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Leapfrogging: How Emerging Technologies Can Revolutionize Microfinance Operations

By IGI Global on Feb 22, 2011
IGI Global would like to thank Mr. Saleh Khan for contributing this guest editorial post.

Technological leapfrogging – the act of bypassing technological stages that other countries have gone through – has been around for a while and tends to benefit the late adopters the most. While this doesn't make a case for being slow in adopting newer technologies, it does provide a benefit to emerging economies which do not have to go through the entire technology development lifecycle but can directly adopt one which has already matured in more developed markets.

The argument against this in almost all cases is the cost of adopting new technologies, especially by traditionally resource marginalized emerging economies. But every once in a while comes along a game changer – a technology so radical that it far outweighs the cost of ownership in terms of the benefits it can bring. An example is the mobile phone – traditionally more expensive to own than fixed line phones and more expensive in terms of ‘running costs' – has overtaken fixed line phones because of the sheer benefits this brings to its owner.

For microfinance institutions (MFIs) that are struggling with reducing operational costs, managing risks of frauds and streamlining recordkeeping – the use of IT tools is an obvious solution. But, as mentioned before, the debates have always centered on costs versus benefits. Mobile phones are now challenging that notion by offering a tradeoff between incurring small costs and being nearly ubiquitous. Mobile based recordkeeping is being piloted in a number of countries and mBanking solutions have already been successfully operating in certain Asian and African countries for a while.

A recent article in Fortune (Lev-Ram, 2011) provides news of an interesting piece of technology that could, potentially, bring immense benefits to MFIs – especially those operating in the higher loan size market – for example to micro SMEs or to small entrepreneurs who already have access to formal banking services.

The article, written by Michal Lev-Ram, highlights a new way of accepting credit card payments using an existing iPhone or iPad with very little need for infrastructure or with little dependence on the formal agreements with banks to open merchant banking account that allows them to accept credit card payments. The technology, called Square, is being promoted by Jack Dorsey, the creator and chairman of Twitter – the world wide microblogging site. The technology, which provides a free credit card reader allows anyone anywhere to accept credit card, and potentially debit card, payments using their existing iPhone or iPad by downloading an app and signing up with Square. While per transaction cost is higher than those charged by traditional banks, the startup process and the dependence on infrastructure as well as service contract is avoided.

How does this relate to microfinance? Well, imagine this technology being ported to the standard mobile phone. A loan officer goes to his collection point, hooks up a magnetic card reader to his existing mobile phone, conducts a transaction with his client (either by collecting physical cash or by charging a credit or debit card if the client has one), updates the client's virtual passbook on a magnetic card, uploads the transaction via data or SMS gateway, and come back to the office. All transactions are processed, updated, and validated even before he reaches the branch office! No paperwork, minimal transaction time, higher efficiency (which directly translates to higher outreach by a MFI), automatic recordkeeping, non-paper based transaction records retained by the client and perhaps, best of all, reduced scope for fraud. Game changer? I would think so.

So, why not adopt it? Cost of ownership and infrastructure in developing countries, where most MFIs are based, are the biggest inhibitors. iPhones with data access aren't the cheapest solutions to begin with. And then you have to have the back end databases with client records in it which is compatible with the Square server. But, these are all technicalities which can be resolved by a few vendors working together. The major obstacle will remain the acquisition cost, unless this technology is usable with low cost mobile handsets, which cannot be too difficult to implement.

Who could adopt it right now? I would think MFIs in developing countries – Central Europe, Central Asia, Latin America – where the loan sizes are higher (therefore making the cost of ownership for this technology more justified) and physical infrastructure required is available (electricity, universal mobile phone coverage with data access, etc). A loan officer for a MFI in France, for example, could go to visit his SME client in the morning, swipe the credit/debit card of the client to accept payment, swipe the client's magnetic card to update his virtual passbook, and return back to the office – all transactions being completed within a minute.

Simple. Lean. Efficient. Cost effective.

References

Lev-Ram, M. (2011, January 31). A twitter guy takes on big banks. Fortune. Retrieved from http://tech.fortune.cnn.com/2011/01/31/a-twitter-guy-takes-on-big-banks/

For comments and discussion on this post, please use the form below. Mr. Saleh Khan is an MSc candidate at the Burgundy School of Business and a member of the Burgundy Group for Microfinance Research. Mr. Khan recently contributed a chapter called " Automating MFIs: How Far Should We Go?" to one of IGI Global's recent releases, " Advanced Technologies for Microfinance: Solutions and Challenges", edited by Arvind Ashta. For more information on this chapter please visit www.igi-global.com/bookstore/chapter.aspx?titleid=46323.

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Digital Divide & Developing CountriesBusiness and ManagementGlobal Information TechnologyAccounting & Finance

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