Information Technology Can Develop Economies Through Social and Natural Capital

This is a continuation of an article about the importance of technology in the development sector; part one covered development through physical and financial capital with the help of different modes of technology.

Social Capital for Development and Information Technology

(Includes hints of physical capital)

Social capital covers networks, communities, and institutions that enrich the social fabric of individuals. Even though this form of capital is highly intangible, it is no less important than the others because social contracts and cultural contexts play a central role in the lives of people in developing countries. Because of the over-arching nature of technology, physical capital (technology, equipment, etc.) is vital in enhancing social capital, and hence, examples mentioned previously are applicable here as well.

Before we discuss how information technology enhances social capital, it is important to link social capital to the Millennium Development Goals of gender equality and global partnership for development. The latter MDG is vague and expansive, and can loosely be accomplished by creating a global knowledge sharing database/platform where individuals and groups come together to discuss specialized ideas. The former goal can be addressed less indirectly through information technology, and three renowned business models come to mind:

• Kopernik is a website that connects breakthrough technology providers with technology seekers (individuals in the field) with the support of generous donors around the world who finance the transactions.
• M-Pesa is a mobile banking platform that is slowly changing the way Kenya’s society handles cash and empowers entrepreneurs to take out loans and save money for rainy days.
• E-Chaupal is a network of computers with access to the internet, which farmers in rural India can use to get the latest agricultural marketing (prices of farm inputs, weather updates, affordable suppliers, etc.) and information from.

These examples not only serve to augment information sharing between groups and communities, but also have a spill-over effect on Millennium Development Goals previously mentioned. For instance, the elimination of intermediaries (through e-Chaupal) strengthens ties between farmers and improves their bargaining power, which impacts the MDG related to ending poverty and hunger. Similarly, the provision of new technology solutions, such as home solar panels and water purification systems (through Kopernik) impacts MDGs related to environmental sustainability and elimination of poverty and hunger.\

While gender equality may not be a direct result of these innovative solutions, it may, however, be an indirect result of strengthened communal ties and empowerment of end-consumers (both men and women). Additionally, new software solutions can be designed to improve literacy levels of girls and women and these programs can be delivered through mobile phones, and SMS campaigns can be launched to positively change public opinion about women rights.

Natural Capital for Development and Information Technology

Natural capital covers natural resources such as land, water, minerals, and anything else naturally available for man’s consumption. The relevant Millennium Development Goal is environmental sustainability, the lack of which is detrimental to the progress of the poor. Issues such as water sanitation and food security plague developing countries, especially those that have been inflicted by natural disasters and wars. Inadequate availability of natural resources also hinders economic progress of individuals because along with knowledge and skills, people need access to good quality raw materials to run their businesses.

There aren’t many examples to go by in this case, but here is a promising mobile phone application:

FLOW (Field Level Operations Watch) is an open-source, Android application that allows field workers to use mobile phones to document how well water pumps and sanitation points in the developing world are functioning, then transmit that data to create an online tagged map of target regions. (Source: Mobile Active)

Environmental sustainability also includes the use of renewable energy sources (solar and wind power, for instance) and reliance on other means to reduce the carbon footprint left on the ecosystem by man. Although the environment may not be the biggest priority of development professionals, who have more pressing issues to deal with (such as poverty, hunger, disease, etc.) its importance cannot be undermined because the poor are most vulnerable to environmental shocks, as recently witnessed by Pakistan and Brazil.

Information technology can step in by improving the distribution of low-cost alternative energy sources (such as Kopernik) and remote monitoring systems (similar to the one used in FLOW) can be used to curtail illegal mining, logging, fishing, poaching, etc. Lastly, disaster alert systems can be developed to alert inhabitants about approaching storms, floods, tsunamis and fires, and consequently, minimize damage to human property.

These ideas seem viable and appealing, to say the least, but it is vital to remember these solutions will fail if cultural contexts are not examined prior to implementation.

