Virtual Conference Day 1, Session 1: What benefits can MFIs expect to gain by using m-banking?

by Sarah Rotman : Wednesday, September 8, 2010

Welcome to the CGAP Virtual Conference on microfinance and mobile banking!  This conference is taking place right here on the blog, no registration is required. Just post your comments using the “Leave a reply” option at the bottom of each thread.

This discussion is moderated by Sarah Rotman, CGAP co-author of the Focus Note Microfinance and Mobile Banking: The Story So Far.

 

Mobile banking has become a subject of debate within the microfinance community largely because most MFIs believe that there are certain benefits m-banking can bring to their institutions. But what is the reality on the ground? We asked this question focused on three specific benefits:

1. Can m-banking help MFIs serve existing customers better? The case studies of SMEP in Kenya and XacBank in Mongolia show that m-banking can help existing MFI customers save time and money, experience greater security, and manage their cash flows with more flexibility. For example, at any time during the repayment period when a SMEP customer has the cash flow to make her repayment (or even a portion of the repayment), she can use M-PESA to send the electronic value to the SMEP account directly. Meetings with loan officers now involve a quick verification of the transaction. Obviously, customer willingness to pay a transaction fee depends on the previous cash collection method used. If customers were responsible for transporting cash to make their repayment, they may be willing to pay an M-PESA-like transaction fee. But if MFI loan officers collect cash, customers may want to protect their “free” cash collection rather than pay a fee to make the repayment.

2. Can m-banking help MFIs reach new customer segments? We found little evidence to suggest that m-banking has helped MFIs reach new customer segments largely due to the fact that microcredit methodology relies heavily on human interaction. The case study of Kenya Women’s Finance Trust (KWFT) shows that this particular MFI does not expect M-PESA to help it expand its loan customer base significantly since loan officers still need to have face-to-face interaction with groups. However, KWFT does see M-PESA as a way to mobilize new deposits easily and cheaply.

3. Can m-banking reduce costs for MFIs and for customers? Early evidence suggests that m-banking can reduce operational costs for MFIs and that these costs can be passed on to customers in the form of lower interest rates. The case study of Green Bank in the Philippines shows that once customers began using GCash for loan repayments, there was less need to send collectors to gather repayments directly. As a result, Green Bank agreed to reduce interest rates from a flat monthly rate of 2.5% to 2%, as well as reduce its service charges from 3% to 2.5%.

What do you think?

• Do these benefits outweigh the costs associated with linking into a mobile banking system?

• Do you think that new customer segments will eventually be reached through m-banking or will the group accountability of microfinance prevent this?

• Will both customers and MFIs see significant cost savings thanks to the use of m-banking technology?

TAGS: Guest Blogger, Kenya, Microfinance, Mobile Banking, Mongolia, Philippines, Tanzania, Technology

Comments: Comments and trackbacks are open.

41 Comments RSS 2.0

  1. September 8th, 2010 at 6:21 am, Gabriel Metz ()

    m-banking can also be very useful for “internal” purposes: streamlining and securing on-the-field transactions – especially for small deposits. When Loan officers are collecting cash (whether for loan repayment of for savings), the transaction can be recorded in (almost) real-time…and the customer can get confirmation by SMS. Such a feature is securing transactions in rural areas where it is not cost effective and/or technically impossible to have a direct connection with the back-office system.

  • September 8th, 2010 at 6:25 am, John ()

    Hi Sarah, under question one, we did find that mbanking is helping rural banks better serve new as well as existing clients. This has involved both transactional mbanking and informational non-transactional mbanking services such as SMS loan payment reminders.

  • September 8th, 2010 at 6:29 am, Sarah Rotman ()

    Thanks John. It is interesting to hear that you have seen experiences where m-banking has allowed rural banks to reach out to new customer bases. Specfically related to transactional m-banking, do you think this is mainly due to the reach that a service like GCash has at a lower cost, versus the traditional dependence on bank branches and loan officers?

