Technology FAQs

1. How can financial institutions benefit from technology solutions?
2. What challenges does the microfinance industry face in widespread adoption of technology?
3. What is an MIS?
4. What information can help MFIs determine the right MIS software for their institution?
5. What is branchless banking?
6. How can MFIs take advantage of branchless banking solutions?
7. What criteria are necessary for poor people to adopt technology-enabled delivery systems?
8. What legal and regulatory challenges do new technologies present? How can policy reform measures respond to these challenges?
   

1. How can financial institutions benefit from technology solutions?

A good information system equips managers to make informed decisions and produce reliable reports that follow recognized international and national standards. This transparency can also attract funders and provide clients with immediate information about their accounts, thereby attracting more customers.

Perhaps the most important contribution of technology is lower operating costs. Researchers have tested the relative costs of tellers and ATMs in several emerging market countries (including Brazil, India, Kenya, Malaysia, Mexico, Nigeria, and South Africa).The comparison shows the potential of cost reduction through technology, which is particularly important today as financial institutions face increasingly competitive markets.

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2. What challenges does the microfinance industry face in widespread adoption of technology?

Despite the fact that the cost of hardware and connectivity is falling, successful use of technology in microfinance is still the exception rather than the rule. Several challenges remain that inhibit the widespread adoption of technology to extend financial service delivery across vast distances and to millions of people quickly:

• Capacity of financial service providers. Financial institutions, especially MFIs, have limited capacity to absorb technology. Financial service providers of all types tend to focus on their own needs, rather than developing a solution that really works for their clients.
  
• Infrastructure. Financial institutions in countries that lack strong communications and electric infrastructure may have a hard time implementing technology solutions that rely on internet connectivity—or even electricity.
  
• Policy environment. As electronic banking expands, governments and regulators struggle to sort out the implications, for instance, of neighborhood shops taking deposits from the public without a formal license to do so. Conversely, governments can help expand access by issuing national identification systems (numerical- or biometric-based) or by distributing welfare payments, pensions, and salaries through electronic networks.
  
• Consumer and staff literacy. Illiterate and uneducated clients do not always trust technology. Staff members may also be reluctant or ill equipped to adopt new technologies. Efforts to educate them may be necessary.
  
• Sound information systems. Institutions should invest in advanced delivery technologies only if their foundation, the information system, is already sound. Yet, in many markets, these systems are not available or they are costly to develop. MFIs continue to struggle with integrating baseline technology into their operations for a number of reasons: many MFIs lack the technological know-how to make informed investment decisions when it comes to technology; commercially available software products can be expensive and vendors often do not provide sufficient local support to ensure efficient implementation of the system; MFIs perceive their operations as unique and therefore prefer to build custom applications which are difficult and costly to develop.

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3. What is an MIS?

A management information system, known as an MIS or simply IS, involves all aspects of gathering, storing, tracking, retrieving and using information within a business or organization. Thanks to the development of computers and the software applications that run on them, much of this work can now be automated and the information more readily accessed. However, the software application itself is not the information system. All the policies, procedures, and practices that direct an organization's operations and the staff that interact with the information, combined with the software and hardware, comprise an information system.

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4. What information can help MFIs determine the right MIS software for their institution?

The MIX Market compiles information on a range of technology providers serving the microfinance industry. Many of their software products were reviewed by CGAP between 2002 and 2010. These reviews cover: Institutional Fit (type of institutions covered by the software); Evaluations (based on functionality, ease of use, management reporting and data analysis, service, and technical capabilities); Geographical Coverage; and Cost Summary (licensing and maintenance costs, plus consulting services).

The Grameen Foundation also put together an MIS Automation Toolkit that provides MFIs and other technical assistants with guidance for understanding, assessing, selecting, implementing and managing automated MIS projects.

In addition, the Microfinance Gateway's consultant registry includes a large number of individuals specializing in MIS, who may be able to help MFIs implement an appropriate solution.

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5. What is branchless banking?

