My introduction: The business model of “trust”

This will be the first post from the blog series of my journey with the ILO and my hosts Pemodalan Nasional Madani (PNM) and Koperasi Mitra Dhu’afa (KOMIDA).

I started a new phase in my career two months ago when I started as an ILO Social Finance Fellow in Jakarta. My focus for the next 18 months is to support two microfinance institutions (MFIs) in Indonesia to develop an integrated risk management solution for their customers as they progress toward better welfare.

I previously worked in an insurance company. While insurance companies and MFIs have a totally different business model, one aspect that connects both financial institutions is the importance of TRUST between the business and customers.

In an insurance company, customers trust the insurer with their money. They believe that through the money they put to the insurer, the insurer will surely give back something to them during a time of need, which could be death, a health event or investment return in an endowment or a unit-linked policy.

Trust in the micro lending industry is reversed. The MFI is the one who trusts the customer with its money (“loan”) and it expects the customer will give back something in terms of loan repayment, interest, or some sort of social impact such as a customer’s economic growth and capacity building.

Trust is the key here and the only way to gain your trust is simply by keeping one’s promise. In the insurance industry, it is by paying the claims and for an MFI it is simply by paying back the loans to the MFI as scheduled. If you deliver, there will be a counter-response from the other party to trust you even more and will trigger a “trust-cycle” for both parties. This cycle will benefit both sides as they will try to give their best effort to their counterpart because now they trust them more.

For instance, if the insurance company is trusted, a customer will prefer it over another insurer. We even see that a customer may recommend its product to their relatives/friends. If an MFI can trust a customer, the MFI will (or should) also prioritize them by giving a special treatment, such as access to particular products and solutions or by giving bigger loan in the next loan cycle.

This is what we are trying to do here in Indonesia with PNM and KOMIDA. Both companies are working with low-income women by giving micro lending through Grameen methodology (group lending) with one purpose: to empower them to build a better future.

PNM is government-owned micro lending institution and as of 2018 has more than 4 million customers within 3 years of establishment since 2015. PNM now has more than 1,700 branches in Indonesia and keeps expanding through its main micro-lending product, Mekaar (Membina Ekonomi Keluarga Sejahtera). KOMIDA on the other hand is a cooperative that started in 2005 after the Indian Ocean earthquake and tsunami with the purpose of helping the survivors. That social purpose encouraged them to scale-up their outreach and by now they have more than 200 branches across the country serving the poorest women. Unlike PNM, KOMIDA has several types of products for loans and savings-related purposes.

Both companies are now trying to develop a new product for their trusted customer that hopefully will answer the need in terms of health risks and children’s welfare. PNM and KOMIDA believe that providing a new product initiative that offers relevant solutions is the first step to build the trust cycle and customer loyalty. Since PNM and KOMIDA having built a relationship of trust with the customer by giving out loans, they are now asking customers to trust the institutions more: either by saving with the institution (as in the case of KOMIDA) or by buying insurance solutions (in the case of PNM).

An example of a successful trust cycle between KOMIDA and the customer. A trusted customer is given access to a larger loan amount and is now able to expand her business. She now recommends the trusted MFI to her neighbor, creating a cycle of trust.

In PNM, we are trying to enhance an existing loan product (PNM Mekaar) by adding more features, including a risk management component such as insurance. The enhanced product is specially designed for the pre-prosperous women who have already reached the 4th cycle of loan in PNM. This type of customer can be trusted more than a “1st cycle customer” because of their excellent track record of loan repayment, thus, making the insurance offer to this segment more relevant and less risky. The insurance product will show that PNM actually cares about customers’ wellbeing, thereby increasing their trust, creating a trust cycle for both.

In KOMIDA, the story is quite similar. The company has trusted their customers even more by providing a non-productive loan such as house repair loan and sanitation loan as a form of helping customers improve their quality of life. This type of product is a brave move because usually an MFI provides a productive loan that only targets business capital purposes so they can guarantee a repayment. In this case, we continue to innovate by introducing other financial products such as savings for the customer. This product hopefully targets their pain point of risks and children’s welfare. Since this is a savings product, customer trust will play an important role to decide whether the product will be successful or not.

I believe that a business model of trust is needed in every industry because trust brings innovation. We see a lot of companies having a trust issue with their existing and potential customers, causing them to take a step back towards a skeptical mindset, only to regret not taking action several years later.

I will share more stories about PNM and KOMIDA regarding how their business model of trust develop in the upcoming blog posts. Meanwhile, stay trusted! :-)