  • September 8th, 2010 at 6:33 am, John ()

    On point number two, I do agree that new clients for deposits and loans still need to go to the bank first but mbanking does help in areas such as initially promoting and supporting money transfer services for new clients. Banks or MFIs offering mobile money transfer services can then cross sell other mbanking services to these new clients.

  • September 8th, 2010 at 6:39 am, John ()

    Mobile money platforms such as GCASH, MPESA, and Smart Money, when combined with networks of cash in and cash out agents, can more easily facilitate clients being able to receive loan disbursements or make loan payments remotely due to more pervasive touch points to transact with a bank or MFI. It is also much cheaper to facilitate payments through third party agents as has been demonstrated by banks in Brazil, Colombia, and Peru.

  • September 8th, 2010 at 6:50 am, Gabriel Metz ()

    m-banking does not have to imply electronic money and “Mobile e-money”. For instance, at XacBank, account-holders can directly transact out/from their accounts. Same for agents: each cash-in/ cash-out operations is immediately settled by debiting/crediting the agent account. A XacBank customer will also be able to send money to an unbanked person (provided the recipient has a mobile phone…). M-banking linked directly to MFis’ account can indeed facilitate transactions.

  • September 8th, 2010 at 6:52 am, Tosin ()

    Hi Sarah. A question for John. You mention above

    “Banks or MFIs offering mobile money transfer services can then cross sell other mbanking services to these new clients”

    In lights of the benefits to the m-banking providers, have there been any moves on their part to provide their services to MFI’s at a reduced cost?

  • September 8th, 2010 at 6:52 am, John Owens ()

    With regard to cost savings under point number three, active rural banks offering m-banking services via GCASH in the Philippines see the greatest benefit in using this new channel to facilitate transactions for clients usually more than 30-45 minutes from a bank branch. We found that this was true in cases where the cost of traveling or collecting from clients far from the bank was more than fees offered by mobile money agents to facilitate these types of transactions.

  • September 8th, 2010 at 6:58 am, Ali Abbas Sikander ()

    As easypaisa, we have done a pilot of Tameer’s loan disbursement via easypaisa locations: Some observations:

    a) delay in disbursement due to cash availability. this effected the daily disbursement targets given to Loan officers

    b)agent charging extra money for disbursement then agreed

    c)loan officer loosing control over the loan operations and introduction of another layer in the process

  • September 8th, 2010 at 7:03 am, Sarah Rotman ()

    Hi Abbas: In the pilot you are running, what is the process whereby the loan officer confirms that a loan has been disbursed by the easypaisa agent? I’m curious what the extra layer in the process is that you reference. Are there ways to make this process less work for the loan officer?

  • September 8th, 2010 at 7:05 am, John Owens ()

    Yes, in the case of GCASH, rural banks and some other MFIs can use these services at low rates. The only cost issue is working with third-party mobile money agents and helping them to keep the costs down for cash in and cash out services. There is no cost for clients to register for the service and the fee from the mobile money issuer is just 2.5 pesos per transaction ($0.05).

  • September 8th, 2010 at 7:09 am, Sarah Rotman ()

    There was a comment left by Alejandro Ceballos just now under the previous blog post announcing the virtual conference, but I think it would be interesting to get comments from people here.

    He says, “M-banking seems like a great opportunity for MFIs to reach more clients but I believe that in many cases MFIs do not have the capabilities to really benefit from it.”

    What capabilities do you think MFIs require to successfully implement m-banking?

  • September 8th, 2010 at 7:11 am, Claudia McKay ()

    Hi John, I have a question for you. I imagine that the difficulty of reaching new clients with m-banking would be greatest with the group loan product (the predominant product offered by most MFIs). Even if the group can easily receive loan disbursements and repayments via the phone, don’t they still need to meet regularly and doesn’t a loan officer from the MFI need to visit to ensure these meetings are taking place and help resolve repayment issues? The only ways I can see m-banking really reach new group clients is if either a) the loan officer doesn’t visit often (and the group can manage itself) or b) the loan officer travels long distances or c) the loan officer operates separately from a branch, perhaps checking in once a week or so. How have the organizations you’ve worked with dealt with this issue? Have new group loan clients really been reached with m-banking?

