Technology and Microfinance Services Part I: Mobile Banking

Over the last decade, microfinance has quickly evolved into a complex sector with a lot of third-party service providers participating in the overall supply chain. Telecom operators, credit information bureaus, ATM and POS network providers, and specialized information system developers are some of the new entrants in the sector, each offering a unique benefit to microfinance institutes (MFIs). This post-series looks at how technology has shaped the dynamics of the microfinance sector, making it more resilient and expansive.

Mobile banking has taken certain economies in the developing world by storm, in some cases acting as a link between the microfinance mission and the poor (even though the reach of mobile banking solutions is far beyond this market segment). Made possible by specialized technology platforms that enable the delivery of financial services through mobile phones, mobile banking is now accessible to anyone with a cell phone and mobile reception. This article specifically looks at how technology enables the provision of the mobile banking service.

Interoperability of Mobile Banking Technology Solutions

The type of mobile banking technology solution depends on where it is hosted and who interacts with it, (as depicted in the Figure 1; credit: Gauravonomics.com), which is sometimes determined by the mobile banking model being followed (bank-focused, bank-led and non-bank-led models). For instance, a bank may operate its own mobile virtual network (MVN) in a bank-focused model, while a mobile operator hosted mobile banking platform is more appropriate for a non-bank-led model (which are run primarily by telecom firms, e.g. Kenya’s M-Pesa and Philippine’s Smart Money).

Any solution hosted with selected banks or mobile operators will limit branchless banking’s progress in the long run as new entrants must evaluate the capital requirements of self-hosting or the ramifications of collaborating with old players in the market. The diagram shows a third alternative, ‘third party hosted mobile banking platform with bank and mobile operator interoperability’ (labelled ’8′), or in other words, cloud computing (which is particularly suited to add value to the developing world). As a number of participants (telecom firms, banks, credit bureaus, network agents, retailers, utility firms, etc.) connect to one another through a single interface, they can gain certain efficiencies that can lower costs and drive growth.

Functions Performed by Mobile Banking Technology Solutions

The range of services supported by advances mobile banking technology platforms is impressive by all means, as it includes:

Airtime purchase / balance recharge

Funds deposit and withdrawal

Fund transfer from one client to another

Mobile wallet functionality

Microloan distribution and collection

Foreign remittance handling, and

Interbank funds transfers.

Different functions are performed to process these transactions in a safe, accurate and timely manner, as explained next.

Sending Data Over the Wireless Carrier

Text messages sent by clients reach the bank’s database instantaneously and securely thanks to advances in technology. Data travels in the form of Short Message Service (SMS) through a wireless carrier network (MNO’s network) and reaches a Short Message Service Centre (SMSC), which acts as an intermediary between the MNO and bank. Once these instructions are converted into a format that can be sent over the internet (HTTP or SMPP), the SMSC interacts with the bank’s specialized mobile banking application, which deals with the bank’s core financial technology solution. (See a detailed diagram). Data is sent back the same way.

These SMSCs have the capability of instantaneously processing messages in bulk so the mobile banking experience is as smooth as possible for client.

Types of Mobile Banking Applications in the SMSC

Each type of mobile banking transaction needs a different application. For instance, the process explained above starts from the customer’s end as s/he requests specific information from the bank’s database, hence a ‘Pull’ application is used to receive customer requests and forward them to the bank’s technology platform.

Alternatively, the bank could initiate the communication through an ‘E-mail to Mobile’ (E2M) application which converts promotional/informational e-mails received from banks into an SMS that can be forwarded to multiple users. The third type of mobile banking application is called ‘Database to Mobile’ (D2M) where any changes made to the client’s account (use of credit card, money deposit, etc.) are automatically conveyed to the client’s cellphone.

Data Security in Mobile Banking

Mobile banking offers no value if transactions are not secure. In order to avoid spam and theft of personal/financial information, all text messages are encrypted, passed through a firewall and verified through digital signatures.

Next week’s post will focus on the role technology plays in transactions related to international remittances services (published).

Looking at Technology in Microfinance from an Investors/Donors Point of View

We have previously covered the role technology plays in reducing costs and improving the efficiency of microfinance institutes, and following the drift, this article explores the microfinance investor’s take on technology.

It is in the best interest of investors to emphasize the development of a microfinance institution’s (MFI’s) core systems through capacity building measures such as employee training, management information system (MIS) deployment, vertical and horizontal integration, knowledge development, external alliances, governance frameworks, and the list goes on. Although expanding outreach and/or enhancing efficiency may be an interim measure , an increase in shareholder value is the end goal from an investor’s perspective.

