ATMs in Microfinance – Part I

During the last decade, microfinance has explored new horizons thanks to innovations in the field of technology. One such innovation is branchless banking, which covers three distinct mediums relevant to microfinance – mobile banking, point of sales devices and finally, ATM networks. This article covers the third element, highlighting the role played by ATM networks in the microfinance sector.

Functions and Features of ATM Networks in Microfinance

ATMs have traditionally been associated with stable financial lifestyles of the medium and upper class; however, that is beginning to change as microfinance institutions (MFIs) leverage the outreach of these machines. Microfinance clients often reside in disparate a rural location, which makes it difficult for loan officers to reach them. Mobile banking services (such as M-Kesho) and POS devices (as in Brazil’s case) may solve the problem, but ATMs have their own role to play here.

MFIs can partner with existing ATM networks (Banco Ademi, Dominican Republic and Nationlink, Philippines) or setup their own system, in order to distribute loans and provide constant access to the client’s savings account. ATMs can also be used to accept deposits on behalf of loan officers and banking agents (used in POS-based microfinance solutions). The benefit using this system have been described later.

Customers typically need a smart card to avail these services, but if an ATM network collaborates with a mobile banking solution, clients may draw cash from on the basis of their mobile wallets (yuCash, Kenya).

Getting the ATM Solution Right

Developing an ATM channel to offer financial services to the poor is no easy task. Here are some factors microfinance institutions need to look at to ensure the ATM delivery channel rolls out properly.

• System integration – a proficient system development team, preferably with expertise in the microfinance sector or a related area, should be contracted to provide a capable technology platform, adequate support and troubleshooting. The ideal technology solution would allow various microfinance institutions to hook on to the ATM network, which means hardware and software interoperability of the database is key. This is essentially a cloud computing model, which has many benefits to offer.
• Cost Management – ATMs are expensive compared to POS networks and mobile banking and microfinance institutions may pause for a moment to consider the cost implications of selecting this delivery channel. There are two options available to cost-conscious MFIs in this regard:

Leverage an existing ATM network – the cost of system integration and service charges will still be present, but the colossal setup cost will not apply.

Approach low-cost ATM manufacturers – recent developments in the Indian financial sector have led to the creation of low-cost ATM machine by Vortex. It uses “about as much electricity as a 70-watt lightbulb. Backup batteries and solar panels can keep it online if the grid fails. Vortex installed a biometric touch pad to combat fraud and assure villagers new to banking that their money is safe.” This machine costs 35% of the typical market price of 20,000.

Next week’s post lists three other important factors that need attention when rolling out an ATM network from the financial inclusion perspective, and lists a few benefits of using ATM networks as a means of reaching the masses.

Point of Sales (POS) Devices in Microfinance

While mobile banking is often promoted as a convenient medium for money transfer (sending or receiving money), it is not the only medium available for the masses at the bottom of the pyramid. Other carriers include:

• Point of Sale (POS) terminals, devices and vendors, and
• Automated Teller Machines (ATMs).

Even though these two technologies are not traditionally associated with the lower income group, they promise to offer convenience, safety and accuracy to both microfinance loan officers and clients.

Point of Sale (POS) terminals, devices and vendors

These are often handheld devices that are wirelessly connected to the main information database of the microfinance institution, and allow for the easy processing and routing of loan repayment transactions. POS devices can be setup at retail stores, pharmacies, petrol stations, and even post offices in rural and urban areas, provided they have a stable connection network. Alternatively, they may be carried by loan officers to each client’s house during periodic field visits for the collection of loan installments.

The POS device often contains a fingerprint scanner to identify the borrower and some sort of slot to swipe a smartcard that holds encrypted details of the client’s loan and required repayment. A keypad and screen helps punch in the transaction details, which are sent to an online database that processes the transaction and makes relevant changes to the customer’s account.

Capabilities of advanced POS devices is not limited to receiving loan payments – services offered include withdrawal, utility bill payments, balance enquiry and account openings – all of which are financial services used by the lower income group.

Russia has recently setup a series of automated payment terminals, which are a step ahead of POS devices. Apart from the features mentioned earlier, these terminals allow users to purchase mobile airtime, pay taxes and rent, without the need to open up a bank account. Additionally, these terminals do not require human operators and offer services day and night, which is not possible in other POS models.

Not all is as good as it seems:

Russia’s payment terminal model isn’t perfect. Consumer protection questions abound. A good chunk of payment terminals are operated by unregulated non-banks, and these don’t always provide a customer service number or even a company name to contact, should your money be taken. (CGAP)

Of course, this can easily be addressed if a solid cloud computing infrastructure is established.

Benefits of Using POS Terminals

POS devices have long been used to process credit card transactions in retail stores, and now their potential in delivering value to microfinance institutions is widely known. As mentioned earlier, loan repayment transactions are not only processed in a secure environment (with a few exceptions), but can also allow the delivery of financial services in far off areas with little infrastructure.

Since the information system takes care of all the data processing and recording, loan officers can allocate more time to customer relationships, which are vital in the microfinance sector. The other benefit of linking this to a centralized information system is the ability to link customer repayment rates to comprehensive credit ratings (through a credit information bureau).

Customers benefit as well since they can safely store their wealth in the form of e-money in their smartcards, and can convenient visit the nearest POS to repay their loans or bills, instead of commuting over large distances to reach the utility company. This is a plus point from the microfinance institution’s perspective as well, since loan officers need not visit each client as his/her home – this saves time and money.

Comparison of POS and Mobile Banking

Since POS terminals and devices are an alternative to mobile banking, it makes sense to compare them. While POS systems process transactions quicker, the cost of mobile banking devices (personal cell phones) is lower. Secondly, POS terminals can be easily used for high-value transactions because smartcards have the ability to store large sums of e-money. You can read other comparisons here.

Next week’s post discusses the role of ATM machines in microfinance.info