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 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).