This post series drew inspiration from a UN Working Paper, Using Information and Communications Technology to Achieve the Millennium Development Goals.

Technology Important For Development Through Human and Financial Capital

This blog has previously defined the need for good information systems in the microfinance model and detailed the various roles technology can play in this regard, such as improving functional performance, managing credit risk and improving outreach through different tools, to name a few. This was followed by an article that explained why Cloud Computing, which includes the Software as a Service (SaaS) model, is an appropriate medium for the delivery of such an information system to microfinance institutions, as opposed to propriety and off-the-shelf software solutions. Following the same drift, this article explores the benefits cloud computing can offer to the development sector in general, and to the Millennium Development Goals, in particular.

There has been plenty of excitement over the role information and communication technology can play in the development sector – that it can reduce poverty by overcoming the digital divide. It may take several years before the benefits and drawbacks of this theory are tested, but the idea seems promising, despite the unreasonably high expectations. Technology can corroborate any efforts in the area of poverty eradication along the lines of the UN’s Millennium Development Goals (MDGs) and Amartya Sen’s five ‘capacities’ that can make a difference between poverty and welfare: human capital, social capital, physical capital, financial capital, and natural capital. These capacities, which loosely cover the MDGs, are assessed against current and potential technological contributions.

Human Capital for Development and Information Technology

(Includes hints of physical capital)

This includes education, skills, health and other such capacities can help achieve Millennium Development Goals related to universal education, child health, maternal health and HIV/AIDS. A few notable efforts in this area have recently emerged as the ubiquitous power of mobile phones became eminent. The safest way of achieving universal primary education is through capacity building of the education system (teachers, curriculum, school facilities, etc.) and here, information technology can deliver gains in the areas of training sessions for teachers in remote locations across the worlds, and enriching the course curriculum by creating knowledge-sharing hubs that offer access to quality educational resources related to academic and vocational education. The One Laptop Per Child (OLPC) program is also relevant here.

Mobile phone penetration has shot up in many developing countries during the last decade, such as India, Kenya, Brazil and Pakistan, and software developers are keen to explore the development potential of mobile phone applications. Mobile Health, commonly referred to as mHealth, is the practice of managing health service through the use of mobile phones. This field is gaining popularity in Sub-Saharan Africa, where a few mobile phone applications have been developed by different software vendors with a vision to help the masses.

These applications can send out text messages to villagers in remote areas to share information about medicine dosage and timings, medical appointments, HIV/AIDS, and offer basic health advice for common problems, such as headaches. If the symptoms get worse, patients are given directions to the nearest medical clinic. One mHealth application goes a step further by combining mobile banking elements into the service by helping customers save money for the desired delivery plan. The service has been successfully tested in Uganda with the help of MTN (the chosen cellular network provider). These applications not only improve patient monitoring over large distances, but can also implicitly train rural health workers by giving them access to a global knowledge base about specialized medical services, rare diagnosis and breakthrough medical practices.

The above ideas about improving human capital in developing countries also implicated physical capital, which covers equipments and technologies, such as software and hardware. Such services would require seamless integration between the software developers (to create these applications), cellular carrier (to transmit information via text message), cloud computing providers (to deliver relevant information to the masses), and third party players (such as hospitals and clinics).

Financial Capital for Development and Information Technology

Financial capital includes financial services such as savings, loans, insurance, and the list can go on. Even though formal financial services are scarce in developing countries, the poor have numerous financial needs that are covered by informal money lenders (ROSCAs, Susu collectors, etc.), which may offer convenience, but are fraught with risk of fraud and mismanagement. Microfinance helped establish the link financial services to economic and social development, which incidentally covers the Millennium Development Goal of eradicating extreme poverty and hunger. The significance of technology in microfinance has already been highlighted on this blog through a variety of articles, which you can read by clicking on the various links.

Leaving aside microfinance, information technology can assist other development programs aimed at tackling hunger and poverty by reducing transaction costs faced by individual low-income traders (consider use of mobile banking and informational mobile applications that reduce information asymmetry in markets for farmers in rural areas).

