Current State of ICT in the Financial Sector in Mongolia

During 1998-2001, with support from the Asian Development Bank, all regulated financial institutions converted their general ledger systems into a new system based on a Windows environment. Also, they all got online connection for their management information systems. As a result, all banks have started exploring technological advancements for further improvements in their systems and product offerings.

One of the most recent developments is the introduction of a card system. Currently, there are three networks issuing credit and debit cards: Anod bank, Golomt bank and Trade and Development Bank (TDB). Each of them issues their own credit and debit cards. All the commercial banks in Mongolia are using POS terminals and cards issued by one of these three banks. However, the cards issued by one network are not compatible with the other networks. In other words, POS terminals of Golomt bank do not recognize the cards issued by TDB or Anod bank. Some merchants had to install three different POS terminals in order to make sure they will be able to serve all customers regardless of which bank issued their cards. If they do not have POS terminals of all three networks, they will not be able to serve customers who have cards issued by a bank whose POS terminal is not installed. This causes inconvenience for customers and raises the cost for both merchants and banks. In a country of 2.7 million people (of whom, only a fraction currently uses a banking card), it is not economical to have three independent networks.

In response, the Bank of Mongolia (BoM) has recently set up a national Clearing and Switching Center (CSC). The main purpose of this center is to consolidate the independent networks and provide one channel for processing all card transactions. Once the CSC is in full operation in 2006, all 17 banks will be linked to this center. All the three individual POS networks will all go to this one switch clearing center. All cards can be processed through this center.

One of the challenges on the agenda for CSC is the connectivity in rural areas. Within each financial institution, data is transferred to the head office from branch offices. Limited access to online connection interrupts reliable and timely data transfer between the branches, which in turn affects the data transfer to the central CSC from the financial institution. To address this issue, CSC is examining the feasibility of wireless POS. There are two technologies for wireless POS. One of them, WiFi, can be used within a 50 km radius. At the time of the field research, this wireless POS was being piloted. This POS device uses a chip card, which can store up to 1000 transactions off-line. Then, wireless connectivity is used to transfer the data once the chip card has stored up to 1000 transactions. CSC will issue its own smart cards. The software that will process the smart cards will be able to store transaction data off-line.

Use of POS

The sector respondents interviewed in this study envisioned that in three years all banks would have their own cards and all trade and shopping centers will have POS terminals to read cards. All salaries will be deposited directly into accounts, which can be accessed by cards.

Currently, mostly banks have bought POS terminals to install in their branches. After this stage, the clients will start to demand merchants to do transactions through POS. Maybe in 3-5 years, merchants will start to buy POS terminals. Initially, banks will start installing them in merchant’s places. In the second stage, when the number of customers with cards grows into a significant scale, merchants will start to buy terminals themselves. Currently, there is no application of a card system in rural areas, except some bank branch offices at the provincial center level.

Regulatory issues

At the time of the field research, there is no regulatory requirement in terms of what infrastructure has to be in place before introducing an ATM or POS. Financial institutions are allowed to choose merchants and evaluate the potential risks. BoM only examines what requirements are in place for selecting merchants and whether they have been complied. However, there is a need for improvements in the regulatory environment in order to ensure sound implementation of ICT solutions in financial services:

• Contractual agreements need to be made with financial institutions and merchants.
• A more carefully thought regulation is necessary for protecting consumer privacy and confidentiality of data. BoM needs to review the policies and procedures in place for consumer protection and confidentiality.
• BoM has to examine technical adequacy (for example in relation to level of computerization and the adequacy of Management Information Systems) when granting a licenses to Banks and Non-Banking financial institutions.

At present, the BoM carries out no assessment of the potential risks which are heightened due to the use of ICT, whether transaction, credit, compliance or strategic risk.

Supply of hardware and software

There is no local capacity to develop software for ATM and POS. BeverTech is the only private company that supplies hardware for POS terminals as an official dealer of an international supplier.¹⁸ It was founded in 2003, and has developed a partnership with a Canadian supplier as its official dealer.¹⁹ The main products offered by BeverTech include:

- Internet Banking: In 1990, the first internet banking model was developed and introduced to Capital Bank, a commercial bank, in partnership with InterActive, a local software developer. InterActive had experience in developing accounting software. It took two years to develop the complete banking system. Now, all the branches of Capital Bank are using this system. The package includes all financial management information system, as well as internet and phone banking software. Total cost was $35,000-40,000. Maintenance is separate: based on need.

