By now, we are familiar with the marketing implications of the Long Tail concept, which have been used to the advantage of sites like Netflix and Amazon. Sites like these try to market more obscure products to a large number of customers, realizing profits in doing so. This same concept has impacted the business models of some non-traditional microfinance and microcredit institutions. Proliferating in recent years, microfinance institutions offer small loans to the poor (often in developing countries), encouraging entrepreneurship and financial and social empowerment.

Traditionally, formal banks don’t offer microfinance services because they tailor their services to those who already have some amount of money. By reviewing credit histories, requiring deposits to open accounts, and requiring collateral for loans, these formal banks have excluded a “long tail” of poor people from financial services. However, several microfinance ventures have had success targeting services to this “long tail,” including the notable organization Kiva (http://www.kiva.org). This organization operates by partnering with microfinance institutions and using its website to post personal stories and requests for loans by entrepreneurs who have been deemed reliable. In many cases, these entrepreneurs are women and people from third-world countries who would otherwise not have access to financial services. Regular people can then go on the site and make a loan as small as $25 to these entrepreneurs.

Kiva is unique because of its use of multiple long tails. By making loans to the poor, Kiva is targeting the long tail of potential borrowers. Also, one of Kiva’s goals (as described in this interview with the Kiva CEO) is to target a long tail of small microfinance institutions as future lending partners (as opposed to larger, more established institutions). Finally, by eliciting loans from regular people, Kiva makes use of even more of the lending tail as individual lenders can supplement microfinance institutions that lend large funds.

As it turns out, this business model can be costly. For one, as the Kiva CEO attested, finding reliable, smaller institutions in the long tail to work with is an issue–many of these these are “off the radar screen of international capital market funders.” It takes time to track these institutions down and determine their reliability. Another issue is screening and ensuring that featured entrepreneurs are extremely reliable people who are almost certain to pay back the loans. Historically, the repayment rate has been about 99.7%, but if the rate were much lower, Kiva could very well lose its long tail of willing lenders.

Still, it is possible to make a profit using the Long Tail strategy in this way. As it stands, Kiva’s interest rates for loans are relatively high. Also, according to the Kiva site, “Microfinance programs like Bangladesh Rural Advancement Committee and ASA in Bangladesh have already demonstrated that very poor clients can be reached profitably: both institutions had profits of more than 4% of assets in 2000.” So - while there are costly obstacles to using the Long Tail strategy - there is evidence that it can and often does work in microfinance. But perhaps the greatest argument for this way of helping the poor is that it improves lives and empowers entrepreneurs around the world.