In a survey CGAP conducted in South Africa, roughly half of those surveyed said they preferred to deal face-to-face with a person rather than with an electronic device, even if the device is quicker. Interestingly, the responses were similar between WIZZIT customers and people who have a mobile phone but do not use it to conduct transactions.

Despite being satisfied with the mobile banking service, users still missed the human touch. Customer research conducted in South Africa pointed at a likely reason for this: having to deal with machine interfaces undermines people’s sense of control over the process. Indeed, a larger proportion of WIZZIT customers than nonmobile-enabled bank customers felt that they had insufficient control over their finances. Similarly, in one anecdote from South Africa, customers using ATMs for the first time checked their balances so frequently that they lost their entire balances to ATM fees.

The same research in South Africa also highlights the need to improve customer awareness of branchless banking and to educate customers about how it works and what it costs. Not understanding the technology is the single most frequent reason given for WIZZIT customers who have stopped using the service. Nonusers thought the cost of the service was on average 14 times more expensive than it really is.

These results demonstrate the importance of marketing and of balancing technology with human interfaces, both to improve awareness and understanding, as well as to improve perceptions of the service. Achieving this through a branchless model will be a challenge.

First, let’s identify what the innovations are in mobile banking. For someone who has a mobile phone, but doesn’t have any bank account, I would see three:

• a new concept of value – electronic, not cash or in kind
• a new financial provider – not manual exchange or through hawala or through bus driver or friends/family, but unknown / untrusted organization or some bank
• a new use of device – use existing device for new purpose (idea that phone can be used for finance is a new idea)

We then try to evaluate the characteristics of the innovations – these are what determine its rate of adoption. We would expect an innovation that has a high relative advantage, compatibility with norms, trialability, observability, and possibilities for re-invention – and low complexity – to have a higher rate of adoption.

The table here is my assessment of the characteristics of the three innovations that encompass m-banking. The picture isn’t pretty.

Second, we look at the communications channels through which messages about the innovations are transferred. There are two broad types – mass media channels, which tend to spread awareness, and interpersonal channels, which spread subjective evaluations and thus form and change attitudes and influence decisions. One problem here is that the diffusion of an innovation usually takes place from promoters or innovators to a mass market that has different characteristics (e.g. less tech-savvy, cosmopolitan, etc.). People are more likely to communicate with others like them.

This ties to the third issue – the ways in which innovation is spread over time. In general, people follow a sequence as follows in adopting or rejecting an innovation:
knowledge – become aware

• persuasion – form an attitude
• decision – to adopt or reject
• implementation – use the new idea
• confirmation – confirm the decision

It seems that most people who have knowledge have formed an attitude about the m-banking service and have decided to reject it. If we assume mass media has been successful at raising awareness (which we found not to be the case in South Africa 2 years ago, however), then it’s a lack of favorable interpersonal communication that is preventing an initial adoption decision.

The final task is to look at the social system, because the social and communication structure of the system determine the pace of innovation diffusion. In this situation we are dealing with social systems in which norms may dictate the use of cash, a mistrust of banks and/or technology. Because most decisions to adopt are made by individuals and not by a collective or by an authority, we expect quicker decisions. But this also means a potentially large number of individual decision-makers who must be influenced. Wizzit and GXI have courted opinion leaders in communities but it isn’t clear this has been successful.

Based on this, I think the hardest thing so far is not the marketing of the solution, but the product and innovation itself. There are three innovations here for an unbanked person, not just one. The innovations itself are counter to social norms, complex, not easily trialed and not observable.

I also wonder – if we allowed people to develop their own financial products using an mbanking interface (e.g. open as many accounts as they want for different purposes, create terms, etc.) would that be a way of increasing usage once adopted and improve subjective evaluations communicated through interpersonal ties?

Credit bureaus, or repositories of borrowers’ credit history, help reduce information asymmetries between lender and borrowers.  Such sharing of credit information can help lending institutions assess risk more efficiently and effectively, leading to improved portfolio quality and reduced interest rates for borrowers. On the financial system level, credit reporting systems increase access to credit and private sector lending, improve the efficiency of credit markets, and provide incentives for borrowers to repay their debt on time.

