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

Internal Control Perspective: Achieving Sustainable Growth in Microfinance – Part III

This is the third part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. Read Part 1 (Marketing Perspective) and Part 2 (Human Resource Perspective).

Other Non-Financial Internal Matters

Managing information that will improve internal controls, specifically, credit discipline of microfinance providers.

1. Client Analysis and Selection

Short-term incentive schemes (mentioned in the last post) encourage loan officers to acquire as many clients as quickly as possible, and therefore, compromise on quality. Instead of making them more efficient, employees may deliberately shorten or ignore rigorous loan approval procedures because following them takes time, and strict guidelines may reject several applicants. Poor decisions are made as little consideration is given to:

Crucial facts of loan requests,

Repayment capacities of clients,

Viability of business plans, and

Credit history and credit risk.

Some solutions are as follows:

Establish detailed and sound credit policies and procedures, and

Automate approval process so all steps are followed and special concessions are not possible without managerial approval.

2. Multiple borrowing and Credit Pollution

The traditional rule of ‘one loan per client’ is overlooked as microfinance providers compete for a limited customer base in saturated markets. The alternative is to search for new clients in other markets, but that option is more costly in the short-run, and therefore, less appealing. As a result, microfinance shifts from a supplier’s market to a buyer’s market and customer bargaining power rises, because of which, three problems can arise:

Reduced incentive for client to invest loan money into productive uses (because a he/she can easily take out a second loan to pay off the first),

Clients may be inclined to borrow more than they can repay and become over-indebted (simply because they have access to additional funds), and

Clients will not worry about defaulting and losing their credit history with their MFI (because they can get a new loan elsewhere and build fresh credit histories with other MFIs).

Some solutions are as follows:

Establish a centralized credit bureau to gather data about clients, based on their incomes, businesses, occupation, family size, age, present and past loans, skills, etc.  MFIs must be given quick access to this information to make timely, informed decisions that will come in handy at the Client Analysis and Selection stage, mentioned above. (Note: The topic of credit bureaus in microfinance is extensive and complex and deserves an individual post, which will come soon).

Program the organization’s information system to track more than one loan per client (in cases where client’s repayment capacity is adequate).

3. Lax Credit Monitoring and Recovery Policies

Traditionally, loan officers visit clients once a week, or conducted weekly group meetings to work out possible problems and to collect loan installments. However, as MFIs quickly add to their client base, these tasks present logistical and economic problems. Therefore, managers often reduce the frequency of field visits or deploy external agents to conduct group meetings and collect money on the MFI’s behalf. As this responsibility is relinquished to non-employees, so too is control over the process and this decentralization can lead to the following problems:

External agents are in a position to amass more influence over borrowers than the MFI itself (which can be dangerous if used against the microfinance provider), and

Non-compliance with credit procedures, along with possibility of fraud or transactional errors.

Some solutions are as follows:

Install mobile banking solution to deliver cost savings and efficiencies (permit repayment of microloans through mobile phones),

Set up automated payment terminals that reduce frequency of field visits for collection purposes, and

Generate reports that highlight clients who missed payments, so loan officers can prioritize their visits.

4. Poor Informational Flow Between Organizational Functions

As microfinance providers spread out to accommodate more clients, products, workers and markets, they need to efficiently gather and digest masses of information for various purposes, including those mentioned under marketing and human resource issues. Naturally, a manual communication and reporting system will crumble within no time because for the MFI to be responsive and successful, information needs to move between various functional areas and departments promptly, if not in real time.

The solution, of course, is to develop an extensive automated information system.

The next, and last post in this series will discuss various problems a high-growth microfinance provider faces in the areas of auditing and accounting. Read Part 1 (Marketing Perspective) and Part 2 (Human Resource Perspective).