  • September 8th, 2010 at 7:12 am, Alejandro Ceballos ()

    In my opinion, M-banking seems like a great opportunity for MFIs to reach more clients but I believe that in many cases MFIs do not have the capabilities to really benefit from it. Do you think this is one of the reasons why MFIs have not been able to increase their outreach by using m-banking technologies?

  • September 8th, 2010 at 7:12 am, Joen Moth-Poulsen ()

    Commenting on the question: “Can MB help MFIs reach new customer segments?”
    No doubt that MB poses new opportunities and challenges for microfinance. Thus, maybe we need to reconsider the underlying role and outlook of microfinance. Could one imagine a system in which loans will be applied for and issued over the mobile phone with hardly any consultation?
    In such setup, one could imagine the MFI customer accumulating points according to punctuality of previous repayments, and hence making it easier for the MFI to distinguish between “good” and “bad” customers. New loans (of higher amounts) could then be granted according to the “status” of the customer.
    I know this system might sound rigid (despite its high proliferation on the internet, take customer satisfaction on e-bay for example), but if the gains from cost reductions and new customer segments outweigh the losses of one-to-one contact the MFI and the customers might be better off. What do you think?

  • September 8th, 2010 at 7:14 am, Eugene Amusin(Citi Microfinance) ()

    Hi Sarah,

    I agree that m-banking can help reach more people. It also creates efficiencies and streamlines operating models. We have seen MFIs become ‘cashless’ which eliminates the security risk of cash. It would be interesting to understand if MFIs put a number security risk of cash. Another advantage of becoming ‘cashless’ is that MFIs can focus on the clients instead of the cash distributions logistics.

  • September 8th, 2010 at 7:18 am, Sarah Rotman ()

    Hi Eugene: Can you talk more about the MFIs that you’ve seen become “cashless”? This sounds really interesting and I’d be curious to know how they’ve achieved this!

  • September 8th, 2010 at 7:20 am, Claudia McKay ()

    Hi Joen I like the idea! However, instant loan approvals would be a big departure from most MF methodologies today. I think that the main reason m-banking is not helping MFIs reach new client segments in big ways today is because the current methodology is so focused on human interaction and a loan officer physically verifying a client’s home, business, cash flow etc. However, I think for MF to really scale it will need to start adapting these methodologies to take advantage of the technologies available today. I think that Equity is planning to do something like that with M-Kesho. However, most countries where MFIs operate do not have a credit bureau and in the absence of this it would be very difficult to give loans without an in-person consultation. Perhaps this could be done for repeat customers (ie pay 3 loans with no problems and thereafter you can get ‘automatic’ top-ups up to a certain percentage of your original loan amount)? Do you have any idea how this could be done for new customers in the absence of a credit bureau?

  • September 8th, 2010 at 7:21 am, Gabriel Metz ()

    “Capabilities required to implement m-banking”: it really depends in the scope of m-banking services. For “informational” services (loan repayments alerts, account enquiries, etc…): this is not difficult and can be implemented without major investments, provided that the MFI has already a core “back-office” system. M-banking can also be used for “internal” purposes: streamlining and securing on-the-field transactions – especially for small deposits: the loan officer record and send the transaction via mobile instead of recording in the evening (and the customer can receive a SMS confirming the transaction). What is more difficult is to launch a network of 3rd party cash in/cash out agents.

  • September 8th, 2010 at 7:21 am, John Owens ()

    To answer your question, MFIs of all sizes can make use of cheap automated SMS services to start off with and move on to other services as they progress.

  • September 8th, 2010 at 7:24 am, Nsinazo Warrakah ()

    M-banking can definitely increase outreach especially in remote locations given the high number of mobile users in these locations who require access to financial services in the most affordable/ appropriate, time saving mode.