Cloud Computing (Saas) in Microfinance – Benefits, Challenges and The Future

Last week’s article covered a comparison of cloud computing solution for microfinance institutions, with off-the-shelf software and propriety software. The article went on to discuss three benefits of cloud computing in the context of microfinance, and this post continues under the same topic.

4. Improved Internal Control Through Cloud Computing

Once automated procedures and real time reporting are in place, the microfinance institution can exercise better control over its operations across all its branches. Specific benefits of such a step can be:

• Reduced default rate through the administration of sound credit underwriting procedures – these procedures can be created to minimize default risk and loan officers will be obliged to adhere to these steps while approving loan applications.
• Better customer service through instant data availability – any queries from clients about the status of their loans can be immediately answered and any alarming behaviour on the part of clients can be promptly identified through real time data availability. Additionally, loan officers will have more time on their hands to deal with clients because paperwork will be minimized.
• Greater accuracy of internal and external reports – microfinance institutions need to give a detailed account of their activities to investors and creditors, as well as donors, which is a tedious and time consuming task, susceptible to deliberate and accidental inaccuracies. Automated reporting procedures eliminate this risk and provide instantaneous reports to multiple stakeholders.

5. Greater Data Security

Data security and protection is vital in every type of business and microfinance is no exception; however, microfinance institutions often setup numerous branches in far off areas, each collecting their own sets of client data, which makes back-up a hassle. Cloud computing software providers take care of data security themselves, regularly backing up all information and protecting servers against viruses as well.

Some Challenges of Cloud Computing For Microfinance

Cloud computing, like any other software solution for microfinance providers, is not without its risks, the biggest one of which is related to regulatory hurdles. Microfinance institutions are bound by different laws about reporting and information management across different countries and software solutions need to abide to those laws too. For instance, sometimes the main server must be hosted locally to ‘prevent discontinuation of operations during an internet blackout, and to keep a copy of all customer data locally’. For this reason, several information system hubs may be setup in different countries to cater specifically to local microfinance institutions.

Secondly, microfinance institutions with other forms of information system may face trouble adopting the new cloud computing solution, because employees must be retrained, data must be shifted to the new database, etc.

Thirdly, a large gap will be left behind by cloud computing vendors that go out of business, even though that is an unlikely scenario. Microfinance institutions must chalk out what happens to the data in such an event, before signing any agreements, and may further avoid this risk by selecting vendors with previous experience in this area.

The Future of Cloud Computing and Microfinance

Cloud computing has a lot of potential in the context of microfinance, as explained previously. The future will see greater penetration of this software solution as the microfinance sector transforms into an industry. Some notable cloud computing developers are setting up information system hubs in microfinance hotspots around the world, such as India, Kenya, and Brazil. These hubs will have the capacity to serve multiple MFIs simultaneously, drawing the benefit of scale economies to further drive down costs and improve outreach as well as product development.

The strategic implications of setting up microfinance information hubs around the world have been mentioned by Ashta and Patel (2010):

It would strengthen knowledge sharing across the region (and) increase opportunities for pricing discounts from vendors…regional coordination would enables sharing of IT staffing costs, which in turn offers opportunity to lower IT costs at the affiliate / partner level and can further lower their operating costs.

The dream is to enable high transferability of microfinance clients, whether it is from one MFI to another, from one mobile banking carrier to another, or even from an MFI to a commercial bank, if need arises. Of course, all this is only useful if costs are well under control, which is something cloud computing promises to offer.

Importance of Third Party Technology Players in Microfinance

One may appreciate that despite numerous challenges, the microfinance sector at the global level, over the last three decades, has experienced a sustained growth. However, the original objectives of microfinance and the business models adopted by a number of market players did not complement each other as some microfinance institutions saw this as an opportunity to maximize the return on their investment, instead of optimizing it. In support for this approach, some stakeholders may seek refuge in higher risks associated with microfinance lending as well as higher operational costs for doing the business; however, a number of risk mitigation options are now available to such MFIs.