- POS system: It will take a lot of time to develop the software locally. Therefore, the company is exploring a possibility to purchase an international package and modify to the local context. The plan is to acquire the right to modify and customize the international package locally. At the time of field research, BeverTech had obtained the exclusive right to sell the hardware of VeriFone, a US-based company. The Bank of Mongolia was the first client to purchase these POS terminals. The purchase price for commercial banks is about $350 (for the one that requires a phone line - Dial or local network - LAN) and $580 (dial up or wireless connection like cell phone).²⁰ It includes training, installation, device, support, and warranty. BeverTech provides training to bank staff on basic maintenance and repair of the hardware. Maintenance support is free during the installation. The technical warranty is one year. Technical support after installation is around $5-10 per visit. Banks have to cover the costs of communication, printer and stationary. In terms of communication, if they use their existing LAN connection, there is no additional cost. If they use a dial up or wireless connection through a cell phone, there will be an additional cost for communications.

ATM: There is only one commercial bank that has an ATM network. The hardware and software were purchased from a Russian company. Currently, these ATMs do not accept deposits due to the fact that Mongolian national currency is not recognized in the international network of ATM manufacturers. BeverTech does not think any individual company will be able to sponsor the process of getting the local currency recognized. The price of the existing ATM was around $60,000.

Infrastructure

As noted already one of the major challenges in bringing in new technology solutions to rural areas is poor infrastructure. In particular, in many rural soums

• it is not possible to send a fax and or to have an email connection (phone connection is poor quality).
• roads are not well maintained, if they exist at all,
• power supplies are limited

In terms of communications infrastructure, currently, both the private sector and the government are working to improve connectivity in rural areas. In particular, three options are being explored:

1. Cable Optic
2. Satellite antenna (wireless)
3. Leased line.

Each of these has advantages and disadvantages. Banks usually use a combination of these three for connectivity depending on the location of branches, the availability of a leased line and the cost of a given option.

The least expensive is a leased line. However, the leased line is possible only if the distance between the two sites is between 2.5 and 3.5 kilometers (km). Also, if the underground is full and there is no room for launching an additional line, then a satellite antenna is the only option. The limitation with the satellite antenna is that the two connecting sites must be able to see each other. Usually, a connection through satellite antenna is possible when the distance is no more than 20 km. If it is more than 20 km, it is possible to connect via a VSAT antenna, but it is much more expensive.

See Table 5 [ PDF 96.2KB | 1 page ]

In terms of coverage, at the time of field research, all banks online were using one of the above three main channels. However, the connectivity in rural areas was still poor. A representative of one of the main communication companies in Mongolia reported that: “Cost is too high to provide an internet service in rural areas by establishing infrastructure on our own due to the small scale of rural market demand. It is only worthwhile in major urban areas.” He further stated that some subsidy is required for developing infrastructure in rural areas. However, previous experience with an infrastructure development project that was subsidized by the Soros Foundation indicates that more thought should be given for the sustainability of infrastructure maintenance. The start-up cost of the project was paid for by the Soros Foundation. It was agreed that the local government would cover the on-going maintenance cost by paying a monthly fee to the internet service provider. However, the local government failed to pay the monthly fee, so the internet service discontinued.

It became obvious from the interviews with private sector internet service providers that the private sector will not invest in creating infrastructure in rural areas. Their main suggestion for expanding the coverage in rural areas was that the government should install optic cables and lease them to private service providers. While this may be a promising approach, the number of years it will take to finally provide reliable internet connection in rural areas remains unanswered.

Voices of customers

A total of 8 customers were interviewed. The sampling was based on a snow-ball technique.²¹ All of them were XacBank customers. In addition, some of them had banking relationship with other financial institutions. Of the eight customers interviewed, three had had experience using a debit card: one of them had a card issued by Golomt bank, one by Trade and Development Bank (TDB) and one by XacBank (which is in the same network as Golomt bank). All three card users acquired their cards due to their employers’ arrangement with the respective banks for direct deposit of their monthly salaries. According to the interviewees, the advantages of using a card, as opposed to cash, included greater security, increased savings, faster service, improved access and faster money transfer. Disadvantages included some delays in accessing card accounts, and the incompatibility of cards at POS terminals. Customers not yet having a card raised concerns over account security and privacy and the difficulty of remembering pin numbers for ATM machines.

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Comment(s)

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1. Pratyush Agarwal
   (posted 12 June 2009 / 03:20:06 PM)
   
   A very good paper! It recognizes and abridges the technological usage for the bank. But, It has not dealt on the possibilities of using land-line phones, a prevalent technology in rural areas.