  • September 8th, 2010 at 7:29 am, Ali Abbas Sikander ()

    Sarah:

    As per existing loan methodology, the service KPIs etc. are all attributed towards a loan officers daily performance. So loan officers are not letting go of his/her customers at the time of disbursement and is present at the agent locations.

  • September 8th, 2010 at 7:39 am, Sarah Rotman ()

    Abbas raises an interesting point that even with easypaisa, loan officers are still present at agent locations for loan disbursements. And Gabriel Metz referenced the example of XacBank in Mongolia in an earlier comment.

    This comes back to the overall question for this session of the virtual conference: can m-banking actually help MFIs reach NEW customers if there are still the same costs involved in close personal monitoring of loans? It seems clear that m-banking can help serve EXISTING customers better. But is the case there yet for reaching new customers cost-effectively?

  • September 8th, 2010 at 7:40 am, Ali Abbas Sikander ()

    It is a very useful tool to expand services in remote locations and for MFIs as opposed to full service MF Banks

  • September 8th, 2010 at 7:43 am, Normand Arsenault ()

    “Capabilities required to implement m-banking”: Poor standards and functionality of back-end systems at many MFIs is the greatest obstacle to the development of mobile banking.
    Mobile banking is a feasible solution, but important groundwork has to be done well in advance for it to work.
    Before considering the installation of new technologies, much more emphasis should be placed first on documenting internal business processes and designing systems that support the efficient flow of information.
    In a previous CGAP virtual conference, Mr. Jorge Perez-Luna, IT Business Partner for Global Development, Bill & Melinda Gates Foundation, wrote “Focusing only on the technology without first streaming the “how” MFIs work is a big mistake. We have seen already many failures for this exact reason.”
    Before any notion of front-end technologies are entertained, MFIs need to ensure that adequate and efficient core management information systems (MIS) are in place.

  • September 8th, 2010 at 7:54 am, Claudia McKay ()

    I agree Normand. I think that most MFIs today could benefit to some extent through some functionality on phones. However, to get the maximum benefit they will need a stable and efficient MIS and well designed business processes and systems. I also think they need to re-think their core product offering and methodology (perhaps along the lines of what Joen was suggesting) to take advantage of the new technology.

  • September 8th, 2010 at 7:55 am, Gabriel Metz ()

    As Alis Abbas commented: m-banking can expand servise in remote locations, and therefore reach NEW customers. As m-banking facilitates and secures low-value transactions more cost effectively, I wonder if the introduction of mobile banking will not facilitate the trend towards individual lending. Where an MFI (or an agricultural bank…) could only lend to a group, a cooperative…due to logistic constraints, now it could be easier to reach individual members directly – which appear more relevant in certain areas where solidarity group lending is sometimes “artificial” (an issue that may have far reaching consequences…). In that case, the MFI will deal with “existing” customers, but offering a different set of financial services

  • September 8th, 2010 at 8:02 am, Eugene Amusin(Citi Microfinance) ()

    A ‘cashless’ MFI has 2 components: back-end and distribution/collection side.

    Back-end is an outsourcing cash management function whereby an MFI can partner with a bank and use the bank’s network to appropriately allocate cash between branches and the head office. Citi partners with microfinance institutions to provide this capability.

    Using m-banking on the distribution/collection side the MFI agent does not touch cash during loan disbursement and collection process.

  • September 8th, 2010 at 8:07 am, Sarah Rotman ()

    Gabriel: You make a very interesting point. Perhaps m-banking will actually change the products and services that MFIs offer to customers. You mentioned that there may be a trend towards individual lending.

    What does everyone here think? Are some groups artificially created in the microfinance world where more individual lending (perhaps facilitated by m-banking) could be the trend of the future?

