One angle that needs to be discussed more is how the introduction of these new services is also lowering barriers to most financial activities. These services are a welcome change to an ecosystem that has been dominated by large institutions. More people are gaining access to Fintech thanks to the increasing availability of internet connections and cheap mobile devices.

While it may seem that most of the developments in Fintech are focused on providing new experiences to those already with means, there are trickle-down benefits to the less fortunate. For instance, the rise of cashless options has given the unbanked access to financial services especially in regions that banks find unserviceable. So, it is quite refreshing then that some new Fintech efforts are focused on this particular area since financial inclusion is considered as a key aspect to poverty reduction.

I recently spoke with Sharone Perlstein who is currently working on delivering microfinance services to emerging markets. Perlstein has been in financial services for 25 years and is a co-founder of several fintech ventures including lending platform service EZBOB. In this interview, he shares how Fintech and microfinance can work to provide more financial inclusion to the unbanked.

What attracted you to microfinance?

There are about 2.5 billion people in the world who are unbanked. This prevents many of them from economically developing, saving, starting a business and investing in it. Microfinance bypasses the banking system and can help unbanked people develop their own personal economy that will enable them to support their families, their communities, and ultimately the economy of their country.

On a business trip to Thailand in 2009, I ran into a service that gives small loans to local businesses and I was very impressed with the potential of this service. However, the field was still in its infancy from a technological point of view, and I realized that to address the needs of the local public would require a very large workforce. The system was also cumbersome and costly, which of course affected the value of the loans and their effectiveness. So, despite my curiosity, I let it go and continued to develop my career in other areas. Today, mobile technology has opened up many new possibilities, and microfinancing is becoming more advanced and more available to many more people. For me, this is an opportunity to help and empower unbanked people to develop; a chance to use my financial and technological expertise to do good in the world.

What is your background in Fintech?

I have been working in finance for 25 years and specialize in advanced technology consulting to banks and other financial institutions. At the outset of my career, I worked as an investment consultant on Wall Street and then became a partner and founder of BrookBank Enterprises, a private investment company that was active in the Eastern European market, mainly in agriculture and real estate. Today, I am a consultant for EZBOB, a company I founded with a partner in 2012 and which provides digital services to financial institutions.

What are the key challenges in microfinancing and how do you think they can be overcome?

Human resources: Until now, a very large workforce was required to provide this service to those who need it. This complicated the process and made it costly. As a result, it took longer to provide the loans and their conditions were not attractive enough. Today, with automation and smarter information systems, we can significantly reduce manpower and streamline processes to make loans more economically viable for borrowers and lenders.

Geographic gaps: Most microfinance companies operate where they are most needed, namely in rural areas where the technological infrastructure is unadvanced and unstable. These areas are usually far from urban centers and transportation is inconvenient and expensive. As a result, communication between the microfinance service provider and its potential customers is complex and challenging. This may sound like a minor technical detail, but it is a significant barrier. Thankfully, today’s mobile age compensates for distance and makes communication easier, meaning that an online loan can be entirely processed by phone.

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Economic risk: Granting loans to people without a bank account may be risky from a business point of view, since it is difficult to know whether potential borrowers are trustworthy or will be able to meet the terms of the loan. It is also difficult to monitor their business and economic activity. In other words, it is very difficult to build a financial profile for a borrower with no banking activity. Here, too, mobile technology changes the picture. Today, in developing countries, the most available technology is mobile phones. The data on a borrower’s phone can provide important information (air time, vacation travel, purchases, general economic behavior, etc.) that helps to create a clearer profile and accordingly design the conditions of the loan.

Some argue that microfinance loans, supposedly meant to help poor people succeed financially, often leave them with debts they can’t afford because of the high-interest rates. What is your opinion on this matter? Is this a real problem? What causes it? And how can it be solved?

Every loan involves an element of risk both for the lender and for the borrower. It’s also important to remember that microfinance loans are usually given to people who couldn’t get a loan from the bank because of the high risk and low profitability. The role of the microfinance company is to succeed in providing a solution that is not only favorable and realistic for the potential borrower, but also profitable and worthwhile for the lender, based on the understanding that the lender does not have the protection of a financial institution, such as a bank. So, I think the best solution is to ensure that:

A. Potential borrowers understand the terms of the loan in depth. To do so, the terms must be explained to them in a user-friendly and clear manner that takes into account their limited economic knowledge, since you don’t have to be an accountant to take a small loan; it’s not a realistic expectation.

B. The Microfinancier knows the potential borrower in depth. To do so, the lenders needs to work with technology that enables them to do a thorough and accurate background check of potential borrowers and make sure they can meet the terms of the loan.

It is also very important to keep things in proportion. After all, we are talking about interest rates on small loans, so the repayments can usually be made. However, lenders must take into account that the inability to meet the terms of the loan is part of the game and they should therefore include this risk in their calculations.

Why do you choose to focus on Indonesia?

A few years ago, I worked in Indonesia and Cambodia with the Rain Forest Trust. We went there to help save rain forests in the area. When I was in Indonesia I was exposed to the incredible entrepreneurial spirit of the local residents. Small businesses everywhere, independent spirit, high motivation, it was a thrill. When I left, I researched the region’s economy a bit and discovered that there were more than 50 million small and medium-sized businesses, representing about 97% of the business sector in Indonesia and responsible for 30%, if not more, of its GDP growth. However, many of these businesses don’t have enough money to realize their full potential, especially in rural areas, and the banks do not provide the right solution. For this reason, the Bank of Indonesia has enacted a law according to which banks will have to devote at least 20% of their loans portfolio to microloans by 2018, thus opening a window of opportunity for businesses and other microfinance companies wishing to enter the local ecosystem. With today’s global technological development and the massive demand for mobile in the Far East, Microfinance’s potential ability to help is enormous.

What is your vision for your microfinance business?

Firstly, I see a business that is all online, digital and automatic. I want to focus on young entrepreneurs and small businesses in various fields and provide safe and effective loans. It is important to me that my loans are not given as a kind of charity but as a real contribution to business development, both on an individual and state level. It is important for me to empower the unbanked population in a sustainable manner. I want to promote this vision in countries in the East - the Philippines, Indonesia, and Vietnam. I want to build optimally automated software and manage loan portfolios of several million clients a year for all types of businesses that need empowerment and support.

How do you see the future of microfinance?

We are currently witnessing a rise in digital assets (cryptocurrencies). The economy is changing and soon there will be possibilities for using digital currencies that will make the banks’ mediation redundant. I believe that once microfinancing and digital assets meet, interesting things will happen and new possibilities will open up for financing and lending.