Mobile Banking Perspectives for Microfinance

Financial services have typically been provided under a conventional brick and mortar setup, where clients physically visit service-centers.This approach however has high transaction costs, and has therefore resulted in financial exclusion of a majority who cannot afford them. For developing countries, where the cost of doing business is relatively high due to lack of physical infrastructure and institutions, and where income levels are low, this issue becomes even more acute.

For provisioning financial services to this low-income population, microfinance sector (which primarily caters to this segment) needs to leverage high levels of innovation in technology and process adoption. From ATMs (e.g. Prodem), to EFT-POS and smart cards (multiple MFIs in India), to Internet (e.g. Kiva), microfinance has effectively lived up to this challenge. Moreover, mobile phones are now envisaged to further revolutionize the way in which micro-finance is delivered. It promises to be transformational in primarily because it enables reaching out to people who would normally not be reachable (due to their remoteness and the associated high costs of delivery).

There is no universal form of mobile banking. Rather, purposes and structures vary from country to country. Most interventions however offer a bouquet of financial functions (micro-payments to merchants, bill-payments to utilities, money transfers between individuals, long-distance remittances). Currently however, different institutional and business models deliver these systems. Some are offered entirely by banks, while others are done by telecommunications providers, and still others may involve partnership between these. Regulatory factors, which can vary dramatically from country to country, also play a pivotal role in determining which services can be delivered via what institutional arrangements. (For example, some national laws stipulate that the stored value accounts be managed by a registered bank, which necessarily requires a bank partner). For all the reasons elaborated above, each model has therefore ended up having different set of actors and services.

However, most models can be categorized into the following three categories:

• Bank-Focused Model is one in which a traditional bank uses non-traditional low-cost delivery channels to provide banking services to its existing customers. This model is additive in nature and can be seen as modest extension of conventional branch-based banking.
• Bank-Led Model offers a distinct alternative to conventional branch-based banking in that customer conducts financial transactions at a whole range of retail agents (or through mobile phone) instead of at bank branches or through bank employees. This model promises the potential to substantially increase the financial services outreach by using a different delivery channel (retailers/ mobile phones), a different trade partner (Telco / Chain Store) having experience and target market distinct from traditional banks, and may be significantly cheaper than the bank based alternatives. Bank led model may be implemented by either using business correspondent arrangements or by creating a joint ventures between Bank andTelco/non-bank. In this model customer account relationship rests with the bank.
• Non Bank-led Model is where bank does not come in picture (except possibly as a safe-keeper of surplus funds) and the Non-Bank/Telco performs all the functions. This however tends to be more risky than a Bank-Led Model.

Key challenges & considerations in development of Mobile Phone Banking are highlighted below. Further, some possible steps to address these have also been suggested.

• Lack of interoperability -- May require the intervention of regulators, as this is not a technological challenge but driven more by competitive tendencies. Operators should also appreciate that the resulting cost reduction from the network economies of scale may then be past onto users in form of lower tariffs.
• Lack of documentation -- Some regulators (e.g. Reserve Bank of India) have taken proactive steps to simplify the KYC requirements for financially excluded sections. This goes a long way in addressing their lack of documentation / identity proof and limiting their access to formal financial services.
• Difficulty in using mobile phones -- It has been observed through field experiences that only number literacy is required for transacting on mobile phones ( which is a lesser problem than functional and language literacy). Therefore, if one is familiar with the use of mobile phone through its conventional use, all one has to do is memorize a few strings of numerical code to carry out the transactions. Biometric technology is also being used, especially at initial customer sign up to address the poor literacy levels of the target market. Finger prints or eye scanners are is use or being experimented with to capture identification data.
• Security concerns -- Mobile phone technology is a secure channel, and conventional belief is a misconception. Multi-level security authentication can be further enabled, with a minimum of two layers - sim & handset. Security of particular system can be augmented through choice of data formats and whether it can be encrypted or not. Technology choice should however bear in mind that not all options can work on all handsets. It may also be noted that considering low value transactions in microfinance, it is not necessary to have an elaborate, expensive security system as the risk factor is low. For instance, GPRS/WAP may not be suitable for a mobile banking platform targeting microfinance as they usually have the low-end handsets. However, it may be important to note that if mobile banking is perceived to be an unsecured channel, credibility risk and potential fall-out is high, regardless of the amount involved.

Some successful M-banking initiatives in developing countries are in South Africa (WIZZIT), the Philippines (Globe), and Kenya (M-PESA).