Technology-Led Activation of CDFIs to Enable Social Impact

The manner in which Community Development Financial Institutions (CDFIs) are utilising technology to expand their social influence is both exciting and sustainable

Community Development Financial Institutions (CDFIs) have long served the unbanked and low-income populations, offering financial services and products that are frequently overlooked by conventional banks. In recent times, technology has presented new prospects for CDFIs to escalate their outreach, proficiency, and effect. Consulting giants Ernst & Young (EY) recently released a report on the technological triggering of CDFIs, which examines how these organisations are exploiting technology to prompt social impact.

According to EY research, “sustainable funds saw a record US$69.2 billion in net new deposits in 2021, and, after a rocky start to 2022, sustainable fund flows returned to the norm, with US$528 million in net deposits for June 2022.”

Enter: Technology

CDFIs are non-profit financial organisations that cater to the financial needs of low-income and neglected communities. Despite their pivotal role in addressing financial disparity, CDFIs have encountered multiple difficulties in recent years, including restricted access to capital, intensifying competition from established financial organisations and the requirement for digital transformation. EY writes:

“Technologies designed for mainstream financial institutions do not meet the specific needs of CDFIs. Even customised solutions for the industry offer limited options or cannot be utilised for all phases of the lending cycle, including document storage, loan origination,  underwriting, closing, servicing loans and monitoring impact. Additionally, the cost to implement new technologies has historically been too high for these organisations that prioritise raising capital and supporting their operations.”

The EY report emphasises several significant ways in which CDFIs are utilising technology to combat these difficulties and amplify their impact. These comprise the utilisation of digital stages for customer engagement, the utilisation of data-driven decision making, and the integration of financial technology (fintech) alternatives to enhance operational efficacy.

• Digital Stages for Customer Reach: CDFIs are leveraging digital stages to extend their customer base and increase outreach. By exploiting technology, CDFIs can broaden their customer pool, escalate the availability of their services, and provide clients with the comfort of digital banking. This not only amplifies the reach of CDFIs but also aids in enhancing financial literacy and financial inclusion in neglected communities.
• Data-driven choice making: CDFIs are also utilising data and analytics to guide decision making and escalate their effect. By exploiting data, CDFIs can better comprehend the requirements and behaviours of their clients, identify areas for improvement, and formulate new products and services that cater to the needs of their target populations. This data-driven approach not only assists CDFIs in serving their clients better but also enables them to make informed decisions about resource allocation and capital dispensation.
• Fintech solutions integration: CDFIs are exploiting financial technology (fintech) alternatives to escalate operational efficiency and decrease costs. This comprises the utilisation of digital loan origination systems, online payment processing, and automated underwriting. This helps them simplify their operations, lower administrative costs and increase the speed and accessibility of services.
• Technological triggers on CDFIs: The technological triggering of CDFIs is having a considerable impact on the communities they cater to. By exploiting technology, CDFIs can escalate their reach, enhance the availability and comfort of their services, and amplify their overall impact. The EY report highlights several key benefits of technological triggering, including elevated financial literacy, improved financial inclusion, and decreased poverty.

According to EY research, common software packages utilised by CDFIs include loan management systems geared toward community development finance, customised spreadsheets and databases, and popular mainstream software packages, such as Excel, QuickBooks and Salesforce.

Technology is assuming an increasingly crucial role in the realm of finance, and CDFIs are no exception. By exploiting technology, CDFIs can overcome some of the difficulties they encounter, amplify their impact, and better serve the communities they were established to cater to. The technological triggering of CDFIs is a positive development for the financial industry and for society as a whole, and it is probable that we will continue to witness more and more CDFIs embrace technology-driven strategies in the upcoming years.