INSIGHTS
The Microcredit Opportunity

We can all read the news. Credit is frozen, or nearly so, and the federal government is laboring mightily to get credit flowing again. Unfortunately, here in the U.S. as well as in other places, like the UK, banks have become averse to doing business. The news reports I read say that after being too lax, many banks are being too strict in their lending policies and are sitting on the cash that governments have given them to lend. What can CRM do here?

The big challenge ahead is that credit is just about frozen, and I expect that the thaw will begin early next year and that by summer credit will be okay, but not great, meaning that if you are big and have a good reason to borrow, you will be able to get credit. However, having been through a financial wringer, banks will continue to be cautious, and there will be enough new safeguards in the financial system that getting credit for the average person will still seem tough. Credit card interest rates will look like the world record in Olympic Monopoly.

If that is the case, then I think we will see vendors across a broad spectrum offering financing of their own in an effort to keep the wheels of commerce turning. In a way, vendor financing has been with us for a very long time. Car makers have had their own financing arms forever, for example, and when an outright purchase won't work, the dealer can just as easily go into lease mode. In the end, the result is the same -- product moves, customer need is satisfied, and commerce continues.

The issue, as I see it, has been that beyond the very large companies that can build and function as their own banks, there are a lot of companies that need the same kind of solutions who cannot afford to build the infrastructure of a bank. They don't need it either, but they do need the ability to extend credit and collect money efficiently.

A Metaphor in Microfinance

There is a business opportunity here, which I have written about before. With credit tight and credit card interest off the charts, some other mechanism for financing purchases is needed. High interest rates provide an opening for vendors to disintermediate conventional lenders, which will have the happy effect of keeping commerce flowing, satisfying customers, enhancing customer loyalty and keeping people employed. In my mind, the logical place for a finance module should be the CRM suite.

In a previous post, I used the example of layaway as the prototype of vendor financing. Layaway has its roots in retail , and in most cases it was discontinued as a retail practice before it was computerized. If layaway doesn't work as a metaphor for you, then consider microfinancing. In the third world, very small sums are lent to poor people for such things as making a purchase of some small piece of equipment or even a cow, with which the third world entrepreneur can begin a business and gradually climb out of poverty.

The system works well enough that its originator, the microfinance banker and economist Muhammad Yunus of Bangladesh, won a Nobel Prize for his efforts in 2006. The UN General Assembly President Sheikha Haya Al Khalifa estimates that the Grameen Bank, a pioneer in the microfinance movement, has disbursed over US$5 billion in microcredit loans to 7 million borrowers, 97 percent of whom are women.

There won't be a Nobel Prize waiting for implementing microfinance concepts in first-world business, but as a business opportunity, the software entrepreneurs could create a new module and a new mode of business by developing, say, an on-demand vendor-financing suite. Such a suite would need to encompass several different styles of financing, from leasing to layaway, with conventional financing somewhere in the middle. To make it all work, collateralization of the loans (as with layaway and most forms of lending) will be an essential early step. This will be a great -- and necessary -- departure from the uncollateralized approach to lending that is our credit card industry.

Creating Loyalty

Perhaps the most powerful additional reason for supporting vendor financing -- after the obvious advantages of keeping business flowing -- is the fact that customers who have established credit with a particular vendor will have an important reason to continue patronizing that vendor.

Other more conventional strategies for selling through a slump will also be useful, but too often those strategies, like the proverbial "staying close to the customer," serve primarily to maintain the relationship in anticipation of the time when the market frees up and more robust commerce resumes. I do not believe that is our situation right now, though. The credit freeze is so significant that it will take not only the intervention of the government in the financial markets but also concerted effort at the microeconomic level to get business going again, and quickly.

When a vendor makes a decision to finance a purchase, it will be because the vendor analyzes and accepts a reasonable risk for the transaction. Banks will have too much to do in this crisis trying to keep credit flowing to their best customers while trying not to lose capital. They won't have the bandwidth to evaluate the micropurchases, so interest rates that regular people pay will remain stubbornly high. However, vendors will have the opportunity and motive to evaluate creditworthiness and grant credit -- and it will be to their advantage to do so.

Microcredit will not solve all of the problems we are facing right now, but it could serve the important function of bringing financing the last mile to the buyer.

Denis Pombriant is the managing principal of the Beagle Research Group, a CRM market research firm and consultancy. Pombriant's research concentrates on evolving product ideas and emerging companies in the sales , marketing and call center disciplines. His research is freely distributed through a blog and Web site. He is working on a book and can be reached at denis.pombriant@beagleresearch.com.