How do we “fix” the mismatch between supply and demand for microfinance technology solutions?

by Monica Brand : Wednesday, December 9, 2009

Monica Brand has spent her career in the financial services and social enterprise sectors, expanding and enhancing the value offered to the majority. Ms. Brand currently manages ACCION’s Frontier Investments, whose mandate is to invest in early stage companies with disruptive business models that catalyze breakthrough innovation in financial inclusion.

OK. Let’s imagine you are the executive director, or perhaps the chief technology officer, of a strong growing MFI. Suppose you know you need to invest in some software, to replace those spreadsheets you are using to track your loan portfolio. You look around for options.  There are some pretty slick core banking systems, but they’re pretty much overkill for what you need if you’re not actually a regulated banking institution.

Those systems are very expensive and are probably sold by a company on the other side of the world that offers limited local support. You could look for a local software firm and ask them to build a custom solution for you. But the company you select might not have any experience in microfinance. And they probably can’t give you a reliable estimate of what it will cost you. And they may not be around later when you need to update the application they build for you.  Finally, you could hire your own team and do the whole project in house.  But what happens when the project is complete or a few years down the road when you need to build in new functionality or scale up beyond the current capacity?

You may have heard about newer models that are hosted on the internet and allow clients to use “on demand”.  But your internet connection is not reliable.  And you also have questions about the security of your data and your ability to develop new products if your software capacity is outsourced.  Is the money savings worth the flexibility?

Needless to say, none of these options are really all that attractive. As an executive director, the solution you might want is a local provider who will help you adopt a ready-made solution that is specifically designed for MFIs, that is affordable, that can be customized to your needs but doesn’t have to be created from scratch. You would not have to pay for more of a system than you need, and because you had a local partner with MFI experience, you could look forward to having the support you need in the future.

But because few MFIs are making investments in management information systems, commercial suppliers are unable to justify the kinds of investments required to produce solutions that can have broad impact across the industry. Is there a better way for vendors to service the many MFIs spread out around the globe? What other models or partnerships might be necessary to work around this mismatch in supply and demand?

CGAP and the Grameen Foundation, with support from the Mastercard Foundation, recently co-organized a workshop to discuss what needs to happen to make appropriate back-office systems (including people and processes as well as technology) more broadly adopted by MFIs.

Dec. 8 and 9 we’re convening a virtual conference here on the CGAP Technology Blog to discuss four themes which emerged from the recent workshop. Today and tomorrow we’ll be joined by several industry experts who will each introduce a theme and moderate a discussion. The objective is to discuss how the theme relates to the broader question at hand, and what each stakeholder group can do to support MFIs.The conference happens here on the blog, no registration is required. Just post your comments using the “Leave a reply” option at the bottom of the thread.

TAGS: Events, MIS

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11 Comments RSS 2.0

  1. December 9th, 2009 at 1:10 pm, jiten patel ()

    This is “the” question plaguing MFIs big and small. There are various software solutions offered by vendors of all shapes and sizes, with software licensing based on per user, per branch, concurrent license, or one based on the number of customer accounts, etc. Regrettably not all viable solutions are affordable largely because they include more than what a MFI really needs, and also because of the market perception about the “fractured” MFI sector.

    The bottom line is that the sector needs access to affordable solutions that are robust, scalable, auditable and secure, and one where the MFI can add products and services as it grows on an as needed basis (and to pay for it as and when needed).

    There is no perfect solution, but there is an approach that is now becoming much more attractive due to improvements in access to Internet connectivity around the globe, even in Africa. The approach that offers the most potential is what I refer to as a hySaaS solution (defined as a Hybrid Service-as-a-Service solution, the use of “Service-as-a-Service” is one coined by my good friend Daryl Skoog, CTO of Opportunity International). SaaS is commonly referred to as a Software-as-a-Service.

    The advantage of a SaaS type solution is affordability, i.e. to pay-as-you-go, with minimal upfront costs.