CGAP defines branchless banking as the delivery of financial services outside conventional bank branches using information and communications technologies and nonbank retail agents, for example, over card-based networks or with mobile phones. Branchless banking entails these elements:

• Use of technology, such as payment cards or mobile phones, to identify customers and record transactions electronically and, in some cases, to allow customers to initiate transactions remotely.
• Use of (exclusive or nonexclusive) third-party outlets, such as post offices and small retailers, that act as agents for financial services providers and that enable customers to perform functions that require their physical presence, such as cash handling and customer due diligence for account opening.
• Offer of at least basic cash deposit and withdrawal in addition to transactional or payment services.
• Backing of a government-recognized, deposit-taking institution, such as a formally licensed bank.
• Structuring of the above so that customers can use these banking services on a regular basis (available during normal business hours) and without needing to go to bank branches at all, if that’s what they choose.

The terms below have also been used when describing branchless banking:

Banking vans - a branch on wheels. Vans (or, in some countries, boats) equipped with the appropriate information technology and communications systems and staff can service a broad area by traveling to several towns. Used in low-density environments, where it is too costly to maintain a permanent banking infrastructure.

In-store POS systems - cashless payments. Used to pay for on-the-spot physical purchases and, more recently, for cash withdrawal from a bank account (“cash back”).

Internet banking - virtual POS. Enables remote transactions and purchases of goods (for immediate online delivery or subsequent physical delivery) but without cash capability.

Banking agents - outsourced branches. Banks create a set of contractual relationships with established retail franchises or outlets, at which they deploy POS systems. Customers can make deposits, in addition to payments and cash withdrawals they would be able to make using a regular POS.

Mobile (telephone) transactions - POS in your pocket. Enables the same set of transactions offered by Internet banking, but mobility allows for transaction from a physical store; a functional alternative to in-store POS.

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6. How can MFIs take advantage of branchless banking solutions?

The key potential benefits of using mobile phones to deliver banking services are lower cost of deployment for MFIs and greater choice and control over financial services by the client. The potential benefits of mobile banking should be related to an MFI’s own strategic drivers. The four core strategies that MFI may follow to promote and protect growth are: 1) increase market penetration; 2) sell more services to existing clients; 3) retention of most valuable clients; and 4) reduce cost of service provision. 

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7. What criteria are necessary for poor people to adopt technology-enabled delivery systems?

Technology-enabled delivery systems can be effective for increasing access to low income clients if six key criteria are met.

• Clients perceive a benefit from the technology, such as convenience, reduced risk of carrying cash, or the ability to transfer funds from one person to another.
  
• Clients are comfortable with, and educated about, technology.
  
• Technology is user-friendly, not too difficult to understand or learn.
  
• Technology addresses cultural sensitivities around gender, class, and privacy.
  
• Clients trust that technology will not somehow cheat them; trust is enhanced by issuing receipts.
  
• Technology solutions are physically accessible and affordable. Limited geographic distribution of transaction points reduces the value of a smart card to the customer. At the same time, extensive ATM and, to a lesser extent, POS networks can be expensive, requiring appropriate fees to recoup the investment.

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8. What legal and regulatory challenges do new technologies present? How can policy reform measures respond to these challenges?

A CGAP study on regulating branchless banking through the use of agents and new technologies identifies the following key policy issues:

• Authorization to use retail agents equipped with ICTs as the “cash-in/cash-out” point and principal customer interface.
  
• Development of risk-based anti-money laundering (AML) rules and rules for combating financing of terrorism (CFT), adapted to the realities of remote transactions conducted through agents.

The use of retail agents introduces new or enhanced risks for policy makers and regulators. For example, agents present a variety of operational risks to the provider and, in particular, reputational risk given that the agent is the public face of the provider. The use of agents adds a special dimension to the challenge of satisfying AML/CFT norms and to consumer protection— two other key topics that are critical to branchless banking.

In addition, four topics have been identified as “next generation” policy and regulatory topics that are particularly important in determining the success and sustainability of branchless banking going forward:

• Appropriate regulatory space for the issuance of e-money and other stored-value instruments (particularly when issued by parties other than fully prudentially licensed and supervised banks)
  
• Effective consumer protection (on a variety of fronts)
  
• Inclusive payment system regulation and effective payment system oversight as branchless banking reaches scale
  
• Policies governing competition among providers (which balance incentives for pioneers to get into the branchless banking business against the risk of establishing or reinforcing customer-unfriendly monopolies which promote interoperability).

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