What Technology Can (and Can’t) Do for Financial Inclusion

> Posted by Loretta Michaels, Partner, HMS Wireless Consulting

Financial Inclusion 2020 Blog Series banner imageThe Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process, and highlights findings from “Mapping the Invisible Market.

A good webinar yields more questions than there is time to answer, and the Financial Inclusion 2020 launch webinar was a case in point. Participants asked some excellent questions we couldn’t address during the webinar, so we are now following up on some of the questions about technology. For answers, we turned to Loretta Michaels, who facilitates our FI2020 Technology Working Group.

Q: Andrew Pospielovsky (Egypt): Clearly technology will dramatically increase access to financial services, and this process of technological development is self-sustaining even without funder intervention. I believe the real challenge for development agencies and regulators is protecting the bottom of the pyramid from technology being exploited by predatory practitioners (such as payday lenders charging four and five digit effective interest rates). How can we tackle this challenge?  

A: You bring up an important point that connects to FI2020’s focus on quality, not just access. CFI believes that advances in financial inclusion need to go hand-in-hand with adequate protections. In my experience, while there will always be “predatory practitioners,” new technologies help reduce the opportunity for fraud and exploitation by providing an electronic record of all transactions, automatic rather than arbitrary calculations of interest rates and charges, and greater overall accountability compared to manual operations today.

Technology per se will not solve all problems out there, but it does provide tools that make it easier to prevent and resolve the issues that come up. Many of the broader responses to predatory practices remain the same whether there’s technology involved or not: user literacy and education, training, proper oversight and regulation, and greater transparency.

Q: Frances Bekey (Nigeria): How can microfinance banks offer mobile money in remote rural areas without basic IT infrastructure? How does the agency relationship work in providing financial services to poor communities?  

A: This is a major issue for small microfinance banks all over the world, and it involves two aspects: the general public infrastructure available in the area as well as the MFI’s own internal infrastructure. Many of the benefits mobile money can provide – cost savings, efficiency, fraud and error reduction, client security, and convenience – depend upon reliable information links between mobile network operators’ databases and microfinance institutions’ (MFI’s) management information systems (MIS). Among the main challenges:

  • If the MFI is using manual or rudimentary MIS or lacks the specialized technical skills to implement mobile banking models or tap into existing platforms, utilizing mobile money systems will be difficult.
  • Without an automatic, real-time software link that can record transactions between the network operator and the MFI’s information systems, the main benefits of mobile money are not going to be realized.
  • For rural MFIs, using technologies such as software links is difficult if they often experience frequent power outages and unreliable IT systems.

One of the reasons mobile money has been so successful in rural areas is that the mobile networks are often the only infrastructure available, providing voice and data networks to allow communications and a broad agent network for cash services. To take advantage of existing mobile networks in conjunction with weaknesses in their own internal infrastructure, some MFIs are approaching this problem by way of cloud-based, or “software as a service” (SAAS) offerings:

  • Vendors of banking and microfinance information systems are starting to offer their services via a subscription, managed-service type of offering.
  • Back-end and front-end services are provided to users and managers on their handsets and computers via data links, with no need for purchasing and maintaining system platforms at the MFI’s own premises.
  • Agents use specialized agent handset software that can serve customers via the mobile network, and the system records can be updated at the MFI’s headquarters via the cloud-service, rather than needing direct links to the rural areas in question.

The agency relationship can be very successful in providing financial services to poor communities, as we’ve seen in many successful branchless banking implementations around the world, both mobile money and bank-based. However, as we’ve also seen, the key to successful agent relationships lies in strong agent management, including clear agent criteria, solid up-front and ongoing training, clear business case incentives, and ongoing supervision. Too many service providers have taken the agent component for granted, and learned a painful and costly lesson as a result.

Q: Barbara Magnoni (United States): Through what channels do you see the effective delivery of products, information, and trust about new mobile-based services? Is the microfinance institution still a viable channel? What others do you see in the space?  

A: To date the most successful examples of mobile-based services have largely come from mobile operator channels directly, which isn’t surprising given their familiarity with designing and marketing mobile-based services in general. We’re also seeing interesting examples like Musoni in Kenya, a microfinance institution that operates exclusively via mobile phone. Other microfinance institutions can also increase their success with mobile services, but they have to think hard about why they want to use this channel and adjust their business processes accordingly. Mobile technology can provide many benefits to financial services provision, but it’s one tool of many that are available for innovation; merely automating poor, inefficient processes will not improve those processes.

Q: Asier Ansorena (Brazil): Is it possible to create mobile solutions for financial inclusion at a small scale and in a bottom-up approach? Or is it mandatory to start top-down with big amounts of funding to start the pilot project?  

A: This is a good question, that is not easily answered. In theory, it should be possible to start with small-scale pilots, but let’s think about the criteria that usually define successful financial services. Ease of use and intuitive operation require careful design. Convenience and availability require a branch or agent network that people can easily reach and that they trust. Safety and reliability require a solid platform and network redundancy. Finally, of course, cost efficiency often requires some degree of scale. It’s not easy to achieve all these criteria without some degree of funding and commitment from the top of an organization.

For more information on Financial Inclusion 2020, sign up for campaign updates.

Loretta MichaelsLoretta Michaels specializes in strategic planning and new venture development, implementation of market strategies and regulatory support for startup-mobile payment providers, with a particular focus on developing markets. While serving as a Consultant to the Center for Financial Inclusion and an Advisor to the Consultative Group to Assist the Poor (CGAP), she is also a partner & co-founder of HMS Wireless.

Image credit: Jan Chipchase

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