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Published by Tulika Bansal

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Published by: Tulika Bansal on Aug 07, 2010
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ate one night in November 2007 AleksandrKalanda, chief executive officer of OpportunityBank in Malawi, sat in his office reviewing strategicplans for 2008.
The commercial microfinance bankhad doubled in size once again in 2007, and now hadmore than 150,000 customers.
In a country where80 percent of the people live in rural areas with littleinfrastructure, Opportunity Bank knew that traditionalmodels of microfinance would not bring scale fastenough. The bank had already used technologyto develop alternative distribution channels likebiometric automated teller machines (ATMs), mobilevans, and kiosks in marketplaces equipped with point-of-sale (POS) devices.
As Kalanda pondered the bank’s plans, he decided thatthese initiatives were not enough. Every OpportunityBank branch was already congested with customersfrom the moment the doors opened until they closed.New branches were taking too long to break even,up to 18 months, due to the high costs of buildingmaterials and training staff. Kalanda had heard aboutthe enormous success of M-PESA in Kenya, and hesaw mobile phone banking (m-banking) as the wayforward. Mobile banking is the delivery of financialservices outside conventional bank branches usingmobile phones and nonbank retail agents. M-bankingcould allow the bank to serve existing customers betterand reach new customers. Meetings with the nationalmobile network operators (MNOs) suggested that theywere not planning to bring an m-banking service toMalawi in the short term. Building a service from scratchwould be challenging, but Opportunity Bank alreadyhad experience with complex technology projects.After some deliberation, Kalanda finally decidedto dedicate significant resources for developing anm-banking channel in the strategic plan.Many microfinance institutions (MFIs) globally arefacing the same challenges Opportunity Bank faced.In the past decade or so, they have experimented withalternative delivery channels to reduce costs, facilitategreater outreach to hard-to-reach areas, and increasecustomer convenience. In theory, mobile phones couldbe used to reach many more customers at a lowercost than any existing delivery channel. Yet despitethis potential, in the vast majority of countries thereis not yet an existing m-banking service that MFIs canleverage. M-banking to date has largely been drivenby MNOs and, to a lesser extent, by some large banks.MFIs have by and large not played a significant role inthe implementation of m-banking services.There are fundamental reasons why MFIs aregenerally not positioned to get into m-banking earlyon. Most m-banking deployments provide transfers,a service that very few MFIs provide. Indeed, MFIsand successful m-banking businesses occupy differentworlds today. The MFI world is focused on creditand maybe some savings, while the m-bankingworld is focused on transfers and payments. The MFIworld largely uses unsophisticated backend systemswhile the m-banking world uses some of the mostsophisticated backend systems we know today (evenbetter than some banks). The MFI world focuses oncreating low-cost, human-driven infrastructure, whilethe m-banking world is tied into and uses paymentsystems infrastructure. It is not surprising then thatthese two worlds have not yet aligned.These gaps mean that many MFIs are consideringm-banking, but find themselves in the same situationas Opportunity Bank in Malawi: m-banking promisesa revolution in customer outreach and service at avery low cost; their customers and potential customersalready have mobile phones; but there is no m-bankingservice available. What should MFIs in these situationsdo? This Focus Note aims to do two things: (
) explorethe various roles that MFIs can play in m-bankingand (
) explore the potential benefits MFIs and theircustomers expect to gain from pursuing m-banking.The role that MFIs can play largely depends on thepresence or absence of widely available m-bankingservices (called mobile banking infrastructure inFigure 1).
Microfinance and MobileBanking: The Story So Far
No. 62July 2010
Kabir Kumar,Claudia McKay,and SarahRotman
     F     O     c     u     s     n     O     T     e
In a country without an existing m-bankinginfrastructure, an MFI must decide whether todevelop its own service or wait until the service andinfrastructure are created. Developing an m-bankingservice takes a significant amount of planning, time,financial investment, organizational and operationalchange, technical expertise, and persistence and is anoption only for MFIs with significant resources and astable infrastructure. Other MFIs in this context canstill use mobile phones to reduce costs and enhancecustomer service, for example, by sending automaticSMS messages for repayment reminders and allowingcustomers to check balances via their phones. Thefirst section of this paper explores how MFIs in thiscontext are responding.The second section looks at the options available toan MFI if it is in a country with an existing m-bankinginfrastructure. The most obvious option is to usethe m-banking network for loan disbursements,repayments, and deposits. As an alternative, MFIscan act as agents on behalf of the m-banking service.This may allow the MFI’s management, staff, andcustomers to gain familiarity with the service and earnadditional revenue for the MFI through commissions.The third section of this paper addresses questionsthat MFIs may have about m-banking. While manysee the potential of m-banking, what are the actualbenefits for an MFI and its customers? This sectionexplores three key questions:1. Can m-banking help MFIs serve existing customersbetter?2. Can m-banking help MFIs reach new customersegments?3. Can m-banking reduce costs for MFIs and forcustomers?
