New Partnerships for Innovation in Microfinance_8

Information Technology Innovations That Extend Rural Microfinance Outreach 177 ments in branch networks, can turn offices from a cost centre into outlets that generate profit. Additionally, the data that is collected through these electronic transactions can then be used to lower the cost of capital through improved portfo-lio reporting, faster capital turnover, market segmentation, investments, and secu-ritisation. Consortium Model The consortium approach enables members to contribute resources such as time, money, expertise, and credibility in a way that no individual member could achieve alone. This approach has had tremendous success in creating industry standards, protocols, and shared software solutions in both the technology and formal financial sectors. Visa International, Bluetooth, Apache, and the Fair Isaac3 data consortium are private sector examples of successful collaboration among competitors that has expanded markets and services for all consortium members. The primary example in the microfinance industry today is the Hewlett Packard (HP) led MFT4 initiative that resulted in the remote transaction system (RTS), a front-end delivery solution available under an open source license. This is a major step forward for the industry, eliminating duplication in devel-oping delivery channel systems, sharing lessons from implementing last mile solu-tions, and gaining the momentum necessary to serve as a catalyst. Other collabora-tive open source initiatives are underway to develop a core management informa-tion system and standard credit bureau management system, both being led by the Grameen Technology Center. The anticipated results of these efforts is a common public good—open source software licences5 that can create new business oppor-tunities by using the technology or providing support services. The consortium model lends itself to sharing credit and transaction histories that can be used to assess risk and build scoring models for underserved customer profiles. Although a common practice in formal finance, there has been little or no sharing of customer data for building scoring models in microfinance. Supporting an industry serving a billion customers will require a significant shift from time-intensive customer screening processes towards high-volume decision making processes, which is achievable only with automated scoring. Electronic transac- 3 The Bluetooth consortium created the Bluetooth standard for hardware devices to transfer data over a short range wireless connection. Apache is an open source web server application created by the Apache Group, which later became the Apache Software Foundation. Fair, Isaac and Company, Inc. is a leading developer and producer of credit scoring tables and associated products. They created a consortium of banks in the US to provide their data to help build and test these products, which the members can then use in their credit businesses. 4 Microfinance Development Team. 5 Open source software in essence is free to anyone that wants to use it as long as they adhere to the restrictions outlined in the licence. 178 Laura I. Frederick tions increasingly provide the data that makes scoring models possible. The next step requires a willingness and commitment among microfinance institutions to share data sets and develop mutually useful scoring based on country, regional or customer profiles. Aggregated Outsourced Services Model An institution that can afford only one information technology (IT) staff member, or even a small team, assumes a great deal of risk. This person or persons will not always be available due to sickness, vacation, outside obligations, and other priori-ties. In addition, information technology has become complex and broad, often requiring considerable specialisation, making it difficult to be a generalist in the field. It is unrealistic to rely on one person or a small team to help an institution analyse all ICT options available, or to expect a team to remain up-to-date on the technology of greatest value to the business. IT staff in an organisation are usually so focused on day-to-day operations that they have little time to think strategically. By outsourcing certain IT activities such as application or database manage-ment, network support, end of day processing, or backing-up and archiving tasks, internal IT departments do not require deep or broad skill sets. Also, outsourcing enables the internal team to focus on optimising business value and on the strate-gic thinking that the institution requires from those who are familiar with opera-tions as well as technology. Outsourcing discreet activities can lower overall ex-penses while simultaneously allowing the microfinance institution to apply its limited resources to its core business, such as improving product portfolios and providing higher quality customer service. Strengths and Weakness of Collaboration Although these models of collaboration have proved successful for microfinance institutions, they are not without risks. The key is managing risks effectively, which requires commitment and attention. Collaboration will expand opportunities for everyone