    Ordinarily SaaS is a multi-tenant, Web-based offering. For MFIs a strict Web-based offering would not work for all of the reasons that we all are aware of. However a hySaaS solution couples the Web-based solution with a local in-country based “branch” server which then offers the best of both worlds.

    A hySaaS approach, when bundled with providing a full suite of support services to the MFIs makes it much more attractive, and reduces the headaches for the MFIs from having to hire a team of experienced IT staff to manage and maintain SQL databases, firewalls, network security and testing of the software for bug fixes and new software releases.

    Such an approach does require collaboration between the software vendor and the hySaaS service provider, and even though such a solution reduces a number of critical headaches for the MFI, the responsibility for some “headaches” cannot be delegated to any vendor, such as the need to perform process documentation and standardization is very much required (it is in the MFI’s interest to have internal staff perform this exercise or be actively engaged in such an exercise if it is performed by some vendor) and as is the close sponsorship and support from MFI upper management for such activities, including the formation of cross-functional committee to assess, select and oversee the procurement and use of technologies, and providing support and commitment for on-going training of staff.

  • December 9th, 2009 at 2:08 pm, Eamon Scullin ()

    The first three questions are the same “How much does it cost?” “How much does it cost?” “How much does it cost?”

    So we have to have different solutions to suit different pockets/budgets. But within a family of solutions that make it easy to migrate as the volumes or sophistication grows. Microsoft became the standard operating system for most people by offering a low cost alternative to the other vendors of computers such as IBM etc. No one said their products were the best but they were the standard and from those standards we were able to advance the uptake of IT to a much wider audience who had been denied access to computers until that time. Likewise low cost standard systems should be encouraged in order to promote the adoption of a standard approach and from that foundation we can then build more sophistication and more services to a wider audience of MFIs.

  • December 9th, 2009 at 2:35 pm, jiten patel ()

    MFIs must be extra careful when considering small, local software vendors especially when it comes to the “core” lending / MIS software platform. The only advantage that they may offer is that they are local.

    Use of a software vendor who is “small and local” has its pitfalls. A small software vendor, who runs a “mom and pop” type operation with a team of 5 to 12 staff may not have the management capacity, nor the wherewithal to adequately support a growing MFI. Most such small entities suffer from a design deficiency, as their software was designed to address some small, local need, and hence lacks the clarity of design and flexibility as it was never meant for a larger, more complex organization.

    And yes a small, local vendor would most likely move fast to develop a solution to address a new requirement that the customer may have, provided they have the resource capacity, but buyer beware.

    In most cases software solutions from small, local vendors are “hard-wired” versus being designed with configurability in mind, this spells trouble as the MFI then ends up spending more money on customizations; also such entities do not always have good, strong software quality assurance practices, which means “bugs” galore whenever the MFI receives new software updates and major releases … translates to the MFI having to spend more time testing and making sure that the software not just works for the new functionality but that it continues to work for the functionality that was there before.

  • December 9th, 2009 at 2:49 pm, Lauren Braniff ()

    I like Eamon’s opening line…How much does it cost?! CGAP has worked with a SaaS project in Ecuador and while the service has not yet launched, all preliminary signs point to this being a more expensive option for the MFI. The next question…more expensive compared to what? It may be more expensive than the “small, local vendors” Jiten is cautioning about, but actually less expensive than if they were to purchase a comparable solution on their own. In theory, the benefits of SaaS still seem to outweigh the costs (even if that cost is higher than some alternative solutions). But it’s a tough sell to MFIs on theory alone. Is there any evidence out there about successful cases of MFIs using SaaS?

  • December 9th, 2009 at 2:57 pm, Monica Brand ()

    In many ways, the points Jiten and Eamon bring up tie to yesterday’s discussion on business processes and the need for MFIs to standardize and simplify in order to break through the current technology bottleneck (software solutions that are too complex and too expensive for massive adoption by MFIs). When we bring up the need to simplify to MFIs, they will respond by invoking the client and tailoring their offer to the unique needs of each market. Is there an 80/20 opportunity that can unlock new business models?