A recent report by CGAP about the microfinance repayment crises in Morocco, Pakistan, Bosnia and Herzegovina, and Nicaragua, adds meat to this argument. The study reveals weak information systems, among other factors, exposes microfinance institutions to the dangers of fast paced client and portfolio growth. Interestingly, the global economic recession was only a secondary cause of the repayment crises.

This ‘technology-funder’ relationship works in inverse too; microfinance institutes stand a better chance of attracting funds from donors, banks, individual investors and venture capital firms if they show a higher degree of transparency, have good performance results and decent back office systems (e.g. management information systems – or MIS – and governance structures) to support rapid growth of clients, products, employees and markets, and to communicate performance data to funding partners. This not only reduces the investment risk, but also helps gain the attention of investors and donors looking for better returns or high impact.

In this context, Triple Jump and Developing World Markets, are just two investment funds specializing in microfinance that follow this strategy. Despite this, MFIs resist the idea of full disclosure:

… MFIs may not have the relevant data to report or may not have the tools
(MIS), or the time (fast growth, time pressure) to provide it. Also, MFIs have no incentive to report any data as long as they benefit from available donor funding.
Kulik, N and Molinari, P. (2004). Sustainable Microfinance and Technology . Ford Motor Company Fellowship.pg 20.

To put this into perspective, back in 2000, only 200 microfinance institutions (MFIs) out of several thousands, submitted financial reporting data to the MIX Market database, and even though this number drastically improved to over 1200 in 2008, last year, only 786 MFIs reported their performance figures.

To improve the flow of data between microfinance institutes and investors, several microfinance rating agencies have been established to look at specific financial and non-financial indicators of MFIs. Most calculations for quantitative indicators require the availability of detailed data that information systems promptly provide. For instance, MicroRate’s financial performance measures include Return on Equity (ROE), Portfolio Yield, Portfolio at Risk, Operating Expenses, Net Operating Margin, Average Loan Size, Percentage of Write-Offs, Loan Provisioning as a Percentage of Portfolio at Risk, and the Current Ratio, to name a few (Source: rating report on ABA SME, Egypt).

No doubt, investors and donors have a fundamental role to play in the establishment and progression of core microfinance systems, and the recent series of Information System Conferences arranged by CGAP reveal the following thoughts:

“Donors and investors can:

• Require MFIs to provide feedback on (technology) vendor and solution (information system)
• Enforce minimum reporting standards
• Invest in IT companies that focus on MFIs
• Encourage and incentivize partners to invest in technology, as a mean to accurate and transparent reports
• Incentivize, through funding, the usage of technology and automated reporting
• Work with partners to develop and implement technology strategies and sound selection of back office solutions
• Allocate funding to procurement/support of back office systems and capacity building in management and maintenance of them.
• Impose funding conditionality related to improvement and standardization of MFI processes and systems
• Develop a robust diagnostic to identify MFIs that are most likely to benefit from support in back office systems…then focus on those MFIs who wish to scale and are not yet big enough to fund their own investment in this area.”

Read full summary of all recommendations.

Other thoughts:

Influence MFIs to adopt lending policies that are less ‘’risk centric’’ and be more ‘’reform oriented’’.

By lowering their financing charges MFI will avert the risk of being labeled as a reformed replica of traditional loan sharks.

This concludes the series of posts about the role of technology from the investor’s perspective. Next week’s post will look at how technology is changing the dynamics of the microfinance sector.

4 Ways Technology can Increase an MFI’s Efficiency Level

This is the third part of the three-post series on enhancing cost-effectiveness and efficiencies in order to improve the overall social and finance performance of a microfinance provider.

The following points refer to different measurements of efficiency, which have been mentioned against each.

1. Computerized Operations and Setting Targets

Efficiency measure: Output/Time

As mentioned in an earlier post, one of the benefits of automating labor-intensive paperwork, is the reduction in the time taken by each loan officer to record his/her daily activities as well as each borrower’s repayment transactions. The same goes for most data collection, analyses and reporting activities of the remaining workforce.  In order to support this end, employees should be given strict performance targets to improve their individual performances (output).

Saving time and increasing the amount of work done by workers increases productivity in two ways; workers not only have extra time to deal with more borrowers, they can also take on additional responsibilities. The added benefit is the ability of managers to quickly analyze the growing amount of raw data (market research, client trends, and competitor analysis) in order to make prudent decisions.

