INNOVATIVE TECHNOLOGIES IN MICROFINANCE FOR LATIN AMERICA: BUILDING EFFECTIVE DELIVERY CHANNELS
Sergio A. Castello, Ph.D. - April 05, 2004
Microfinance has grown rapidly in developing countries over the past 15 years. The earliest microfinance institutions, (MFIs) appeared in Bolivia, Bangladesh and Indonesia during the 1980’s. Today, the number of microfinance institutions worldwide exceeds 10,000. Microfinance is emerging as a pragmatic financial approach to provide financial services to micro-entrepreneurs, small and medium-size firms not able to secure credit in the formal financial system.
As profit margins continue to decline, financial institutions are forced to find new ways of providing better customer service while at the same time reducing transactions costs. Recent experiences suggest that the innovative use of existing technologies such as automated teller machines, (ATMs), smart cards and phones, personal digital assistants, (PDAs), mobile technologies, and remote transaction services can significantly improve quality of service and customer satisfaction, increase data collection and analysis, and reduce transactions costs.
Economic success is increasingly linked to unconventional new business models with the ability to control and manipulate information. This new economic milieu suggests a radical shift in company strategy and industry economics, particularly for the financial sector, which now must be part of the knowledge and information economy to survive and successfully compete in this new world of digital convergence. Financial corporations need to do more than just adapt, they need, to some considerable degree, redefine and re-architect themselves. The widespread use of information technology (IT) will increase when it becomes easier, more convenient, reliable, and secure for consumers. In this new IT world, technologies that will matter most will be Web-based services increasing the uninterrupted interconnection and digitization of businesses and consumers.
Latin America has experienced limited growth in microfinance particularly in larger countries like Argentina, Brazil, Mexico, and Venezuela, where there are almost seven million possible clients and less than half a million active customers. Smaller nations in Central and South America have reached higher levels of market penetration tapping already more than 50% of their actual markets. Challenges facing the industry in Latin America are three fold; first, finding a technology that can break the existing paradigm in larger nations; second, expanding the offering of other financial products, and finally reevaluating the idea of serving the poorest and finding sustainable ways to serve them.
Two new and innovative delivery channel concepts are mobile finance and remote transaction systems. M-finance promises financial firms to better service their customers by providing the freedom to conduct financial transactions when and where users choose, in some instances it helps users overcome the shortcomings of physical infrastructure by introducing new products and services. Mobile finance allows users the ability to access financial information, manage financial transactions, and make choices related to purchases via wireless or Internet enabled devices. Remote transaction systems allow third-parties to intermediate cash deposits and withdrawals thanks to the automation of the customer interface. This technology permits for safe cash disbursements, electronic data collection, transaction origination, and in-field distribution of information to customers and loan officers.
Microfinance delivery channels in Latin America contribute to the reduction of personal contact in branches favoring self-service transactions through mobile and virtual banking, ATMs, smart cards, and PDAs. Each delivery technology provides significant benefits for MFIs, but most have yet to be proven sustainable through in –depth costbenefit analysis, especially when applied in rural areas that have limited usage and connectivity. These technologies cannot replace the human interaction that is so important to providing successful financial services, especially to the poor. Most customers prefer personal contact transactions, rather than automated or Internet based services; thus, financial institutions must carefully consider ease of use, client technology familiarity, language preferences and literacy when designing such costly technologydriven delivery channels.
The growth and success of MFIs in Latin America depend on first, the adoption of new technologies in delivery channels like ATMs, smart cards, and PDAs; second, the successful implementation of virtual delivery channels such as mobile finance and remote transaction systems, and third, the degree of cooperation and alliances among MFIs to reduce IT investment cost and to increase standardization reaping economies of scale and scope.