Since the microfinance sector has been a seller’s market and consumers with no alternative were receptive to any financing options offered to them at the seller’s (microfinance institution’s) conditions. The microfinance sector is still largely an unexplored world with tremendous potential and it was eventually realized that microfinance clients need to be served in new ways, with new tools and products.

Initially, a number of microfinance institutions, some with a view to make quick money and others willing to make a positive difference, entered the field with great ease and aplomb but little or no tactical tools to assure and sustain their growth. These players having suffered from a lack of efficiencies and without operational controls or risk discipline indulged in wayward financing that not only harmed themselves, but also their clients.

However these experiences underscored that the latest challenges for the microfinance business world were:

• Risk management,
• Ever-increasing operational expenses,
• Outreach to far-off areas
• Difficulties in repayment process, and
• Loan recovery processes.

Therefore, issues like business efficiency, reduction in operational costs, software development and communications are becoming increasingly relevant to the success of microfinance.

There are two ways to overcome these challenges:

• Invest substantially in relevant business areas which, at the end of the day, would affect return on investments (ROI), or
• Engage third party players that offer specialized services related to overcoming these challenges.

Whichever path is taken, it can be safely assumed that today, for the success of any microfinance business model, the role of third parties is becoming increasingly important.

Similar to commercial banking, the dynamics of microfinance needs better technical tools for almost every step of the model, be it evaluation of prospective borrower’s profile, monitoring of repayment schedules, anticipating impending threats and taking remedial measures.

Understandably, credit bureaus are well positioned to fill in this void as they have the infrastructure in place and by adding information regarding microfinance borrowers and other clients, credit bureaus can offer to significantly reduce credit risk for microfinance institutions. Real time integration between credit bureaus and MFIs is enabled through the telecommunications sector, which also have a role to play in enhancing service outreach while controlling transport and other costs. Mobile banking can significantly lower the cost of delivering these services, as stated in a recent CGAP report.

In today’s business, manual or semi-computerized environments in microfinance institutions is a recipe for disaster. Only sound office management policies and operational controls can ensure effective risk management and reduction in administrative expenses. However, improving business efficiency often requires investment in software development and communications and that is where the real obstacle lies, because capital cost of such inputs is beyond the capacity of most microfinance institutions.

In such a scenario, specialized third party solution providers (be they manufacturers of off-the-shelf solutions or software hosted in the cloud) emerge as viable alternatives. These outfits have in-depth knowledge about microfinance as well as ability to service numerous customers under bilateral fee based agreements without compromising the information security of the constituents.

Such an arrangement, on one side, enables microfinance institutions to avoid related capital cost for technological implements and on the other, improves capacity building processes within the organization, and allows them to focus on their core business.

While operational efficiency and telecom related solutions are easy to handle, presently the concept of cloud computing is likely to face two major obstacles:

• local regulations for microfinance institutions vary from country to country,
• under the existing mind-set, microfinance institutions prefer to have physical control over their database.

Naturally, the first challenge is far easier to overcome than the second.

People are normally resistant to change so it would entail a long continuous awareness campaign on part of stakeholders (technology firms, microfinance investors, etc.) to change the psyche of microfinance practitioners engaged and to convince them that the emerging role of specialized third party players is going to change the dynamics of microfinance in favour of the MFIs.

Cloud Computing (Saas) in Microfinance – Risks and Benefits

Microfinance is witnessing a revolution on the front end, as microfinance institutions engage in product innovation and market exploration to serve diverse needs that venture beyond the financial realm. Naturally, this front-end revolution has driven a back-end revolution, that of the microfinance sector infrastructure, where cloud computing is the next big thing.

Cloud computing is also known as ‘Computing as a Service’ (CaaS), which includes the famous ‘Software as a Service’ (SaaS) model that is quickly gaining acceptance among microfinance institutions who wish to streamline their growing operations while keeping costs under control. SaaS models involve the provision of a complete suite of software applications through the internet to microfinance institutions (clients), who only access the software as and when needed, i.e. the software is provided on demand. Cloud computing goes a notch above SaaS because it covers the provision of on-demand software and hardware.