Should an MFI in a countrywithout any existing m-bankinginfrastructure create itsown m-banking system?
Let’s return to the story of Opportunity Bank of Malawiand its decision to develop an m-banking service inthe absence of an existing m-banking infrastructurein the country. How did this small microfinance bankfare in the midst of the various challenges involved insetting up an m-banking service?Unfortunately, as Opportunity Bank discovered,setting up an m-banking service is complex, time-consuming, and expensive. Most m-banking servicesused by commercial banks focus on existing (oftenupscale) customers who want more convenience, asopposed to bringing the unbanked into the financialsystem.
Developing an m-banking service from
Figure 1: Typology of MFIs in m-bankingCONTEXT:MFIs in countries with no existingmobile banking infrastructureMFIs in countries with existingmobile banking infrastructureROLE OFMFI:Build mobilebanking systemUse phones fordata collectionand other non-cash purposesUse m-bankingsystem for loandisbursements/repaymentsand/ordepositsAct as agenton behalf of bank or MNO
scratch that effectively reaches the unbanked is noteasy. In the first months of 2008, Opportunity Bankdiscovered many regulatory, technological, andoperational hurdles. It hired external consultants tohelp develop an appropriate plan that focused on thefollowing four activities that are required for any MFIdeveloping an m-banking service.
1. Develop a strategy and business plan.
MFIsmust be clear about how m-banking addressestheir core customer value proposition. In anindustry with as much hype as m-banking, it iseasy to get carried away with enthusiasm withoutfully understanding the benefits and costs.MFIs must identify the problem they are tryingto solve and determine how exactly m-bankingwill solve that problem. Are there alternativesolutions available? For example, is the primarypurpose of the service to improve satisfactionand retain existing customers? To reach newcustomer segments or new geographic areas?To reduce congestion in branches? To reducetransaction costs (which ones)? Are ATMs, kiosks,or mobile banks a better solution? MFIs shouldbe as specific as possible about what they wantto achieve before committing to developing asystem.
2. Develop a technological solution.
Developinga technological solution is time consuming andexpensive. First, the bank’s own banking softwaremust have the ability to be integrated with anm-banking platform. Opportunity Bank had to doan entire systems upgrade—a process that tooka year and cost more than $100,000 to complete. XacBank, a microfinance bank in Mongolia,invested even more than this to upgrade itscore banking system before developing its ownm-banking service.
Second, the phone’s interfacewith the bank (e.g., SMS, USSD, STK, etc.) mustbe selected. Important factors influencing thisdecision include security, ease of use, abilityto function on unsophisticated handsets, andcapabilities of the MNO.
Opportunity Bankdeveloped a USSD interface that it felt was secureand would work on even the cheapest phones.Finally, the interface or middleware between themanagement information system (MIS) and thecustomer-facing application must be developed.Institutions can purchase an off-the-shelf solutionor develop their own, although both options areexpensive.
3. Create and manage an agent network.
To usean electronic channel, such as mobile phones,for financial services, customers have to convertcash to electronic value and vice versa. This canbe achieved through networks of retail agents,such as airtime resellers, post offices, and smallstore owners. MNOs have a distinct advantagein this area because their national-scale networksfor airtime distribution often involve distributorsand thousands of retailers. Building and managingan extensive agent network from scratch isconsiderably different than running an MFI. Thebusiness processes involved include identifyingand training agents and ensuring an effective,continuous system of liquidity management andquality control. In light of this, Opportunity Bankdecided to partner with a major agriculturalsupply store in Malawi that had shops in manyMalawi towns. Doing so leveraged the national-scale infrastructure of the agricultural supplier andeliminated the need to manage individual stores.
4. Negotiate partnerships with one or more MNOs.
An MFI or bank cannot develop an m-bankingservice without the cooperation of at least one
Box 1. Main Messages
Developing an m-banking system is expensive,time consuming, and complex; very few MFIshave the significant financial, technical, andmanagerial capacity that is required.Most MFIs should use mobile phones in waysthat increase customer convenience (e.g.,automatic loan reminders) and strengthen theinstitution so that it will be ready to link to asystem when it is developed.

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