In 2001, the International Finance Corporation launched its Global Credit Bureau Program to support the development of functioning credit registry systems around the world. Their experience and best practice guidelines are compiled in a Credit Bureau Knowledge Guide which hints at three criteria that determine the success of a credit bureau:
1) Ownership structure (public vs. private), the
2) Type of credit information collected (negative-only vs. full file), and
3) Participation in the system (i.e., number and type of data furnishers)

These lessons have now been taken further:  PERC (Political and Economic Research Council)  recently published important research pieces (“Economic Impacts of Payment Reporting Participation in Latin America” , “Factors to Consider on the Eve of Brazilian Credit Reporting Reform” ) which not only provide a comprehensive literature review, but also an assessment of the impact of the three criteria above on private sector lending:  

“The results suggest that privately owned, full-file credit bureaus with 100% participation lead to significantly greater lending to the private sector (at least 47.5% greater) than no participation.”

But this still does not completely solve the problem of the person described in the first paragraph (just to remind you: no collateral, informally employed, in a remote location, and without existing credit history). CGAP’s Technology Program is preparing a study to learn more about the potential of alternative or non-traditional data (i.e., payment obligations such as phone, gas, electric, etc.) in developing countries to integrate these clients in the credit registry systems, but also how such data can be used by lending institutions to assess client repayment capacity and creditworthiness. A study by PERC regarding the impact of alternative data on the US market already goes into this direction.

We are dead set on proving a hypothesis: good return to our shareholders can go together with reaching the poor.
-Riza Maniego-Eala, President of G-Xchange, Inc.

Our market research shows that 50% are keen to have mobile banking services made available through local grocery stores, post offices and gas stations. But getting the service out is proving to be a challenge.
-Ganhuyag Chuluun Hutagt, CEO, XacBank

Download the pdf here.

 

Financial literacy - the level of understanding that customers have when it comes to services - is significant. Danielle Hopkins is with Microfinance Opportunities, a Washington-based group that focuses on financial literacy and other issues facing microfinance. Here are her thoughts.

Financial inclusion was a central theme of the Next Generation Access to Finance Conference held earlier this year at the World Bank Headquarters in Washington, DC.  One issue that was mentioned repeatedly was the importance of financial education in electronic banking.The potential for ICT-based financial services to achieve scale will depend largely on adoption and usage rates of the various technologies.  Thus far, these rates have been lower than desired and many hurdles remain.  Some of the problems lie in the hardware and infrastructure; others pertain to people’s knowledge, skills, and behaviors. 

Microfinance Opportunities recently conducted market research with bank staff and their clients in the Philippines and the Dominican Republic (DR) to explore the usage of m-banking and electronic cards and the role for financial education in raising adoption rates.

Mechanics is one issue associated with both m-banking and bank cards.  In the Philippines, many of the clients interviewed do not know how to use G-cash, an m-banking service provided by the telecom Globe.  Clients are confused by the different syntax or key words for different services.  According to staff of First Valley Bank, trust is the biggest obstacle to adoption because clients are skeptical of electronic money they cannot touch or see.  In the DR, ADOPEM clients do not understand the difference between a debit card and a credit card and are thus wary about using electronic cards in general.  In addition, many clients fear they will spend too much money when using an electronic card that provides easy access to their account, as opposed to having a set amount of cash in their wallet.  In general, clients are unaware of the full range of benefits and financial services associated with using either of the technologies. 

Despite these knowledge gaps, many clients readily acknowledge the advantages of being able to access money quickly and securely via a cell phone or electronic card.  For clients in the DR, the debit card is a status symbol that gives the bearer a sense of security and power.  Withdrawing money is the number one use of cards, followed by depositing money, checking balances, buying goods in a store, and receiving cash back.  Among m-banking clients in the Philippines, remittances are the most popular service.  Payments are the second most popular feature, although not all providers offer a payment platform.  Retail outlets provide cash in/out services that allow clients to make deposits and withdrawals, two widely used services. 