  • September 8th, 2010 at 8:08 am, Joen Moth-Poulsen ()

    Hi Claudia, I appreciate your insight. And yes credit bureaus are very important. For the countries that have none I agree that a sound solution may be to issue the first loans by having an MFI officer physically present.
    That said, neither this strategy is (as we know) a guarantee that the customer will repay what is due.

    Otherwise I see two scenarios (I prefer the first one):
    1) The loans are issued in incremental steps starting at a lower amount as the usual one. The first couple of loans/repayments are then almost “tests” to check the character of the customer. While the customer will know that she has to prove her credit worthiness in order to ultimately receive the desired loan, she will simultaneously adopt good routines for repayments and experience some sort of contact with the MFI.

    2) A heavier reliance on jurisdiction. Although the jurisdictional system in most cases won’t be as we know it in the western countries, digitalized microloans enables a much more precise and provable tracking down of repayments and thus convictions. If people get exposed to examples where defaults have serious and near unavoidable consequences we might see the mentality and landscape change very quickly.

    All this said, IF MFIs begin to adopt this new methodology of less person-to-person contact there will very quickly be a great demand for an either privatized or state supported credit bureau. MFIs will start screaming for information on credit worthiness and rating.

  • September 8th, 2010 at 8:09 am, John Owens ()

    September 8th, 2010 at 7:11 am, Claudia McKay ()

    Hi John, I have a question for you. I imagine that the difficulty of reaching new clients with m-banking would be greatest with the group loan product (the predominant product offered by most MFIs). Even if the group can easily receive loan disbursements and repayments via the phone, don’t they still need to meet regularly and doesn’t a loan officer from the MFI need to visit to ensure these meetings are taking place and help resolve repayment issues? The only ways I can see m-banking really reach new group clients is if either a) the loan officer doesn’t visit often (and the group can manage itself) or b) the loan officer travels long distances or c) the loan officer operates separately from a branch, perhaps checking in once a week or so. How have the organizations you’ve worked with dealt with this issue? Have new group loan clients really been reached with m-banking?

    Claudia, to answer your question, we have had the most difficulty with group loan clients as far as disbursements and repayments for the reasons you mentioned as well as the ones raised by Ali Abbas. Most rural banks also offer individual loans so mobile money for loan payments is usually only offered to these clients. We find that all clients benefit by using mobile money for transfers and for facilitating remote savings deposits and withdrawals from their bank savings accounts.

  • September 8th, 2010 at 8:25 am, E. Kanini ()

    A 2009 national financial access survey in Kenya revealed that mobile money transfer services are indeed leading the expansion of financial inclusion. This is primarily because they provide faster, safer, cheaper and reliable services.There is great potential for m-banking to enhance the provision of affordable, reliable, sustainable and accessible financial services to all, especially the poor.If MFIs were to tap into these technology-led delivery channels like m-banking, this would go a long way in enhancing their outreach at low costs. However, concerns often raised are valid.. would these erode the group model that microfinance is built on?

  • September 8th, 2010 at 8:30 am, Sarah Rotman ()

    Thanks to everyone for a great discussion during this first session of our virtual conference on the benefits of mobile banking for MFIs. People here seem optimistic about the opportunities that m-banking presents to the microfinance industry. Yet at the same time, there was frank discussion about many of the challenges. Will it change the group dynamic inherent to microfinance? Is it more suited toward individual loan customers only? Are MFIs’ MIS strong enough to support an m-banking platform? Will MFIs not only serve existing customers, but new customers through m-banking? There have been some useful answers and insights to all of these questions discussed here.

    Please feel free to continue to comment within this session stream. But the next session of our virtual conference will be starting in about 30 minutes, at 1 pm GMT. This session will tackle the question: Should an MFI in a country without any existing m-banking infrastructure create its own m-banking system? The session will be moderated by Aleksandr-Alain Kalanda, CEO of Opportunity Bank Malawi which developed their own m-banking system from scratch.

