Promising Solutions

This paper started with a premise that MFIs operate with a high ratio of administrative costs per dollar loaned, because (by definition) they make small loans. The cost is even higher in servicing rural remote areas. Proper application of ICT can reduce the burdensome bookkeeping and administrative cost, improve staff productivity and expand outreach. Technological innovations can significantly increase the efficiency and lower the costs of financial service providers operating in rural areas (Christen & Pearce, 2005). Reduction in costs is obtained in two ways – through lowering per unit costs and higher volume productivity (WorldBank, 2005).

Given these premises, and the review of the available ICT innovations in microfinance here we develop four scenarios as possible solutions for XacBank in extending microfinance services in rural areas of Mongolia

Option 1: ATMs – operated as a stand-alone service center
Option 2: ATMs placed in a Post Office or local XAAN bank branch
Option 3: Wireless POS devices carried by a mobile banking team
Option 4: Wireless POS devices placed in a XacBank franchise (local Savings and Credit Cooperative)

These ICT solutions take into consideration the problems that XacBank faces in rural areas: poor road and communication infrastructure, geographically dispersed clients, and a small volume of transactions.

The implications of these challenges are:

1. Reaching rural clients is difficult and formal financial institutions reach those closest to the urban centers
2. Close monitoring of the lending portfolio by financial institutions is difficult
3. Mobilizing small savings is impossible without regular access

Furthermore, the interviews with key stakeholders in Mongolia and customers of XacBank helped to fine tune the identification of appropriate ICT solutions and the possible issues that need to be addressed in implementing them.

The key expected outcomes of these ICT solutions are:

Expanding the access points: By leveraging technology solutions such as POS devices and ATMs, a microfinance institution can extend access to their services in rural areas by creating flexible, far-reaching delivery channels.

Improving efficiency: By using technology to streamline microfinance operations, an institution could reduce the time required to disburse loans from 5 to 2 days, which translates into a 40 percent increase in the number of loans disbursed.

Strengthening risk management: Technology enables institutions to collect data in electronic format that can be synthesized and analyzed to identify trends, such as delinquency or yields, assess individual creditworthiness through payment histories, and develop scoring models and potentially insurance products.

Analysis of four ICT solutions

There are two options for operating ATMs in rural soums of Mongolia:

1. Operating as a stand-alone service center
2. Placing it in a Post office or XAAN bank branch.

Stand-alone: When placed as a stand-alone service center either outside or inside a building, ATMs can replace the need for an office or field staff, but require a strong security system and good instructions for customers to follow. In most cases, ATMs have not been operated as a stand-alone due to these two requirements. Rural clients will likely need customer service to guide them how to use ATMs. Therefore, XacBank will have to have at least one or two staff persons. Also, there is a need to have a physical building to house the ATM.

Post-office or XAAN bank branch: In many countries post offices have been traditionally favored by poorer people but have lost custom due to poor customer service, poor products and manual procedures. In Mongolia, there is a post-office branch in every rural soums. However, the post-offices serve as a branch of Post Bank, which is a major competitor of XacBank. While at present they do not have well-developed microfinance products, Post Bank is planning to enter the lower end market and is aggressively recruiting expertise in developing microfinance products. Another option is XAAN bank branches in rural soums. XAAN bank has a branch infrastructure in every rural soum. It will be to the benefit of both XAAN bank and XacBank to partner and share the cost of using ATM to offer a wide range of services. However, past experience of XacBank with XAAN bank has been rather unpromising in terms of partnership, as they see each other as direct competitors.

Considering the challenges with ATMs, two other options are identified using POS technology. As described in the previous section, the full service channel model of POS technology is the most promising solution. To operate such a model, XacBank will need a third party to provide customer services, handle transactions, perform loan appraisal and follow up functions. As we have seen two possibilities have been consdered to perform these functions: one is a mobile banking unit of XacBank and the other is a XacBank franchise.

A simple ranking approach is used to compare these four solutions and assess which is most feasible and appropriate given the unique characteristics and challenges of the local context within which XacBank has to operate. In total, seven categories are used to rank the four solutions: three of them relate to client preferences and four of them relate to institutional preferences. These categories were identified based on the literature review and interviews with key stakeholders in Mongolia.¹⁷ The following table provides an outline of the ranking results of each ICT solution by each category from the perspective of both clients and institutions

See Table 4 [ PDF 95.8KB | 1 page ]

Accessibility:

Use of ATM has the potential to provide accessible, convenient financial services because it no longer requires bricks and mortar operated by the permanent staff of a financial institution. However, due to security and infrastructure development in a given area, the actual applications of ATM differ in terms of location and accessibility. Not every ATM implemented by MFIs offer 24-hour service, as expected.

If the ATM were to be placed in a post office or a branch office of XAAN bank, the access will be limited to the office hours of Post Office and XAAN bank. They usually operate from 9am to 4pm.

However, the above two options are better than carrying POS terminals in a mobile banking unit because it visits a given soum only once a month. Therefore, it is the least accessible option.