Financial education can play an important role in expanding the access frontier and increasing uptake of ICT-based financial services by helping low income clients to understand the technology as well as the financial services behind the transactions.  Currently in the institutions visited, clients receive minimal, if any, training on how to use the technology.  Financial education on savings can teach clients how to exercise self-control in their spending habits when using an electronic card or cell phone.  Consumer protection is also pertinent to both m-banking and electronic cards as clients need to be informed of how to protect their pin number and what to do in the event that their phone or card is lost or stolen.

The tremendous growth of electronic banking requires that financial education be disseminated on a large scale to all economic strata of the population.  TV, video and radio are three delivery channels with the potential to achieve massification.  In Uganda alone, radio has been used to deliver financial education to over 6.4 million people.  

By teaching clients how to use technology to better manage their money, financial education can build trust in ICT-based financial services and ultimately increase the adoption and usage of new banking technologies.  As Elizabeth Littlefield pointed out at the opening session of the Next Generation Access to Finance Conference, clients’ lack of understanding of technology-based financial services is a challenge to adoption.  Financial education is a viable way to overcome this challenge.

For more information on Microfinance Opportunities Global Financial Education Program, visit our website at www.globalfinancialeducation.org or contact us at info@mfopps.org.

The Hindu

Using thumbprint and voice guidance in ATMs reduces literacy requirements to a considerable extent. Thus, establishing the identity of a rural depositor through biometrics makes it possible for illiterate or barely literate people to become part of the banking user community.

A simplified menu on ATMs coupled with possible audio guidance in local language enables easy use for rural masses. So far, bank ATMs are dependent on PIN (personal identification number) verification. The fingerprint authentication method is non-PIN based, and this requires enhancements to the standard switch environment. Though identification can be via face, voice, retina or iris, fingerprinting has the advantage of being a familiar concept worldwide.

Though exciting, widespread deployment will be a challenge. How to handle cash - what about banking agents? What is required for customer adoption? With lower levels of functional literacy, what about financial literacy? These are questions we at CGAP are working on with our research collaboration with Microsoft Research India, as well as our project partners.

In addition to the focal research on User Interface design, the MSRI-CGAP collaboration will also involve joint explorations in understanding the social and economic context and impact of mobile-banking on poor households.

What we learn will be shared with everyone. Aishwarya Ratan is with MSRI and joined us in Washington at our conference this week to talk about the work envisioned and some of the things MSR has already learned in India. Here are her thoughts.

This three-day conference has covered a good set of issues relevant to the expansion of formal financial services to currently underserved populations - incorporating credit/payments reporting and scoring tools into microfinance provision, using technological channels to enable low-cost information and cash exchanges, and establishing suitable policy environments to allow new and improved methods of conducting financial transactions. However, I felt there could have been more discussion of the operational issues involved in implementing these changes, particularly for small players, as well as the specific set of impact measurements that might allow practitioners to assess whether the new systems and channels are indeed enabling lower-cost, more-efficient operations for themselves, and significant improvements in the lives and livelihoods of ‘the poor’ being reached and served.

The response to our work at Microsoft Research India was very encouraging. I discussed issues around cost realism, social context, and user interface design in effectively deploying mobile phones to enable various aspects of microfinance delivery to the poor (data management, payments/ transfers, etc.). The central theme of thinking about ‘mobile phones for microfinance’ as not a single category, but as a composite of several categories of applications and services conditional on variations in context and usage, echoed with many people in the audience. This presentation will soon be available on our project website, and more information on the TEM group’s ongoing work can be found here.

Looking forward, specific understandings on what differentiates poor clients from rich ones, and what changes in approach and product design are needed to serve low-income households based on their behavioral preferences, economic constraints, and social networks will not only be useful, but vital to realize the ‘development’ potential of these efforts without compromising on the security and soundness of the local financial sector. The research partnership between Microsoft Research India and CGAP will work towards exploring and sharing insights in these important areas.

-Aishwarya Ratan, Microsoft Research India

That was fun. What did we learn? 

We reaffirmed that small, including micro, enterprises have proven themselves to be reliable and sustainable ways to help people out of poverty and that, in that context, we have abundant proof that microfinance is a workable idea.

