Technology Innovations for Financial Inclusion
In today’s rapidly changing and competitive microfinance industry, most institutions are looking hard at the potential benefits to be derived from Information and Communications Technology (ICT). This focus has taken on even greater urgency as institutions struggle with the issue of sustainable rural finance and the challenges of outreach and scale. In recent years, a significant amount of institutional capital and donor funds has been invested in overcoming technology and infrastructure barriers. Much has been written about the use of personal digital assistants (PDAs), point of sale (POS)/smart cards, automated teller machines (ATMs), and mobile phones.
To date, the results of technology investments in the microfinance industry have been mixed. Full understanding of the problems in implementing ICT requires examination of the environment and institutions themselves, as well as the technology. With so much money spent on ICT for microfinance, why has the industry been largely unable to demonstrate significant results? The reasons include:
- Common problems that affect the ability of microfinance institutions (MFIs) to deploy and manage advanced technology;
- The reality of cost versus impact of ICT investments;
- The theory vs. practice of the solutions (i.e. are they really appropriate?); and
- The infrastructure limitations present in country environments that create a real barrier to effectively deploying ICT.
MFIs are facing increasing competitive pressures from other MFIs and larger entrants such as traditional commercial banks, and seek to use technology innovations to improve their competitive advantage. Practitioners and donors, as they consider large investments in ICT, need clarity and guidance regarding the true impact of these technologies.
To date, the evidence of the benefits of ICTs for microfinance is more anecdotal than quantifiable. This is partly due to the fact that MFIs are at varying levels of maturity and do not usually develop the business case and cost/benefit models prior to making an ICT investment, nor do they have the internal procedures and systems in place to measure the return on investment.
USAID’s Microenterprise Development office (MD) learning agenda in the area of ICT for microfinance seeks to separate the hype from the reality with more hard evidence. MD’s research is focused on three main components:
- Core banking system. The lack of robust management information systems (MIS) has been and continues to be one of the most significant constraints to MFI growth. The cost of implementing and maintaining an MIS can be as daunting as the task of selecting an appropriate MIS. With the increasing availability of open source software, ASP/middleware, and outsourcing options in the market, MD is exploring the business case for each of these models for MFIs.
- Client-focused technologies. Technologies such as PDAs, ATMs, POS, and mobile phones have the potential to improve the efficiency and lower transaction costs of MFIs as well as provide more convenience to the customer. However, more quantitative data is needed to understand:
- What is the real level of usage of ICTs among MFIs?
- What challenges do MFIs face in implementing these technologies?
- What factors are critical to successful implementation, high adoption rates, high level of usage, and growth in usage?
- Are these investments producing business benefits for the MFIs?
- Strategic alliances for improved delivery. MFIs seeking to expand and deepen their outreach to rural and more remote areas need to develop different delivery channels to reduce transaction costs as well as increase security and convenience for their clients.
KNOWLEDGE AND PRACTICE
MD conducted a survey of 54 microfinance providers (MFIs, non-governmental organizations, credit unions, and banks) regarding their current use of technologies, and found that half of the responding institutions are using one or more client-focused technologies. A number of the respondents, however, appear to be unable to measure the benefits they are receiving.
The surveyed institutions had high expectations that many of the new technologies would substantially benefit their bottom lines, but so far the record is mixed. ATMs appear to be the best performers in delivering on those benefits. POS, one of the least used technologies, nevertheless seems to be the most interesting of these technologies in terms of increasing productivity and revenue. Contrary to what one might believe from the literature, PDAs appear to be less successful at delivering business benefits. Mobile phones also showed mixed results, though they are the least mature of the four studied and should continue to be monitored and evaluated.
In a more in-depth follow-up study of eight financial institutions, research showed that ICT implementation has benefited the institutions and has had measurable impact on client outreach and efficiency. Factors such as institutional buy-in, the choice of technology provider, the state of local infrastructure, and regulations play a key role in the success of these technology projects. More due diligence on the technology and the vendor is a key to success.
Currently, MD is examining the possibility of outsourcing core banking IT systems as a potentially viable option for MFIs in developing countries. By studying the experiences and lessons of US small banks, as well as interviewing core banking system vendors and implementation consultants, MD seeks to build a business case for applying this outsourcing model in the developing world.
MD is supporting two MFIs in the testing and implementation of technology-enabled solutions for expanding rural outreach.
- In Mexico, FINCA is linking clients to the existing financial infrastructure through strategic partnerships with Citibank/Banamex and HSBC. FINCA is implementing card-based services for loan disbursement and leveraging the infrastructure of Banamex Aqui points of service to facilitate loan repayment.
- In Malawi, Opportunity International Bank of Malawi (OIBM) is seeking to reduce the risks and costs associated with serving the rural poor by using a range of delivery channels such as satellite branches, mobile branches, ATMs, POS devices, and partnerships with existing business organizations.
In addition, MD is providing technical support to USAID missions that are interested in exploring the use of mobile technologies in expanding access to financial services. To date, two mini-feasibility studies have been completed in Nigeria and Mexico.