Innovations of Information and Communication Technology

There is an increasing recognition of ICT potential in contributing to income generation and poverty reduction. It enables people and enterprises to capture economic opportunities by increasing process efficiency, promoting participation in expanded economic networks and creating opportunities for employment. For example, online portals for are providing farmers with a variety of information including market prices, weather reports, and farming bestpractices. They can also provide isolated communities with access to the latest health information and treatment and inform officials of rural public health issues.

Specifically in relation to microfinance the use of ICT began with the arrival of the Palm Pilot (or called, Personal Digital Assistant – PDA). These pocket computers allowed loan officers to fill out forms containing customer information and provide an initial indication of whether loan would be approved or not in the field, thereby automating the information gathering process (Silva, 2002). In a series of articles by Steve Whelan, for The Consultative Group to Assist the Poorest (CGAP), talks of the various technological devices that are currently being used around the world (Whelan, 2003). These articles highlight devices such as automated teller machines (ATMs), interactive voice response technology (IVRs), smart cards and personal digital assistants (PDAs). The series also has an article on how biometrics is used by MFIs in various parts of the world. These articles give the usage of these devices, their requirements and how they work, their costs and benefits, and who should use them.

Moreover, in recent years, with the coming of the digital age, there has been a growing awareness of the significance of information. MFIs have understood that poor information systems have an impact on every aspect of an institution's performance, from operational effectiveness to strategic management. As the scale of operations grows, MFIs feel the need for having an integrated and well developed information system to handle their portfolio and transactions. It is also necessary in taking appropriate policy decisions to provide efficient, effective, and transparent services to clients, while maintaining effective time management and increasing outreach. Gibbons and Meehan claim the use of a management information system (MIS) will improve efficiency and increase outreach (Gibson & Meehan, June 2000). Therefore, there is a need for the use of technology by the microfinance sector for both a greater outreach and efficiency at a lower cost to the people.

Below is the summary of most commonly used ICT applications in microfinance.³

Automated Teller Machines (ATMs) or Point of Sales (POS) devices– conduct many banking transactions that would otherwise require staff attention: they furnish account information, accept deposits, draw down on pre-approved loans and transfer funds. These are the main ICT applications in microfinance and we discuss them in more detail below.

Interactive voice response (IVR) technology - refers to examples like using phones (either mobile or stationary phones) to check an account balance, make transfers, learn about products, and find the nearest branch location and its office hours. This saves time both for the clients and staff.

Internet banking –clients can make the same transactions as with phone banking (checking their account balance, making transfers, learning about products and finding the nearest branch location and its office hours) on the Internet.

Personal digital assistant (PDA) – can be used by loan officers to process loan applications by using the preset credit scoring model, to review a client’s historical data, and to monitor loan performance by reviewing the list of borrowers and their loan repayment status. Virtually all client data and client visit records are stored electronically and are immediately available in this small device (like a palm pilot).

Management information system (MIS): - provides computerized data processing for management decision making; it is used primarily for portfolio management, accounting and financial performance management.⁴

Credit scoring – analyzes historical client data, identifies links between client characteristics and behavior; and assumes those links will persist to predict how clients will act. The technology can help a microfinance institution analyze how its clients have behaved in the past to make more reliable loan application decisions, devise more effective collection strategies, better target marketing efforts and increase client retention.

Complimentary devices:

Smart cards – can be used for financial services, such as managing savings accounts, disbursing loans, or making transfers. There are different forms of personal identification, such as biometric technology and fingerprinting. Smart cards function like an electronic passbook. There is also a lower cost card, which operates through a magnetic strip on the reverse side of the card. A smart card differs in that it operates through more expensive chips that can store information offline on the embedded chips. Both cards are used in conjunction with ATMs or POS.

Biometric technology – measures an individual’s unique physical or behavioral characteristics, voice pattern and gait, to recognize and confirm identity. This is a supplementary technology used with ATMs or POS.

Each of these technologies can help microfinance operations in various functions, as illustrated in Table 1 [ PDF 92.6KB | 1 page ] (see also Reille & Ivatury, 2003)

PDA/Palm Pilots are used for account opening and transactions, while phone banking and internet banking are primarily used in transactions. MIS and smart cards are of greater utility for the product development an marketing, account maintenance and risk management. On the other hand, ATMs and POS devices can be used in all aspects of operational chain, and hence are the most promising and comprehensive ICT solutions.

In terms of geographical spread of ICT applications in microfinance, Figure 2 [ PDF 328.1KB | 1 page ] demonstrates that there is still a very limited coverage.⁵ Clearly, the least innovations are applied in Asia, with the exception of India and the Philippines.

The main reasons that appear to influence the uptake of ICT applications in microfinance are:

• Direct and indirect cost of implementing ICT applications
• Policy and regulatory environment
• Infrastructure development (communications, connectivity, power, etc)
• Development stage of the financial sector, especially the microfinance sector
• Level of financial literacy (mentality towards using technology versus human interaction)
• Population density
• Language.

