Banks in the United States are increasingly outsourcing their technology. In 2007, 70% of new core technology sales to financial institutions were for outsourcing while only 30% were for in-house use (sources weren’t cited in the article). While we don’t have similar statistics for the microfinance market, I would guess that 100% of sales were for in-house use. So why are the US banks outsourcing and what does this have to do with microfinance?

Outsourcing allows banks to focus on their core competency: providing financial services. Outsourcing can also reduce operating costs, help the institution make efficient use of technology, save on investment in hardware and software, streamline reporting to management and regulators, provide access to additional functionality, improve data security, and the list goes on. The perceived benefits seem to be paying off as the number of US banks outsourcing IT is increasing, especially among medium-sized institutions.

Microfinance institutions face many of the same technology challenges as banks in the US. If technology is such a headache and outsourcing can help alleviate some of these grievances, why aren’t more MFIs outsourcing their information systems?

While there does seem to be increasing chatter on the topic, some of the big differences between microfinance institutions and US banks may explain the lag. First of all, unreliable electricity and internet connectivity is a fact of life in many (most?) MFIs. Technology providers need creative solutions to reach these markets in a way that improves upon systems already in place (i.e. more convenient and lower cost). Second, MFIs require specialized software designed for things like group loans and compulsory savings. A company which outsources for US banks, for example, would need to tailor its products and services to be compatible with the particular needs of MFIs.

Despite the potential hurdles, outsourcing appears promising for microfinance. Will the outsourcing trend transcend geographic and other boundaries?