Before we go any further, one may stop and wonder why it is important for microfinance institutions (MFIs) to shift from manual processing to automated processing in the first place, considering MFIs have been relying on manual systems for years. This topic has been previously discussed through a blog post series about the role and importance of technology in microfinance. Once we determine the high-tech way is the right way for quickly growing microfinance institutions, the question arises as to why cloud computing is a good idea in the microfinance context, and the answer lies in the multiple benefits cloud computing has to offer MFIs.

The benefits of cloud computing are immense, but there are two sides to every story. This article discusses the advantages cloud computing promises to deliver to the microfinance sector and mentions a few problems associated with this model, accompanied by their solutions.

Benefits of Cloud Computing for Microfinance

The following benefits directly apply to microfinance institutions and indirectly impact microfinance clients and the microfinance sector.

1. Ease in Setup and Administration

The importance of a technology-based information system for microfinance institutions has already been established, and the next step is to determine which type of software is most suitable. A basic comparison of the three choices available to microfinance institutions in this regard explains why it is easiest to select cloud computing:

Comparison of Technology Solutions for Microfinance Institutions (Limited to Setup and Administration)
Technology Solution	Pros	Cons
Off-the-shelf software solution	Costs less (investment in plenty of hardware, such as servers, PCs, air conditioners, administrators, etc.)	Mew features May not cater to unique needs of MFI Need to train employees to use the software, Need to contact software developers for troubleshooting and support Regular maintenance required
Propriety software solution	Feature savvy	Costs more (investment in plenty of hardware and software programming fees) Need to train employees to use the software Need to contact software developers for troubleshooting Regular maintenance required
Hybrid between the two options, i.e. a software hosted in the cloud (cloud computing)	Costs are moderate (reduced hardware cost, no software programming fee, usage fee applies) Feature savvy Cloud computing service provider takes care of maintenance, support and software up-gradation	Employees need to be trained in the front-end area only (i.e. software usage) Internet connectivity is a must Cost of data migration

2. Cloud Computing and New Microfinance Services/Facilities

The cloud computing SaaS solution helps microfinance institutions introduce new services with relative ease, because the software developers handle all technical elements while the MFI can focus on product details (as well as serving their clients and maintain good repayment rates). For instance, together with a telecom firm, the CaaS team can setup a single mobile banking application on their platform that can be accessed by a variety of MFIs as they begin to roll out the service to their clients. In this instance, all that is needed is to integrate the microfinance provider’s information system with the mobile banking solution and they are ready to go.

Similarly, any decisions to rely on ATM networks and Point of Sale devices for remittances or loan disbursement can be quickly implemented throughout the microfinance sector if a centralized cloud computing hub integrates these applications. These hubs enable the easy portability of various financial and non-financial applications that are relevant to microfinance today, as mentioned in the following excerpt:

The network of partners in the hub permits interface with payment networks, remittance networks, credit bureaus, proprietary applications, ATM Networks/ switches, Mobile devices and national banking networks.(Jimenez 2008b).

3. Cloud Computing and Cost Control for Microfinance Institutions

The cloud computing SaaS solution uses an affordable pricing policy where microfinance institutions pay in accordance to the software usage (a fee is typically charged on a per-user basis), apart from a subscription fee. As a result, a small MFI can get away with using the information system for a small fee as a limited number of employees use the system to communicate details about a limited number of clients. The biggest benefit is that small microfinance providers can can enjoy the benefits of economies of scale despite their size.

On the other end of the spectrum, large MFIs pay discounted user-fees owing to the sheer size of their users (the aggregate fee is obviously more but the pricing is constructed in a manner that makes it economical compared to proprietary software). As their scale grows, the comparison between stand-alone solutions and cloud computing may shift in favour of the former, but as far as small and medium sized MFIs are concerned, the balance is in favour of the former.

