offering, without the support or conditions of an established actor. This model could perhaps be an option for particular market segments, such as small businesses, farmers and workers on digital platforms.
  3. Cooperatives-as-a-Service ( Co-op-as-a-Service, CaaS ). These entities would offer a technology stack , a set of white label products, and a regulated license. The purpose of this model would be to drastically reduce the time to market required by other neo-cooperatives, possibly like the two previous models.

We believe that continuing to explore these and other neocooperative models, reflecting those that are currently gaining ground in the commercial sector, is essential to ensure the continued relevance of financial cooperatives in Mexico and other emerging markets.

While we are excited about the above concepts and the value they could create for cooperative members, we recognize that there is still much work to be done to conceptualize what neocooperatives could represent. We need to delve deeper into the concepts to understand their technical and legal feasibility, their financial viability, and the governance implications of each proposed neo-cooperative model. To do that, we need to answer questions like these:

  • What are the technologies required to launch a predominantly digital cooperative and what are their costs?
  • Does the current regulation allow the creation of a predominantly digital cooperative?
  • How would the financing of the initial investments necessary to adapt and implement fintech technologies materialize?
  • What would cooperative governance look like with a distributive digital approach? Could technology improve or hinder partner engagement?

Open questions and the move to action

We intend to explore these and other questions in the second half of our neo-cooperative conceptualization project, mainly following a similar path based on consultations with experts and professionals on the subject. We may need to change direction toward an action-focused research project at a later time to fully understand the practical implications of this effort.    We surely don't have all the answers and are willing to collaborate with others to find them. Let us know if you are interested in the concept and its potential!