Dependent on these factors, ICT solutions have been applied mostly in countries that have a larger population density (such as India, Mexico and the Philippines), a more favorable regulatory and policy environment (such as South Africa and Brazil) and a more mature financial sector (such as South Africa). Cracknell (2004) reaffirms the importance of an enabling environment, that is well developed banking and retail sectors, a supportive central bank, good communications and a generally positive policy environment.

Figure 2 [ PDF 328.1KB | 1 page ] also demonstrates that there are many more application of ATM and POS compared to other innovations such as Palm Pilot, Smart card and Internet/Phone banking, with the exception of ACCION International which has implemented Palm Pilots (PDA) in all of its affiliates in Latin America.

Our literature review indicates that the most common benefits expected from the use of ICT in microfinance, for clients and for MFIs, are:

Clients:

• Access to banking services
• More convenient service – anytime to conduct transaction
• No time to wait in line
• Faster loan processing (with PDA) in the field

MFIs::

• Reduced transaction cost (by reducing staff time)
• Less fraud (better internal control and less cash transactions)
• Improved quality of financial information (better performance management due to faster and better quality data processing)
• Increased outreach (by making services available 24 hours and closer to clients)
• Reduction in expensive premises (if ATMs or POS devices are placed in off-site locations)
• More professional look
• Increase customer satisfaction and loyalty (by introducing new types of services, such as money transfers and direct deposits).

There is a tendency in the literature to generalize these benefits to any ICT application. However, not every application will result in the same benefits. Table 2 [ PDF 100.1KB | 1 page ] summarizes the benefits that may be associated with different ICT applications. PDA/Palm Pilots are likely to improve the efficiency of staff in recording transaction data and the quality of data entered. Smart cards also play similar roles in that they will allow transactions to be recorded electronically. PDAs are used by loan officers, while smart cards are used by clients.

On the other hand, phone banking and internet banking allow clients to access their account information by phone or on the internet and transfer funds electronically, including making payment directly from their accounts. All transactions are recorded electronically and data are integrated to the MFI’s MIS. This saves staff time, improves the quality of data, and provides an electronic database for all transactions of the MFI. In addition, the MFI improves its client satisfaction and loyalty by offering more convenient access to account information and allows clients to conduct transactions online or by phone without having to come to a branch office in person.

In addition to these benefits, ATM/POS devices offer more service delivery functions, some of which replace staff responsibilities. As these offer the greatest immediate scope for application we discuss them separately in more detail.

Automatic Teller Machines

Hirschland (2003) observes that ATMs provide 24-hour access to speedy transactions. ATMs, supplemented by smart cards and debit cards can provide flexible payment options and more convenient access to client accounts. They can also reduce branch infrastructure and employee costs, and facilitate financial services in areas with poor communications and electricity supplies. In particular, staff of MFIs could be relieved of some mundane functions like processing withdrawals and fund transfer over the counter, and rather, focus on personalized services. When fully utilized, ATMs can be used for balance inquiry, cash withdrawal, transfer of funds, bill payments and making deposits.

In Bolivia, PRODEM has extended its branch network by installing 20 ATMs. These machines have some unique features: they are equipped with fingerprint readers for client verification and they provide audio instructions in three languages, to make financial services more accessible to illiterate and semiliterate clients and to those who do not speak Spanish. Because ATMs are linked to smart cards (which contain information on client accounts and previous transactions), they only have to update data from the central processing site twice a day-saving about US$800,000 a year in internet access charges. Smart cards cost clients $10 to obtain, and $7 a year in operating fees. PRODEM’s ATMs cost less than $20,000 each, making their installation economical, when compared to the costs of setting up a branch office (Whelan, 2003).

In Ecuador, a network of ATMs enables poor and rural families to access remittances sent by relatives working in Spain. Banco Solidario, an Ecuadorian bank for poor people, offers a debit card that clients can use to withdraw money deposited in Spanish savings banks, including La Ciaxa, Caja Madrid and Caja Murcia, as well as Banca Sella in Italy. Clients can access remittances at more than 800 ATMs nationwide, or at any of about 100 cooperatives with whom Banco Solidario has strategic alliance (Christen & Pearce, 2005).

The services provided by ATMs

The advent of the ATMs has enabled financial institutions to provide their customers with a wide variety of banking services twenty-four hours a day, seven days a week without a significant increase in personnel, when ATMs are utilized to their full capacity. The most common service that ATMs are capable of offering is the withdrawal from checking or passbook accounts. The same result was found by the survey of banks conducted by the Office of the Comptroller of the Currency as early as 1975 (McLeod, 1979).