This infrastructure-sharing mechanism along with the lower system development and maintenance cost enable microfinance institutions to control their operational expense in the long run, which will theoretically lower the high interest rates charged on microloans.

Next week’s article mentions a few other benefits of cloud computing in microfinance as well as a few risks.

Reference:
Jimenez, Alberto. 2008b. Microfinance Processing Hub: Latin America, Presentation at Asia Microfinance Forum, August 26 – 29, Hanoi, Vietnam.

Credit Scoring in Microfinance – Collecting Data and the Role of Technology

We have previously looked at the various benefits credit bureaus could deliver to microfinance clients, microfinance institutions, as well as to the entire economy, as well as ways to overcome challenges associated with credit bureaus in microfinance . This week we look at the variety of information sources used in credit scoring and the role of technology in this system.

Collecting Data for Credit Bureaus

Credit agencies typically develop credit data and risk profile based on data obtained from a variety of sources, such as banks, retailers, utility companies and government agencies; however, these sources are not always applicable in the microfinance context. The high-touch nature of the microfinance model means loan officers personally gather such information by analyzing the applicant’s business and family demographics. Even if all this information is freely available, which is often not the case, this leads to a more qualitative credit profile, rather than a quantitative credit score, giving way to accuracy problems.

Microfinance credit bureaus eliminate these problems, as loan officers instantaneously gain access to a wide array of verified information, allowing them to take well-calculated risks.

A variety of data may be amalgamated by credit bureaus, and updated regularly, to create reliable credit risk scores. These include:

Financial information about microfinance clients

• About the business: type, length, financial statements, outstanding dues to suppliers, receivables from customers, mobile banking accounts
• About the credit history: Number of previous loans (from all microfinance institutions), total outstanding loans, missed loan repayments, late repayments, on-time repayments and repayments made before schedule, nature of loan collateral, number of scheduled installments, details of previous affiliation with other microfinance institutions, nature of loan contract (group based or individual, and performance against each type of contract), types of loans taken out (housing loans, education loans), other financial products used (micro-savings, micro-insurance, etc.)
• About the family: assets (such as telephones, ownership of house), businesses run by members
• Other: any previous fraudulent behavior

Non-financial information about microfinance clients

• Identification information (to eliminate chance of fraud), family size and particulars of members
• Education and age of client, as well as length of time spent as client

Role of Technology in Microfinance Credit Bureaus

A solid information system is at the heart of a credit bureau, considering the plethora of information gathered and analyzed by these systems on a regular basis.

Microfinance Credit Bureau Architecture

The diagram briefly explains the information flows in a typical credit scoring setup (considering an external credit bureau is involved). Initially, the microfinance credit bureau database is loaded with information from various sources (banks, government, microfinance institutions, mobile banking firms, etc.) to form risk profiles, which are shared with loan officers from different MFIs, as and when requested. Since the communication channel is two-way, information about microfinance clients (new clients, loan repayments, etc.) is regularly sent to the credit bureau in different ways, as discussed later.

Client data is private, and is therefore sent in a secure environment where information is encrypted and password protected. At the same time, the credit bureau must ensure compliance with the regulatory framework of the company it operates in.

Nature of System Integration of Credit Bureau with Microfinance Institution

Credit bureaus can be integrated with the information systems of microfinance institutions in a manner that caters to the informational needs of loan officers. There are two basic types of system integration in this case:

• Real time information sharing: the credit bureau database can be linked directly with the core system of (large) microfinance institutions to instantaneously update the credit profile of borrowers.
• Intermittent information sharing: light-volume (small MFIs) users automatically transmit client information through internet connections in batches, at the end of the day, or when authorized. Similarly, when loan officers wish to determine a client’s credit score, they may send hundreds of queries in a single batch, or make individual inquiries. In return, microfinance institutions may simply receive blacklists of clients with poor credit scores, or detailed credit reports.

