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.

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.