involved: to make them work successfully they must be well-managed with incentives properly aligned from the start. Building a delivery channel network requires time and resources to determine the criteria or profile for the channel partner, conduct due diligence, build relation-ships and establish working agreements with good partners. Policies and their enforcement must be established regarding liability, liquidity management, secu-rity of handling cash, customer service levels, reconciliation, settlement, compen-sation, training, support, and quality control. Cultural differences in customer bases can be a problem, making market research on client behaviour essential throughout. The regulatory requirements of working with third-party agents must be understood, adhered to and in some cases changed. Institutions should follow international standards and precedents to make sure all risks are properly ad- Information Technology Innovations That Extend Rural Microfinance Outreach 179 dressed. In countries lacking laws regarding third-party agents, such guidelines can help establish standards. Creation and management of a consortium is time-consuming, especially in the early stages when commitments are made regarding working principles, overall objectives, and exit strategies for all participants. To be successful, the potential impact and value of the final results must be aligned with the objectives of all members of the consortium. A common vision and guiding principles for working together are an essential starting point, but relationships are truly built by promot-ing the principles and dedicating time and attention to them. Outsourced service models also require due diligence to identify the partner with the right technology and the highest possible quality of service. If the tech-nology provider is not committed to the results of the MF providers, the relation-ship is unlikely to be viable. Outsourced ICT services create dependency on exter-nal partners if the business is to survive as it grows in complexity. This position may be uncomfortable for institutions that are accustomed to operating independ-ently. This makes due diligence on vendors critical. Clear contracts defining the responsibilities and commitments of each entity are essential. All these partnership models contain the potential risk of falling apart before gains are realised. The most effective means of managing this risk is to require, from the start, a clear understanding of the intended purpose or benefits of the collaboration, authentic commitment to the process, and agreements or covenants to guide the work. Given this risk, the most common driver of collaboration is cost savings. Many microfinance providers cannot afford to create new IT solutions or to pay for the infrastructure required to expand operations, especially into rural areas. This key resource driver provides the essential rationale for overcoming the challenges and risks of collaboration. Collaboration provides a higher likelihood that institutions can obtain access to the most appropriate technologies without commitments to on-going development and investment in specialised expertise. Additionally, collaboration makes it possible for institutions to leverage fully their investment in information communication technology. In summary, collaboration enables MF providers to use technology creatively to expand operations without incurring the full cost of ownership. Examples of the Potential of Information Technology Partnerships in Rural Microfinance Outreach Operating in rural areas is difficult and expensive given low population density, long distances and travel time that lower staff productivity and raise costs or risks associated with moving cash, limited market access, and lower savings and bor-rowing capacities. Historically, telecommunication and power infrastructure is underdeveloped in rural areas. Each of these factors increases costs. Furthermore, the traditional space-based model of growth by expansion, by establishing more branch offices, is capital intensive and expensive to maintain, requiring higher 180 Laura I. Frederick transaction volumes to be sustainable. This cost structure limits the areas into which microfinance providers can expand, making it very difficult to reach rural populations. This section provides examples of the three models that are overcom-ing these barriers. Model 1: Delivery Channel Networks Several emerging IT solutions to support alternative delivery models demonstrate the potential to contribute to the scaling-up of microfinance. Most noteworthy is the creation of merchant networks using PoS and mobile solutions or ATM networks to expand access to cash transactions, payment and other financial services. Addition-ally short messaging systems (SMS), interactive voice response (IVR), and internet banking options make it easier and more convenient for customers to access account information, apply for new products or services, and perform financial transactions. All of these options offer different benefits and cost structures must be analysed to determine the strategic value of each in the local context. A growing number of businesses are working to