Having said this, the information system provider should preferably have a history of managing large sets of data, and attention should be paid to whether the firm has the relevant skills and capabilities of delivering such a complex project.

Reference:

Dutheil, M. (2006). Microfinance Bureaus : Balancing Vision and Pragmatic Solutions. Available: info.worldbank.org/etools/library/latestversion.asp?235943. Last accessed 2, April, 2010.

ATMs in Microfinance – Part 2

Getting the ATM Solution Right…Cont.

• Usage Barriers – new technology itself can be slightly intimidating, especially for those who are unfamiliar with the English language, which is commonly used in gadgets such as cell phones and ATMs. The rural population in many developing economies may find is easy to operate ATMs through pictorial instructions, or instructions written in their local languages.

• Communication line – ATMs need to send transaction details over a reliable wireless network to the relevant database in order to record debit and credit entries in user accounts, whether they are bank accounts of mobile wallet accounts. A good and cost-effective internet connection is required to instantaneously process data online (an OLAP database may be used). In order to keep internet costs under control, transaction details may be sent to the database for processing in batches, perhaps twice a day (an OLTP database may be used).

• Security and trust – since ATM machines are a modified version of bank branches, they are exposed to criminal theft and misuse in a variety of ways. ATM machines may be tampered to steal ATM cards, funds may be given to the wrong person if the pin-code is misplaced by a user, or currency notes may be stolen altogether. While there are many ways to address these concerns, one not-so-obvious solution is to use biometrics, instead of pin-codes to correctly identify people. Mass usage will only entail once customers trust the technology, and good security arrangements facilitate the development of trust.

Benefits and drawbacks of ATM Machines in Microfinance

ATM networks offer plenty of benefits to microfinance institutions and fulfil the vision of financial inclusion in three ways:

• Cash float management – supply chain management is slightly complicated in mobile banking because of cash-float issues. Mobile banking agents need to keep plenty of cash in hand in order to service cash-out requests from customers, the frequency of which are difficult to predict. As a result, these agents must travel to the nearest bank, which could be several miles away, or be inaccessible in the evening or at night. ATM networks can solve this problem based on their ubiquitous nature.

• 24/7 availability – The day-and-night availability of ATMs offers three benefits:
  • Customers enjoy a great deal of freedom in paying back their loan instalments as they need not leave their jobs/businesses to attend weekly or monthly group meetings.
  • Customers based in regions far and wide can easily access low-cost financial services.
  • These machines replace loan officers to a certain degree (customers can deposit their money on their own) which leaves them with more time to focus on customer acquisition and personalized interactions that have a lot of value.
• Easy distribution of government support funds for the poor, such as social security payments or post-disaster relief assistance.

• Customer empowerment – customers grow accustomed to using an array of services offered through ATM networks, which improves their financial independence, as highlighted in the following excerpt from a CGAP report:

For Prodem FFP, the primary benefit of the ATM network was greater convenience for customers and increased deposit mobilization. Customers used the ATMs for many transactions that previously required staff attention, and were able to conduct business in many locations. In turn, this makes it more convenient for clients to save, which increased the volume of deposit funds available to the institution.

• Safety – Low-income groups usually rely on unsafe means of storing money, such as underneath their mattress, or by investing it in livestock, which may be sold at a later date when cash is needed. ATMs are a safe way to store this money and the service is offered free of cost.

Lastly, here is a video of an ATM prototype that is ideal for the developing world.

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

Technology and Microfinance Services Part II: International Remittance

Migrant worker sent over $550 billion in remittances to their home countries in 2008, which is almost 20 times the total US budget for international aid. No doubt, international remittance services offer a lucrative opportunity for microfinance institutions (MFIs) and mobile banking operators because most workers rely on informal methods to send money home since they lack access to banks.

