«Arvind Ashta 1 Chairholder in Microfinance, Burgundy School of Business, CEREN, CERMi Jiten Patel CEO, MicroPlanet Technologies Abstract ...»
Is SaaS the Appropriate technology for Microfinance?
Arvind Ashta 1
Chairholder in Microfinance, Burgundy School of Business, CEREN, CERMi
CEO, MicroPlanet Technologies
Microfinance, the provision of financial services to poor people, suffers from high interest rates
owing to high transaction costs. Within these transaction costs, technologies such as MIS may be a
solution to lower operating costs. However, the small size of most MFIs makes software seem
expensive and the MIS providers are many and the offer is rather opaque to MFIs who cannot distinguish between the offers. At the same time, the specificities of the microfinance sector and its large diversity require high degree of support from MIS suppliers. Shared infrastructure solution such as Software as a Service (SaaS) may be a possible solution to bring down costs and remove uncertainties. The sharing of infrastructure costs comes from a gap analysis which indicates that software providers would like to receive high margins and provide low support to a few customers.
As opposed to this, the long tail of small MFIs would like to buy cheap products and get volunteer support for their products. The Software as a Service (SaaS) provider becomes an intermediary who enables both of these opposite needs to be addressed. Essentially, the SaaS provider uses a software solution which they host in the cloud. The MFIs use this paid on a pricing model such as number of transactions, accounts or customers. The paper provides technical detail of how SaaS will operate in an international microfinance setting with its unique problems mentioned earlier. To overcome many of the problems a hybrid SaaS solution is proposed. Case studies (MicroPlanet Technoloiges, IBM, FINO and MOSTFIT) illustrate the mechanics of this partnership between MIS and Microfinance. The paper deals will questions such as under what conditions SaaS is appropriate partner for MFIs, the difficulties of implementation and needs of tailor made solutions.
Keywords Microfinance, SaaS, cloud computing, technology, MIS architecture, shared infrastructure Arvind Ashta would like to thank Banque Populaire de Bourgogne Franche-Comté for financing the Chair in Microfinance that he is holding. Our thanks to Alberto Jimenez of IBM, Siddharth Sharma of Intellecap and Jatinder Handoo of FINO.
Electronic copy available at: http://ssrn.com/abstract=1604741 Is SaaS the Appropriate technology for Microfinance?
1. INTRODCUTION: THE NEED FOR MIS FOR MFIsApplication Service Providers (ASP) and Software as a Service (SaaS) are concepts bordering on transaction cost economics (Susarla et al. 2009) and innovation (Fortune and Aldrich 2003) as well as Management Information Systems. This paper applies it to microfinance brings it within the realm of development economics also. As a result, the paper is interdisciplinary. Since ASP and SaaS are similar and recent, some authors seem to use them synonymously (Fortune and Aldrich 2003, Susarla et al. 2009), although others differentiate between them (Choudhary 2007, Guptill and McNee 2008).
SaaS is a fast growing field and should lead to more employment in the IT industry (Braude 2008).
Microfinance is the provision of small financial services to poor people 2 in a bid to promote financial inclusion. In the last forty years, this movement has grown considerably and today it is estimated that 150 million poor people have taken a small loan. With an average family size of five, approximately 750 million people have access to microcredit. This extraordinary growth of 30% per annum in outreach has been coupled with a Nobel Prize for the Grameen Bank and its founder, Dr.
Muhammad Yunus, all of which makes microfinance a very visible sector. Notable achievements include reaching previously unbanked people in remote villages and ensure high rates of repayment of 98%. Its major contribution has been to use groups to avail of locally available information to overcome information asymmetry problems and associated risks as well as to reduce transactions costs through group lending and group repayments(Morduch 1999). Today, in addition to microcredit, microfinance includes other financial services such as savings, insurance, remittances, and payments (Armendariz and Morduch 2005).
However, because the transaction size is small, transaction costs are proportionately high and the sector suffers from high interest rates of 15% to 50% (higher in some cases), with an average interest rate of about 28% per annum. The costing of these interest rates and comparing them to banking interest rates indicate that operational costs is the key component of the extra interest costs(Rosenberg et al. 2009).
Electronic copy available at: http://ssrn.com/abstract=1604741 It is hoped that technology will provide the solution, such as mobile banking, online lending and MIS and shared infrastructure (Ashta In Press). To understand the challenges of the sector, and the limitations in which technology has to function, it has to be understood that 70% of the Microfinance Institutions are very small and are donor dependant. Thus, they are operating with tight budgets.
Therefore, technology solutions are limited. Moreover, the operating staff has often basic levels of literacy and therefore can use only very basic technological solutions. This staff is also subject to high turnover. Owing to both these reasons, the quality of data which can be input into the system is low, with a high error rate and a lot of re-work necessary. Often, the operational processes that are not documented, varying from branch to branch and operation to operation, and systems are largely manual (Iyengar et al. 2010 forthcoming, Quadri et al. In Press). Therefore, paper proliferates across the MFI's operations. Since loans are for short durations, often less than a year, there could be high customer turnover unless the MFI tries to provide bigger loans to retain their customers as their business expands.
In this paper, we look at the partnerships between suppliers of MIS support and microfinance institutions to help bring down the transaction costs and interest costs of Microfinance. To reduce operating costs, one solution would be to bring in Management Information Systems (MIS).
Management information systems are essentially systems which record or capture data and transform it into useful or usable information for management decision making as well as for reporting internally or externally. In the microfinance world, one of the key success factors in upscaling an MFI from a few customers (say a few hundred) to many (say, a hundred thousand) is the quality of its MIS.
