MFTransparency is Dead … What Does That Mean for Pricing Transparency?
Monday, March 30, 2015 – Chuck Waterfield, the CEO of the influential watchdog initiative discusses the future of pricing transparency in microfinance. Click here to view the orginal article on NextBillion website!
As many of you have likely heard, MicroFinance Transparency (MFT) has announced that after six years of activity, we will no longer collect pricing data for the global microfinance industry. As this news is creating much discussion and confusion, we want to emphasize that our decision doesn’t mean that we believe the industry’s attention to transparent pricing is dead or a failure. We do expect and encourage the industry to continue its progress on divulging the true price microfinance institutions (MFIs) charge on loans to the poor. But we also want to emphasize that the industry really must do a much better job of judging pricing data, not just collecting pricing data. Transparency alone has never really been the end goal.
Here we will answer many of the questions that people have asked about why MFT made this decision and we will explain how the industry can both continue and advance the essential work of assessing the price we charge the poor.
Will the MFT website, tools and resources disappear?
Although no new pricing data will be published, MFT’s website will remain online. In addition, MFT will release a variety of new pricing tools and analytical reports over the next several months that will enable those in the industry to continue incorporating pricing data into their procedures, and to evaluate whether those prices balance the needs of the client with the needs of the business.
Did you run out of funding? Can we help you get more funding to continue?
This is not at all the situation. MFT’s policy has always been to only seek funding when we believe funding can produce solid results. After trying three approaches for data collection, all evidence shows that the collection of a large volume of pricing data cannot be done sustainably. The last funding MFT sought was nine months ago, to fund the pilot of a new approach to data collection (explained below). That pilot ended, giving evidence that the new approach was not viable. Thus, MFT has sought no additional funding and is now positioned to phase out operations without any incomplete obligations.
This comes as an unexpected shock. Might MFT reconsider and continue?
Those of you who have followed us closely will know that while this news is disappointing, it is not entirely unexpected. A year ago, MFT stated clearly to the industry that we would no longer work alone to collect pricing. We had found that it requires a great deal of communication and negotiation to get MFIs to voluntarily share their pricing data with an independent NGO like us. We knew this would be the case when we first started, since transparent pricing was a new area at that time. But we were disappointed that this continued to be the case, even when asking MFIs to refresh data that was already published on MFT’s website.
However, we did find one very positive change in those five years – many funders and international networks had begun to incorporate pricing collection into their due diligence practices, reflecting their increased awareness of the importance of pricing data. As a result, MFT announced in 2014 that we would organize funders and international networks to collect the pricing data using a consistent methodology, and then provide a path for them to pool and share that pricing data. We assembled ten organizations to participate in a pilot, but to everyone’s disappointment, each of the ten found it very difficult to collect the pricing data.
In all three approaches to collecting pricing data that we tried, whether operating alone or operating through or with other partners, we ran into the same challenge: MFIs are either reluctant to become vulnerable by voluntarily sharing their pricing data (the majority of the industry), or they are simply unwilling to do so (a small portion of the industry).
Does this mean the industry has failed at transparent pricing?
By all standards, microfinance has accomplished unprecedented levels of transparent pricing. Remember that in most countries, true prices are not known for the commercial loan market, yet microfinance voluntarily published the much higher loan prices we charge on microloans. No other global industry ever created a central public location where their prices are transparent and can be compared.
Though the industry cannot fully sustain this same level of transparency, our work is not a failure. We can now build on what we learned, and even advance by now developing methods of using an MFI’s pricing data in our decision-making. Disappointingly, outside of a few countries and a small number of organizations, access to transparent pricing has not had a significant influence on institutional practice – we see infrequent changes in MFI pricing decisions, and we see limited influence on the way that funders and networks select their partners. That must change, and that can change.
Can some other organizations carry on the work?
MFT has explored options for others to take on the responsibility of collecting and publishing pricing data. Although a number of organizations are receptive to publishing pricing data, there is the reality that if data doesn’t come in, there isn’t any data to publish.
Undeniably, the challenging part is collecting the data. Most MFIs are concerned about their competitive advantage, as well as public and political reactions to making the true price public. And while regulators can obligate transparent pricing, self-regulation can only encourage and incentivize transparent pricing. That means that, given sparse and inconsistent national truth-in-lending requirements, any future data collection will be at reduced scale, not able to cover large percentages of the market in a typical country – as MFT was able to do only through diligent efforts.
But even so, some pricing data will continue to be voluntarily collected via social performance initiatives with permission to be published. This can provide an interesting baseline, even though it won’t match the extent of MFT’s data. And funders and international networks should continue to collect pricing data during due diligence. Though it is difficult for most of them to insist that this data be transparent, the data can be evaluated internally using parameters such as those MFT is advocating in its new Balanced Pricing Analysis Tool that will be released in May. Other methods have also been developed, such as TripleJump’s Interest Traffic Light.
Given your intensive experience in pricing, what advice do you have for the industry?
MFT was conceptualized in 2007 as an urgent response to the serious issue of hidden prices in the industry. We initiated and ran MFT more as a short-term project than an institution; we never had a physical office, and we had only a handful of people on short-term contracts scattered around the globe.
But by collecting a vast amount of transparent pricing data, MFT helped the industry learn an enormous amount about how pricing works in microfinance. We showed that it wasn’t just consumers who were unable to evaluate and compare price; the majority of us in the industry were also baffled and confused. Our goal was to raise awareness inside the industry of the seriousness of the problem, and to create a path forward to more ethical practice. And in many ways we have accomplished that mission.
But now, it is time for microfinance to shift the emphasis of its pricing work. Because though we’ve helped illuminate how pricing works in the industry, MFT’s work has also demonstrated that pricing competition does not happen in large parts of the industry, even when this data is available. In contexts where prices are not affected by market pressures, it is meaningless to judge prices by comparison to other prices in the same market. Instead, prices can and must be judged by what we have learned about pricing in these six years, and doing so does not require a full database of current prices in the market. For instance, we’ve seen clearly that an MFI doesn’t have “one price”; a loan product doesn’t even have “one price.” Prices of responsible MFIs reflect the cost curve of delivering loans. And high profits come less from being efficient in a competitive market and more from pricing “off the curve,” taking advantage of the confusing and opaque pricing environment many MFIs operate in.
Microfinance practitioners and stakeholders are now aware of the importance of ethical and transparent pricing, and we now have the ability to help ensure that it becomes the industry standard. But true change comes not from knowledge but from action. Each and every stakeholder in microfinance has the ability to now take action to make fair pricing a reality. MFT has never been the solution to the problem; actions taken by each and every institution are the solution to the problem. So our parting advice for the industry boils down to three words: It’s your turn.