MFIs, although having reached increasingly impressive numbers of people, must nonetheless recognize that more than two-thirds of the inhabitants of developing countries remain to be touched by the MFI mission of bringing the advantages of banking to the unbanked and under-banked.

Both the time and the opportunity have arrived for MFIs to rethink their original ethic of experimentation, labor intensiveness and small scale and to extend access to finance to as many as possible of the 2.5 billion who lack access to finance.

This volume of clients can only be reached through significant reductions in the cost of MFI’s operation and a quantum leap in the scale at which the industry functions.

The response to this imperative for reduced cost and increased scale must include the optimum use of technologies that are available or that can feasibly be put in place, as well of credit bureaus and credit scoring.

We started our discussions with the promise that we would engage in a round of critical and in-depth analysis of what has worked in these areas and what needs to be done differently and more efficiently and effectively. Fortunately, we did not inaugurate this meeting with the idea or the promise that after three days of discussion we would be able to take a vote and announce to the world the answers to the questions posed by the pursuit of greater access to finance. Indeed, if anything, our attempts to find answers to questions often yielded a harvest of new questions.

Productive inquiry begins with the asking of the right questions, so, if all this meeting produced was a greater clarity of the issues that we need to address, our assembling here in Washington would have been of tremendous value. But we believe that we also achieved at least four other advantages. These are:

• A greater understanding of each other’s concerns, which, as we have seen at the level of individual partnership arrangements, is critical to any progress in the access to finance area.
• A greater awareness of each other’s successes, which we believe, are a necessary encouragement as we continue with the enormous task that access to finance represents.
• An understanding that the idea that every problem represents an opportunity is, in the context of access to finance, more than a jargon, and is in fact the only mindset that we can afford to take to the challenges and opportunities that beckon us.
• A belief that prevailing opportunities for reaching the next 2 or 3 billion of the world’s financially excluded inhabitants represent nothing less than a tipping point that we cannot afford either to ignore or to mismanage.

When the Meeting Began

So when we opened our meeting on Monday, what were the questions we set out to answer? Perhaps there were four main ones:

• How can we take advantage of the growth in MFI investments, lending volumes and outreach and the availability of a range of financial technologies to increase scale and reduce costs in microfinance operations with a view to increasing access to finance for those who still lack such access?
• How can the establishment and functioning of credit bureaus and the use of credit scoring enhance decision-making, portfolio management and other MFI functions?
• Is the suggested approach destined to leave the poor exactly where they are, or does it really have the potential to transform the financial sector in both developed and developing countries and generate what one speaker called a seismic shift in the circumstances of people in the developing world?
• And to look at that question another way, what are the likely consequences—for the financially disenfranchised, for the MFI as we know it today and for the new actors responding to the opportunities and challenges of access to finance—represented by the new disaggregated business model and the attempt to employ second-generation solution to first-generation problems.

After some 50 people have spoken on stage and many hundreds more taken questions and answers in the audience, some salient ideas.

The Technological Imperative

• While not understating the concerns that some have expressed on the possible negative impacts of certain technological innovations, there seems general agreement that using financial technologies in the pursuit of access to finance is not a question of whether or even of when, but one of how.

• Need to focus on the back end for information systems. “The back end is broken.”

• Interoperability

• Balancing need for a common platform perhaps based on open source technology (as against a plethora of individually customized systems) with the need to do sufficient customization to meet the peculiar needs of clients at the bottom of the pyramid.

• Cultural requirements—Multilanguage, literacy and related concerns.

The Efficiency, Transparency and Accountability Imperative

• As with technology, the use of credit bureaus and the introduction of some form of credit scoring are a sine qua non for financial institutions wishing to avail themselves of the opportunity to reach masses of potential clients without losing control of the management of the decisioning and portfolio-management processes.

• Increased presence of credit bureaus in emerging markets.

• Again, meeting the specific needs and circumstances of the target market.
Experiments, Experiences and Successes in Innovation

• We’ve received reports of a wide array of studies, plans, experiments, experiences and successes that seem to establish that, given the right circumstances and correct actions, innovation can work.

