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

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).