build solutions that support use of third party delivery channels. FERLO, a technology company in Senegal, has established separate private merchant networks for three cooperatives using PoS devices for prepaid services. Teba Bank in South Africa has pilot-tested a PoS solution enabling salaried workers and pensioners to purchase items, top-up airtime and make cash withdrawals through a merchant network. SMART Communications in the Philippines began in 2004 to offer remittance services – Smart Money and Smart Padala—using SMS messaging. MABS, a USAID pro-ject in the Philippines, is working with four rural banks, members of the rural bankers association, and two telecommunications companies, including SMART Communications and also GLOBE, which offers G-Cash, that have developed a chain of outlets to pilot test loan payment and remittance services using SMS messaging via mobile phones. In a recent study of microenterprise borrowers in the Philippines, 93%6 had a mobile phone or a family member with one, making this approach viable. In Latin America, a growing number of cyber centre networks offer services to microfinance service providers, small and medium sized enterprises or other busi-nesses interested in delivering products and services to customers in urban slums (‘barrios’) and rural villages, creating yet another type of channel. Major banks in Brazil have developed nearly 30,000 points of service in every municipality in the country, making it possible to open accounts and access savings, credit, money transfers, insurance, government benefits, bill payment and other services. By combining technology (in this case PoS devices and PCs) at postal and lottery outlets and retail shops such as groceries stores, drug stores and butchers, the 6 Of these, 68% had a mobile phone and the other 25% had a family member with a mobile phone. Information Technology Innovations That Extend Rural Microfinance Outreach 181 banks now serve every town in Brazil, some of which can be reached only by plane or boat. Vodafone is working with its African subsidiaries, Safaricom in Kenya and Vodacom in Tanzania, to transmit financial transactions through cellular net-works. Safaricom and Vodacom airtime shop dealers will use either a mobile phone or a point of sale device in the store to complete transactions. Vodafone’s subsidiaries leverage a bank partner for clearinghouse services and work with FAULU, an MFI, to pilot test the solution with their customers. Using their chain of airtime shops as outlets, Vodafone affiliates will offer loan payments to pilot test the initiative, which will be extended to include bill payments, checking credit information, and transmission of loan requests. The technology leverages Voda-fone’s SMS platform as well as mobile phone and PoS technology. HP, in conjunction with the MFT consortium, has been working with three MFIs in Uganda to pilot-test a remote transaction system (RTS) that leverages web services, smart cards, and PoS devices. The technology supports loan pay-ments, savings deposits, transfers, and withdrawals offline and online. An MF partner, Uganda Microfinance Union (MFO), has used the solution to build a net-work of independent third-party merchants in operation since January 2005.7 ICICI Bank in India has built a network of 1500 village kiosk operators who re-sell ICICI’s insurance products. Operators were selected who had an existing business with a physical location, demonstrated an entrepreneurial attitude, and were respected and trusted in the community. The kiosk consists of a personal computer with an internet connection, a printer and a web camera. ICICI Bank built a web-based application for entering insurance requests as well as an online banking interface. The operator network is also a disbursement location for money orders paying out insurance claims. ICICI plans to offer other types of financial transactions through this network. The operators are free to use the equipment and connection to offer, and charge for, other services important to the community. In all these scenarios an agent takes or gives cash, making these outlets cash in-put or output points. The agent model relies on liquidity management by the agent as well as the capacity to manage cash surpluses or shortages. In essence, the third-party merchant model rotates cash in rural areas and electronically in the capital city, limiting the movement of cash between urban and rural areas. Through these points of access customers can put cash in, take cash out, or con-duct cashless transactions, which helps the rural poor to manage their liquidity. An alternative example of a delivery channel is the strategic partnership of echange, LLC and Centro AFIN.8 Centro AFIN is a private institution that con-tributes to the development and consolidation of the financial industry in Latin 7 See Janine Firpo, “Banking the Unbanked: Issues in Designing Technology to Deliver Financial Services to the Poor” in this volume. 8 Centro AFIN was founded in 2002 and is comprised of ACCION International, FINRURAL, BANCOSOL, CAF, DGRV, ECOLF Peru, FONDESIF, AGROCAPITAL and FUNDA-PRO, all of which are involved in microfinance. ... - tailieumienphi.vn