To offer international fund transfer services to clients, MFIs and mobile banking operators must leverage linkages with money transfer operators (MTOs) within migrant-sending countries (Pakistan, India, Philippines, Bangladesh, Mexico, Poland, etc.) as well as within migrant-receiving countries (Saudi Arabia, USA, Australia, Russia, Germany, among others; see map). Since this post series is about the role of technology in microfinance services, this particular article limits itself to international remittances. (Part 1, which looked at the different technological elements of mobile banking, is a supporting post.)

Basic Requirements of Information Systems That Handle Remittances

Any effective remittance system must possess the following capabilities (Hastings, 2006):

Managing large volumes of low value transactions at low costs

Ensure speedy delivery of funds across the globe

Ensure safety and privacy of transaction orders (encrypted files are sent through different servers to communicate details about credit card numbers, bank account numbers, remittance amount, subscriber’s mobile phone number, etc.)

Interlinking with different MTOs (microfinance bank, exchange firms and money service bureaus, such as Western Union, Dollar East, MoneyGram, etc.) and clearance houses in numerous countries.

Getting Money From Customers

Customers can send remittances in a variety of ways, some of which are:

Visit MFI in person and hand over funds that are to be remitted,

Use their mobile wallets to transfer funds internationally (see previous article on mechanics of mobile banking), and

Deposit cash through specialized kiosks or extensive ATM networks electronically integrated with a variety of MFIs (details in next week’s article).

Processing in Banking Hub

Transaction details are conveyed to the information system so they may be processed along the following dimensions.

Service pricing: Each MTO has a unique service charge for different countries, and an MTO’s information platform must select the most economical option for each transaction. The World Bank has published a list of remittance prices across the world for various MTOs, which individuals as well as MFIs can leverage.

Exchange rate handling: banking systems (of the remittance-sending bank) must also determine the most favourable daily exchange rate, which varies from MTO to MTO by a few decimal points. (These decimal points make a big impact when the aggregate transaction size is large.) Exchange rates also come into play when MFIs deposit funds as floats in their bank accounts with various banks in the remittance-receiving countries.

Communicating transaction details: payment instructions and details (credit card number, account number, amount, receiver’s mobile phone numbers, etc.) are sent via the internet to the partner MTO’s system. If the remittance-sending MTO relies on its own processing system, a bridging interface may be used to connect the two portals, or the sending partner’s interface may suffice on its own.

Account settlement: the final account is settled by the core banking system (through an auxiliary application system, in the case of mobile banking – read more) behind the scene as the individual draws money out of the system. There are two ways this transaction is finalized:

Pull transaction: sometimes, a remittance-sender may not specify a bank from which his/her family can collect the money. In that case, the MTO stores transaction details and instruction in cloud computing system which can be accessed by various banks in the remittance-receiving country (provided the MTO owns bank accounts into those institutions). All transactions are pooled in the cloud and ‘pulled’ individually by banks as needed.

Push transaction: when remittance-senders specify the receiving bank, MTOs simply push the transaction instructions to that bank.

Compliance: lastly, information systems ensure compliance with regulatory standards related to customer authentication, documentation, reporting, fraud prevention, etc.

Giving Money to Customers

Three basic options allow the remitted funds to come under the possession of family members back home:

Place money in the relevant bank account at the microfinance institution

Deliver cash directly to individual, or

Deposit the funds in the relevant mobile wallet account, where it can be used for various purposes (read more).

This concludes the second article in the post-series about the role of technology in microfinance services. Part 1 looked at the various technological elements of mobile banking. Next week’s post will discuss how technology enables the setup of ATM networks and POS terminals in microfinance.

Reference:

Hastings, A. (2006). Entry of MFIs into the Remittance Market: Opportunities and Challenges. Available: http://www.google.com/url?sa=t&source=web&cd=1&ved=0CBQQFjAA&url=http%3A%2F%2Fwww.microcreditsummit.org%2Fpapers%2FWorkshops%2F23_Hastings.pdf&ei=G2-STM6YNc6XceeSxLUG&usg=AFQjCNED_bGYoqf7J0NvrtI-4NrIO. Last accessed 10th Sept

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