  • September 8th, 2010 at 9:02 am, John Owens ()

    Joen, you raised the point about mobile phone banking being a bit less personal than direct person-to-person contact. Here in the Philippines, we actually find SMS contact as more personal and offers a greater chance to actually reach a client than via a face-to-face visit or over a phone call. Most active clients are often too busy or are not around when a loan officer goes to visit them or sometimes they are not able to take a call. They actually prefer getting reminders or updates via SMS on a phone since it is something they always carry with them. In fact, rather than being less personal, we actually find we are able to increase the personal contact we have with clients via a mobile phone, especially via SMS. This is, however, still quite unique to the Philippines where clients are fairly literate and very text-savvy. I like the fact that every time a deposit or a withdrawal or a payment is made from/to my account, I get a free SMS update from my bank. I don’t have to go online as much here to check my balance or make a payment. Mobile money and mobile banking actually provide clients with greater access to banking information and supports more transactions than possible over the counter or even online with a more immediate personal touch!

  • September 8th, 2010 at 9:09 am, Claudia McKay ()

    Hi John, thanks for your response. We came to similar conclusions – m-banking can provide great benefits (and reach new clients) but mainly if you reach beyond group lending to products like individual loans, deposits and transfers. Many MFIs don’t offer these products but in regions like the Philippines, where they do, I can see how they can both benefit existing customers as well as attract new customers.

  • September 8th, 2010 at 9:20 am, Pranav ()

    Request views on what additional MBanking plus services can be offered on mobile phones. Can it become an effective tool for insurance premium collection if MFIs start offering these services?

  • September 8th, 2010 at 10:22 am, Claudia McKay ()

    Hi Pranav, I don’t know much about insurance premium collection via m-banking but I know that that there are a few products in Kenya using M-PESA for microinsurance. Here is an example of one:

    http://www.sciencedaily.com/releases/2010/03/100304202242.htm

  • September 8th, 2010 at 11:02 am, Emily ()

    Pt 1 and 3–that m-banking helps reduce time and money for MFI’s and customers and serves customers better is in line with what we’ve found working with M-PESA in Kenya and now extending cell phone banking to Opportunity clients in Malawi. Regarding point number 2, though, I would point out that cell phone ownership is growing exponentially, especially in the developing world, and so with more widespread ownership of phones comes a greater base of potential clients poised to take advantage of m-banking services. Regarding John’s point that this reduces person-to-person contact, an MFI can combine Trust Group model lending–a social format–with m-banking for remittances and funds transfers.

  • September 8th, 2010 at 11:32 am, John Ngahu ()

    Hi Sarah,

    I’m shy to say that m-banking CANNOT help reach out to new MFI customers as the uses of technology keep unfolding rapidly. For now, its not a clear opportunity. To get new customers, you need to engage them either through advertising or word of mouth. Mobile banking, on its own can reduce cost of operations freeing up resources for marketing an MFI’s services. Also, by providing easier and cheaper ways for your existing MFI clients to transact, word may go round to prospective customers who may take up the MFI’s services. If we make such connections for now, then perhaps we can attribute mobile banking as a ‘reach’ tool to new MFI customers. On its own, I can’t see a stand alone connection, for now.

  • September 8th, 2010 at 12:23 pm, Sarah Rotman ()

    John, I really like your classification of mobile banking as a “reach” tool. This makes a lot of sense, and also recognizes the limitations of mobile banking when direct engagement is still necessary in microfinance.

  • September 9th, 2010 at 12:21 am, Bayaraa ()

    Sarah,

    We agree that m-banking can help existing MFI customers save time and money and manage their cash flows on their own in case of convenience.
    In return, it is gonna benefit MFI. We are looking at the 3 different levels within a bank which divides all customers based on transaction amount. M banking is focusing on daily basis transaction with small amount of money especially in hard-to-reach areas, small amount transactions go through ATM and master agents and big amount transactions at branches.
    We are ready to go to next level which is starting to make repayment transactions. It would be great, if you would share any studies and findings with us.
    Thank you,

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