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).

Related posts:

1. Technology and Microfinance Services Part II: International Remittance