• These vary from the project being developed by CGAP and Xac Bank Mongolia to more mature examples in Kenya, India, and the Philippines.

• The experience of Alieu Conteh, who started the first GSM network in the Democratic Republic of Congo.

The Need to Balance Optimism with Realism

•This conference provided us with many moments when we could easily have been tempted to see the glass not only as half full, but as approaching the three-quarter mark. We should therefore thank those who kept calling us back to a  recognition of the reality and reminding us that, despite the wonderful successes, we are engaged in a work in progress, indeed a work barely begun. So we have to balance optimism with realism.

The Requirements, Benefits and Challenges of Partnership

However, one of the great takeaways from our discussions is the importance—indeed the inevitability—of conceiving, establishing and managing effective partnerships if we are to be successful either on the credit bureau/credit scoring or the technological side of the equation.

Bringing together elements previously seen as discrete—e.g. a large international bank and a small MFI/NGO, an international mobile-phone provider and a local bank downscaling to the microfinance market, or perhaps a larger consortium of actors including a systems provider, a number of MFIs, a credit bureau and a regulatory agency. Not to mention the silent partners, i.e. the hundreds or thousands of underserved clients.

Only a thin line stands between such actors being partners and becoming competitors—or between their working together at this important enterprise or walking away from the table.

Potential fault lines in this relationship relating to such variables as the sharing of fees and the question of exclusivity need to be carefully managed.

The Urgent Need for a Generation of Visionary Regulators

The need for an inviting regulatory framework, long a challenge in the world of microfinance, becomes even more critical with the degree of experimentation, the possible high investment costs and the larger number of stakeholders that must be managed in this new phase of access to finance.

Regulators now need not only to understand the distinctions between MFIs and the traditional banking sector but also the requirements and challenges of combining the peculiarities of different sectors and technologies—principally telecommunications and banking and finance.

The Future of MFIs

How could the management and sustainability of the “group loan” methodology be affected by both credit scoring and mobile lending?

Danger of the ethic, or the very existence, of the MFI being forgotten if not threatened by the emerging discourse between banks downscaling to reach the microfinance market and mobile phone providers becoming aware of that market.

Abbas Sikander’s (Tameer Bank) encouraging revelation of how he emerged from his identity crisis and his confusion about the future MFI role early in the conversations at his meeting an awareness that the growing interest of these new players and what they bring to the table represent new opportunities for MFIs.

While this number was down to 16% by early 2007, it exemplifies the immense operational challenges of implementing new channels. Elizabeth’s comments on the promise of new technology were coupled with a cautionary tone that has been a resounding theme of many presentations at the Next Generation Access to Finance conference this week. And we haven’t even heard from the regulators yet!

In the first day’s sessions on credit bureaus and bank-end systems, moderators and presenters made the convincing case that infrastructure is critical and must be in place before embarking on other technology-enabled delivery approaches. We’ve also heard from MFIs actively using credit scoring, m-banking, and agents.

Based on conversations with MFIs over the past two days, conference attendees lie on the spectrum from those without solid back-end systems or from countries without much financial infrastructure such as payment systems and credit bureaus, to those already using m-banking, scoring, and other advanced technology approaches. While some MFIs are mingling with the technology vendors on display and discussing their m-banking plans, others are interested in pursuing these ideas but know that they and the markets in which they work need to put some basics in place before it will be possible.

Despite the different starting points, several issues are emerging as critical to the sucessful planning and roll-out of technology approaches:

1. Strong back-end systems and regulatory clarity are the foundation to introducing advanced technologies.
2. “Ecosystems” where people can readily transact electronically or convert cash into electronic units will be important to develop scale.
3. Financial education is key to customer adoption.
4. Interoperability improves the value proposition to the agent (more traffic means more commission) and client (more points of sale) but can be challenging to implement.

All the cautions and challenges aside, the mood at the conference remains optimistic. Technology alone will not magically bring the millions of unbanked into the formal financial system, but coupled with the customer-focused approach that microfinance is known for, it just might.