On the other hand, if a POS terminal is placed in a franchise of XacBank (SCC), rural clients will have better access, though not 24 hours. In general, local SCCs have longer operating hours than the post office and the XAAN bank branch.

Features/service functions:

When utilized fully, ATMs and POS devices offer a wide range of services: Withdrawal, Cashing Pre-approved loans, Deposits, Money transfer and Account inquiry. However, in many countries, ATMs provide only limited functions due to the acceptability of local currency notes, security of cash and so on. Also, the cost of an ATM depends on how many functions it can provide. Thus, most financial institutions start only with the basic function, that is to disburse cash.

However, if a POS terminal is carried by the mobile banking unit, there may be wider range of functions offered since there will be staff, who will operate it. For instance, there may be a possibility to not only disburse pre-approved loans and withdraw cash but also to make deposits, transfer funds and enquire about account balance. Also, POS terminals are generally cheaper even with additional functions. When the POS terminal is left with the local franchise, some of these functions may not be made available due to the limited capacity of a local franchise staff and security issues of cash handling by the franchise staff. In the case of an ATM machine in a post-office or XAAN bank branch, again there will be limited functions due to the possible reluctance by the staff of these agencies to collect deposits and provide other additional services on behalf of XacBank who is considered as a competitor.

Ease of use – convenience:

Systems should be simple to use, fast and user friendly. Service should be standardized so that wherever the solution is used the customer is familiar with the procedure followed. Customers should have ready sources of advice, whether this is through call centers, through publicity or through physical presence. Also, the screen and the buttons should be in the local language.

When a ATM machine is operating as a stand-alone service center, there will be no staff person to provide an assistance. Therefore, it is likely to be the least convenient in terms of ease of use. On the other hand, if a POS terminal is operated by a mobile banking staff of XacBank, the staff person is likely to have received training on how to operate it and will conduct transactions on behalf of clients by operating the POS terminal. Placing the POS terminal in the XacBank franchise will also be a relatively easier to use option than an ATM placed in the post office or XAAN bank branch, because the franchise staff will have received training from Xacbank, though may not be as good as the Xacbank branch staff, and also, the POS terminals are much easier to operate than ATM machine.

From an institutional perspective:

Cost:

If XacBank were to operate ATM machines as a stand-alone service center, it will bear the full cost of purchasing and maintaining them, hence this will be the most expensive option. If it were to partner with XAAN bank or the post office, they can share the cost, hence this will be a less expensive option. The cost will be cheapest if XacBank were to place a POS terminal in its franchise office and share the cost, since a POS terminal is much less expensive than an ATM machine. Carrying a POS terminal in a mobile bank unit is more expensive because there is no cost sharing.

Building volume:

One way to reduce the cost burden on the institution is to achieve economies of scale by building more volume of transactions. Using a POS terminal with mobile banking will have the least chance for building volume, since it will be used only once a month when the mobile bank visits a soum.

An ATM housed at a post office or XAAN bank branch will be able to build up the most volume by serving customers of both partners and providing a wider range of services. Operating a POS from XacBank’s franchise office may not be able to achieve as much volume, but more than an ATM placed as a stand-alone due to the reasons mentioned, such as the limited functions and difficulties customers may face in operating the machine without human instructions.

Liquidity:

One of the major problems in using an ATM or POS is liquidity. Due to the great distance from a branch office and poor road infrastructure, it will be hard for XacBank staff to charge the machines with cash, especially if the ATM is operated as a stand-alone. A POS placed at a franchise may also face the same difficulty due to a limited volume of transactions, especially if they are a small SCC and have few members to begin with. On the other hand, a post office or XAAN bank branch will be the best option in this respect because they handle most transactions in a given soum; as all state benefits, pensions, salaries, money transfers and subscriptions to newspapers go through these local offices. A POS terminal carried by a mobile banking unit will have somewhat less difficulty with liquidity due to their ability to tap into cash at the branch office in a provincial center. However, when they travel a long distance without sufficient security, they have to be careful about carrying a large sum of cash.

Requirement for communication infrastructure

As was mentioned earlier, communication infrastructure is a must requirement for operating any of these ICT innovations. Rural soums in Mongolia do not have connectivity. The only means of communication is phone by a land line. Operating ATM as a stand-alone will be the most challenging. Xacbank will have to find a way to establish a connection through a phone line using a dial-up service, if that is available. If housed at a post office or XAAN bank branch, an ATM may have a better chance to get access to a connection because these outlets already have some communication infrastructure in place, alhough this may be poor and irregular.

The best solution in this case is to use wireless POS terminals that can be operated with smart cards (chip based). As explained earlier, smart cards can store transaction data offline. After a certain number of transactions, the data has to be uploaded. In this respect, the wireless POS using smart cards carried in the mobile banking unit is the most feasible.

Based on the above seven categories of clients’ and institutional preferences, the most desirable option is placing a POS terminal in a XacBank franchise (SCC). In order to ensure successful implementation, it is important to take into consideration the current state of ICT deployment in the financial sector in the country, the supply of hardware and software, the regulatory environment and the experiences of clients with these new technologies.

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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.