Expected Benefits:

• Reduces transaction cost: typical ATM transactions are a fraction of the cost of teller transactions (Ketley & Duminy, 2003)
• Provides more convenient access to customers: In its classic form, ATMs are able to offer 24-hour access for clients who want to withdraw, deposit, transfer funds or inquire about their account balance. However, the access will depend on how ATM is installed: whether it is placed in its own booth with access to clients, or in a banking hall which closes at certain times.
• Frees staff time to handle more personalized customer interactions, rather than routine deposit-taking and balance checking.
• Increases savings mobilization as a result of widened and any-time access points.

Limitations of ATMs

While an ATM offers a potential to provide a wider and easier access to poor people in rural areas as a delivery channel, it faces a number of issues that need to be addressed:

Cost: The cost of a smart card may be significantly higher than that of a conventional passbook making the former relevant only for the better-off poor.

Cash based economy: Most rural areas are still heavily based on cash transactions. Day laborers are unlikely to be able to use card-based cash. In order to expand the use of cards in rural areas, all merchants and service points will have to introduce card payment systems. At present, the roadside stalls and service points in rural areas are unlikely to be able to afford to buy or maintain a POS device.

Operating instructions: With a typical ATM, transactions are driven by language on a screen. This system excludes savers who are not literate. PRODEM in Bolivia has overcome this obstacle by developing an interactive “intelligent automatic teller machine” which identifies clients and their native language by their fingerprint. However, this will not be crucial in Mongolia, where the level of literacy is relatively high even in rural areas. However, it was noted that most ATMs have instructions in the English language. This could raise a concern unless the instruction screen is translated into Mongolian.

Functionality: When fully utilized, ATM has a capacity to offer a wide range of functions. But in most developing countries, ATMs are not fully utilized primarily due to cost: the price gets higher the more functions are put into force. Furthermore, there are limitations as to what ATMs can do. For instance, ATMs cannot take a loan application, review it and approve a loan. The human touch is still necessary for fully-fledged banking services.

Currency recognition: Local currency has to be recognized by an international network of ATM manufacturers in order for ATMs to recognize and accept a local currency note. Furthermore, poor people usually have money in small units, most of which are not necessarily freshly printed Yet, cash that can be accepted by ATMs will have to meet certain quality standard. If not, they will be rejected.

Customer trust: It was concluded during the virtual conference facilitated by CGAP and Microsave⁶ that physical presence and the bigger issue of building trust is essential in serving small depositors. This is even more so in rural areas, where formal financial services have been limited, if not absent. The conference participants indicated that building at least medium-sized full service branches that inspire people’s trust is an important investment. Therefore, the use of ATMs cannot be assumed to be a complete substitute for a physical branch, at least in mobilizing savings.

Point of Sale terminals

Financial institutions are increasingly installing point-of-sale (POS) terminals in retail outlets. These terminals are typically used for authorizations of credit card and demand deposit transactions as well as for account balance inquiries. The purpose of a POS terminal system is to allow a customer to make payment for goods and services at a merchant location with the maximum ease and convenience and the minimum cost and expense to the merchant and the financial institution.

The cost of POS terminals is directly related to the number of functions the machine will perform and the degree of automation. While some institutions partner with others and jointly own and operate the switching and processing centers, others install and own POS terminals individually. There are three models that have been identified in using POS technology.⁷

Model 1: Customers use their debit or credit cards to make payments to vendors. The POS device does not allow withdrawals or deposits. Customers must visit bank branches to apply for loans, deposit cash, or open a new account. In this model, the POS technology requires no handling of cash by the customer or the retail outlet that has the POS device.

Model 2: Customers can deposit and withdraw cash, and possibly transfer money to other account-holders. The POS device identifies and authenticates the client and authorizes the transaction, but the cash counting, handling and storage are the responsibility of the retailer’s staff or a store employee dedicated for this purpose. Clients have less need to visit bank branches, and can transact at more convenient times and places. However, they must still visit branches to open accounts and handle more complicated transactions, such as applying for credit cards or term loans. The bank must ensure that the retailer is properly handling cash on its behalf. Five of the seven institutions that provided detailed information to CGAP on their POS devices reported using this model.

Model 3: A full service channel provides the full range of banking services to retail or postal outlets that may be nearer to clients. Again, the POS handles the transaction processing and the human attendant performs basic cash handling and customer service functions. But in this case, customers are allowed to open new accounts and apply for loans. In some cases, an MFI or other third party may perform loan appraisal and follow up or monitoring functions.

It is this last model that brings the full range of financial services to the poor in rural areas, hence as discussed below it seems the most promising solution in the Mongolian context for XacBank. In Mongolia, as elsewhere, it is necessary to analyze the reactions of customers to advances in electronic payments systems in order to effectively eliminate the potential barriers in the early stages of development. Most surveys suggest that customers see the convenience that an electronic payments system provides. The major disadvantages for them are the fear of the machines, and a concern over an invasion of privacy and the possibility of errors.

The rest of the paper explores the feasibility of utilizing ICT solutions for microfinance services in rural areas of Mongolia.

Download this Discussion Paper [ PDF 626KB| 34 pages ].

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.