2. Planned Field Visits

Efficiency measure: Output/costs

Regular field visits are an important element of the microfinance model, which means loan officers need to be sensitive to fuel prices and vehicular maintenance expense in order to achieve a win-win situation. By improving the utilization of available transport vehicles (rickshaws, bicycles, scooters and motorcycles) and planning each round of field trip in order to minimize the fuel consumption, MFIs can considerably lower their transport costs. Of course, all this is just a matter of common sense for smaller microfinance providers and can be done manually, but as the client base grows to accommodate several thousands of customers, managers may rely on route management software to make trips as efficient as possible.

3. Benefit From Economies of Scale and Vast Product Range

Efficiency measure: operating expense ratio (OER) / average gross loan portfolio (GLP)

A recent study by The MIX shows MFIs can improve their efficiencies through economies of scale, i.e. by gaining experience in serving more clients through services offering beyond microloans (micro-savings, education, health, etc.). The results were not as straight-forward as expected, but significant enough to lead microfinance managers to grasp the need to rely on technology to ensure higher growth translates into higher social and financial returns. This entire sub-heading is linked to an earlier post series about the different ways technology supports sustainable growth, which you can read here.

4. Credit Rating Agencies / Credit Information Bureaus

Efficiency measure: operating expense ratio (OER) / average gross loan portfolio (GLP)

The same study, mentioned above, revealed that the presence of a credit rating agency dedicated to microfinance (public and private) in business environment increased efficiency of MFIs. The results indicate that higher efficiency possibly results from ‘some form of access to the credit bureau and client information, thereby reducing efforts in screening borrowers, and collecting and enforcing contracts due to the value that borrowers put on their reputations and future access to credit’.

Once large/high-growth MFIs realize the importance of integrating technology with their operations, they are faced with the decision of whether to build the system in-house, buy an off-the-shelf product, or purchase an open-source software that can be customized to the MFI’s unique needs. This, of course, will be discussed in another post.

This series ends with two important points:

• Technology alone cannot reduce an MFIs cost; it must first be aligned with the organization’s ‘people, processes and mission’,
• The process of developing cost-saving and efficiency-enhancing practices is continuous.

The next post will look at the importance of technology in MFIs from the investor’s perspective.

Cont…7 Ways Technology Can Deliver Cost Savings for Microfinance Providers – Part II

4. Minimize Credit Risk (Reduce Provisions for Bad Debt)

According to the report mentioned previously, portfolio losses (provisions for bad debt and write-offs) account for 7% of a microfinance provider’s costs, and although this isn’t the largest source of expenses, it is something that can be easily controlled by strengthening credit discipline. An MIS can help in the following way:

• Strict tracking of loans made to individuals and groups (repayments made and overdue, as well as the quantified risk of default)
• Thorough selection procedure of client by analyzing business plan, family size, personal assets, skills and knowledge, current employment, if any, etc.,
• Assessment of credit ratings (through internal or external credit rating agencies),
• Determine maximum exposure an MFI should take on a borrower, through a product (insurance and microloan), or on a geographical market,
• Collaborate with microloan guarantee services,
• Creation of specialized products (that compensate) for high-risk clients,
• Offer incentives for prompt repayment by borrowers (integrate this information with microloan pricing models).

2. Introduce Low-Cost Financial Services and Lower Distribution Costs

Some financial services, such as micro-savings, are less expensive to administer than others, such as micro-insurance, and MFIs, depending on their mission, can alter their service offering to focus on low cost services that are adequately supported by technology. Additionally, this decision concerns the medium of service delivery, where m-commerce offers significant cost-saving opportunities, as publicized by a recent report by CGAP (On average, branchless banking is 19% cheaper than banks).

3. Lower Cost of Funds

A well-managed MIS allows MFIs to work in real time, which improves operational and financial transparency, market responsiveness, and customer protection, to name a few. This transparency, which is not common in the development sector owing to the informal organizational structures of NGOs, will serve to attract investors that may be willing to provide capital at lower costs, thus reducing the financial expenses of an MFI.

4. Pool Resources and Reduce Processing Costs

Lastly, MFIs can lower their collective data processing costs and improve the market research function if they all rely on a central processing hub that is efficient, affordable, secure, and scalable. This requires that several MFIs outsource their back-end technology department to a single competent technology vendor who offers an MIS following the ‘Software as a Service’ (SaaS) model. The centralized database will handle integration with each MFI’s operations, as well as any third party delivery channels (in the case of branchless banking) so the benefits of economies of scale can be transferred to MFIs, and hence, to their clients. These service hubs will also allow MFIs to focus on their core business while the technology partner handles all technical issues.