In fact, MFIs require easy and ready access to real-time information, both operational and financial, on a daily basis that they can query and analyze to run their business. Relying on “canned” operational reports from the “core” back-end systems is not sufficient to manage a growing operation effectively. There are many benefits of having such easy and ready access to data. Firstly, operations and branch managers have a clear view of the “pipeline” of loans entered, waiting to be approved and waiting to be disbursed. Second, for loans which are not being reimbursed on due dates, timely information provides strong oversight on managing Portfolio-at-risk (PAR), not from day 30 but effectively from day 1 when a loan is late. Third, the finance and accounting departments also have a view of this “pipeline” to more effectively manage and forecast cash-flow. Fourth, a good MIS allows branch managers and loan officers to view their performance (P&L, loan performance, etc) on a real-time daily basis. Fifth, it allows finance and accounting department to perform month-end closing and consolidations faster and more accurately. Sixth, since MFIs have to provide a lot of external reporting to donors, financers, apex bodies, regulatory oversight bodies, etc., a good MIS makes this possible at a much lower cost.
2. BACKGROUND: PROBLEMS WITH OFF-THE-SHELF MIS SOLUTIONS FOR MFIs
It therefore behooves MFIs to have a sound Information and Technology (IT) strategy, and one that focuses on “basic blocking and tackling” and researches and pilots disruptive technologies to change the rules of the game. While such MIS is often considered as an aid to control, it is also required for strategic decision making. In some cases, the MIS is even considered a strategic strength enabling a firm to outcompete (Barua et al. 1991, Brown et al. 1995). Nevertheless, it is now being recognized that MIS technology by itself is not the panacea (Clemons et al. 1993) except in certain sectors (Clemons and Row 1991), but when coupled with strong and effective operational process management, MFIs can gain significant benefits that flow to its bottom-line, strengthening its competitive positioning and improving its ability to meet customer demands.
MFIs of all sizes cite technology and the “core” MIS / Banking software (or often referred to as the back-office software) s in particular as one of their biggest challenges. It is the back-office that is the heart, the processing engine which processes high transaction volumes on a daily basis that enables MFIs to grow and scale their operations. There are a number of reasons why “core” back-office technologies are still important3. Firstly, providing financial services for the poor is an informationintensive business. Strong core MIS systems enable MFIs to process large numbers of relatively small transactions efficiently, and can provide insight into an MFI’s business that enables MFI leadership to tune their products and operations to more effectively serve more poor clients. Secondly, while achieving greater numbers – reaching more of the poor with financial services – is important, equally important is measuring the results. A core MIS system can provide MFIs and their stakeholders with the tools to more effectively measure both financial and social performance and, in turn, enable the MFIs to tap new sources of capital and tune their business for greater impact. Thirdly, as mentioned earlier, a good MIS is necessary for scalable innovation. Microfinance is a fertile ground for innovation in both business process and technology. Innovations – mobile banking, ATM integration, new products and business models, etc. – need to be tied together in order to achieve network effects and scale (Cartwright 2002). Those innovations must plug into and be supported by strong back-end technology to transform the innovations into a new baseline of operations for MFIs.
Source: CGAP A good number of MFIs do have a “core” back-office, however a significant proportion of those systems are not supporting the growth and increased impact of the institutions running them. MFIs must invest in a good, robust, and scalable “core” if they are serious about growing their operations effectively and efficiently.
Since the majority of MFIs are very small and most of them are fund-strapped, it is difficult for MFIs to make their own MIS and they need to outsource this activity. Outsourcing comes in multiple flavors – including purchase of software, managed services, renting from ASP (Application Service Providers, and providing SaaS (Software-as-a-Service). The specificities of microfinance, especially its differences from banking, its human resource issues, infrastructure issues, support issues and standardization issues impose particular constraints on the MIS that is specific to this sector. As a result, MFIs should not be in the “core” software development business. The MFI's focus should be on its own core business - providing the right products and services to the customer on a timely basis.
As a case in point, a number of MFIs have start out as a owner or part-owner of a small “core” backoffice software vendor and use this software across its operations. The vision is excellent to begin with, however over time execution suffers (software quality was low, each affiliate evolved over time to using different versions, support was sub-par) primarily because these MFIs do not know technology and do not know how to properly manage the partner which eventually leads to a decision to sell-off its portion to the partner, a 3 rd party or to acquire control of the partner, and in some instances to begin a search for off-the-shelf robust and scalable “core” software to support its growth.
CGAP lists “core” software vendors on its website – an the list has over 100 vendors. Of this list less than a handful offer good, robust and scalable “core” software that would be useful to a mid-to-large MFI. MFIs must do a comprehensive due diligence on these vendors, and not just on functional capabilities offered, but on customer support - the caliber, level and number of staff, quality assurance practices, success rate to implement in a timely manner, and importantly the financial condition and viability (of the vendor). Figure 1 illustrates the software market with hundreds of vendors chasing thousands of MFIs.
Proprietary Software for Microfinance Hundreds of Software Vendors serving thousands of MFIs
Figure 1: Proprietary off the shelf software market Our research, based on the CGAP4 reviews, informs us that these “Core” software vendors come in all shapes and sizes. The size could vary from a one-man shop to vendors with more than 200 staff. The software that they offer is usually based on proprietary codes but a few open source vendors are also present. Most software is being updated regularly, reflecting the high rate of obsolescence in a competitive sector where software manufacturer imitate competition with minimum time lags.