  • December 9th, 2009 at 3:00 pm, Normand Arsenault, Consultant ()

    I think one of the main causes behind the mismatch between supply and demand for microfinance technology solutions is the selection and implementation of high end solutions inappropriate for small and medium-sized businesses.

    Some platform and architecture don’t apply at all to an SMB environment. Some MFIs are trapped by unsuitable and costly technology not suitable for their size. Overselling of high end solutions by vendors have resulted in many MFIs having high-end technology with practically very little usefulness for operations and management.

    There is a big difference between the system architecture design for an MFI handling 10,000 loans and the one used by a bank serving millions of customers, having a full IT department with specialized IT experts, operating in an environment where telecommunications services are available and relatively inexpensive.
    Fortunately, there is an alternative approach to traditional banking system for small and medium-sized financial institutions. It is the off-the-shelf/simple network system approach which is based on the idea that information systems can be developed by selecting appropriate off-the-shelf software that can work on a simple network appropriate for small and medium sized businesses.

    IT experts having only knowledge and experience about high end systems have the tendency to recommend high end solutions not appropriate for small and medium-sized MFIs. Unfortunately, few MFIs use the services of local IT specialists knowledgeable of the working environment of local small and medium-sized businesses. Some of these local IT specialists are even Microsoft Gold Certified partners. It would make sense to have someone having knowledge and experience about IT solutions for small and medium size local businesses to evaluate and make recommendations about the MFI’s infrastructure to make sure that the software application selected will work properly on the network.

  • December 9th, 2009 at 3:26 pm, jiten patel ()

    Lauren … The question of affordability and SaaS is not a theoretical one but one that has been proven, though not in the microfinance sector as yet, but it is a viable and cost effective approach in the mainstream financial services sector.

    One does not have to look further than the likes of Fidelity Information and Fiserv here in the US, both of whom offer a SaaS type service, and they are able to do so cost effectively.

    The concern with SaaS in the microfinance sector is one of scale, i.e. identifying the right “core” lending / MIS software software platform to use; and the other concern is how to attract enough MFIs to enable this platform to be viable. These are just two of the concerns.

    Given that no two MFIs can agree on a given process, if they have a process, makes this challenging but not insurmountable.

    I am highly optimistic that a SaaS model can be made affordable and sustainable for both the vendor and the MFIs, just have more work to do.

  • December 9th, 2009 at 3:40 pm, Lauren Braniff ()

    Thanks for the clarification, Jiten. You’re right that it’s been successful in other industries but can that success translate to microfinance? I know of a lot of projects in the works, but are there any implementations which are already operational?

  • December 9th, 2009 at 3:48 pm, jiten patel ()

    The one SaaS type effort that is operational is in India, and limited to that sector, the one offered by FINO; as for any others, I am not aware of any; as for any about to become reality, yes i am aware of one.

  • December 10th, 2009 at 9:51 am, How do we “fix” the mismatch between supply and demand for microfinance technology solutions? « ()

    [...] Frontier Investments manager Monica Brand poses something of a conundrum in her CGAP Technology Blog post. Many microfinance institutions around the world realize they need updated management information [...]

  • December 10th, 2009 at 11:55 am, Asif Mohamed ()

    Jiten, to add to the vendors that you have mentioned, there is another platform Banker’s Realm .NET that is now being offered on a SaaS platform. They already have a customer live on this solution. This MFI has also recently won an Emerging MFI Award in one of the Microfinance Awards and Forum event in Mumbai. But like you have rightly mentioned, the success of any SaaS platform is in the numbers who will subscribe to it. The success of a SaaS platform can only be achieved once there is a certain amount of scale built. This is true for all the countries wherein Microfinance is really emerging as the best way to offer multiple financial services and other products to the BPL or unbanked community.

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