This is by no means an exhaustive list of the ways and MFI can reduce its costs through an MIS, however, it covers the bulk of the methods. Next week’s post will discuss the different ways an MFI can improve the efficiency of its operations, which will go on to improve overall management and investor returns, if any.

7 Ways Technology Can Deliver Cost Savings for Microfinance Providers – Part I

This post stems from an earlier post about different roles of technology in microfinance.

Regardless of the fact that investors are drawn to the sector by high financial and social returns, microfinance institutes (MFIs) must improve cost-effectiveness and efficiency to become sustainable, competitive and to protect clients from high interest rates. Even if the intentions of an MFI are noble, financial services ought to be offered to the poor at the least possible cost, which are essentially driven by efficient management systems.

This is the first of three posts that look at the different ways technology, in the form of management information systems (MIS) can be used to reduce costs and increase the efficiency of microfinance providers.

Reducing Costs Through an MIS

‘Lose the fat and keep the muscle’ – PWC.

Microfinance providers must analyze possible cost reduction in different business areas through regular, detailed reports (easily generated by an MIS) about different Operating and Financial Costs (two major cost components for MFIs, 2010 MIX Publication). Managers must prioritize various elements in terms of ‘absolute essential expenses’ (muscle) and ‘dispensable expenses’ (fat), while keeping in mind the microfinance provider’s unique mission (social development, product innovation, client relationships, financial returns, and so on). As explained in detail below, excessive spending in the following areas can be quickly controlled:

• Labour intensive manual activities (administrative costs),
• Communication and information redundancy
• Personnel salaries and training,
• Provisions for bad debt,
• Cost of financial services and distribution (covered in next post)
• Cost of funding (covered in next post)
• Data processing (covered in next post)

Regular measurement of these elements through key performance indicators will enable managers to significantly lower their overall costs.

1. Automate Labour-Intensive Manual Activities (Collection of Loan and Other Administrative Work)

A lot of paper work about loans and repayments of clients is done manually by loan officers, which not only consumes time, but also increases the risk of errors. By relying on an MIS that incorporates:

• computerized accounting systems,
• automatic hand-held devices for recording payments,
• ATM or debit cards, and,
• payment terminals,

microfinance institutions can greatly:

• reduce the administrative burden on loan officers,
• lower the purchase of office supplies,
• reduce transaction fees,
• improve data accuracy and security,
• facilitate data sharing between different employees, and,
• allow loan officers to handle more clients during the same period of time.

2. Improve Communication and Lower Information Redundancy

As a small MFI grows, its informational needs grow as well; employees need to be in contact with one another, as well as data about new clients, products, branches, agents, markets, etc. Unless efficient information and communication technology (ICT) is deployed (to enable real time exchange of information), over time, there may be significant shortage or duplicity of information as it gets harder to communicate ideas and knowledge across various functional areas and teams of an MFI.

For instance, the accounts department and sales department may both keep duplicate records about the loans advanced to each client, simply because the two departments are located in different geographical areas. A central database, easily accessible by all employees, solves this problem while improving data security and accuracy.

3. Control Personnel Cost

Since microfinance is a unique high-touch financial service, loan officers are hired abundantly to deal with thousands of clients, and the back-end staff is specially trained to work within the differentiated business framework. Additionally, MFIs may wish to keep their salaries competitive, therefore, the following techniques may be used to control personnel-related expenses:

• Strictly matching salaries to the worker’s job responsibilities and performance (against targets and Key Performance Indicators, KPIs), and avoiding any concessions that may raise operating costs,
• Improving the productivity/efficiency of workers (through technology, as shall soon be explained in another post)
• Controlling training and development costs, possibly through job rotation programs or an informal knowledge management system.
• Educate workers about the importance of cutting costs, and set an environment for cost reduction,
• Limit hiring of workers to pre-planned business targets to avoid under-employment, and
• Improve labour productivity – this will be discussed in a post scheduled for publication.

Evidently, these tasks are difficult to manage through standalone manual management systems; therefore, large microfinance providers may consider using a human resource MIS (HRMIS).

This concludes the first of two posts on the ways technology can deliver cost savings for microfinance providers. If you would like to receive immediate notification when the second part is published, please subscribe.