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110Chapter 8 - New Technologies: A Path to Lower Costs and New Productseconomic activity, achieving high enough transactional volume often requires institutions to cooperate andcoinvest in new technologies.MFIs must also consider the users’ willingness and ability to take advantage of new technologies, given theclients’ preferences and circumstances. For example, if clients find bank branches to be conveniently locatedand efficient, the clients may not appreciate the possible benefits from new ways of doing business (likemobile phones or ATMs). In such cases, the MFI’s investment in remote processing devices may not justifythe investment, staff training, and client education costs. There are also elements of new technologies thatmay discourage clients from adopting them. Clients may not be comfortable enough with mobile phones tonavigate multiple menu sequences with tiny buttons on a small screen. Field staff members may not have accessto reliable power supplies for recharging handheld devices, or POS agents may experience regular interruptionsin telephone service, which disrupt transactions.In addition to the technological and operational risks, MFIs will need to plan for new risks that emerge. Forexample, an institution or its terminal agents might be unable to maintain adequate levels of liquidity, if clientsmake unusually high withdrawals in a given area. In the case of distributed payments systems, the MFI mustguard the security of transactions and must know how to identify and stop illicit transfers of funds.For governments, there is a broad range of complex policy and regulatory issues to consider in determining howto create the conditions for new technologies in microfinance to flourish, especially with respect to distributedpayments systems. Regulators will need to modify the legal environments affecting the telecommunications,financial, and retail sectors. Box 8.2 outlines the necessary preconditions for establishing electronic micropaymentsnetworks. It includes a number of next generation issues and basic principles for regulators and policy makersto consider so they can enable the safe development of new payments channels. 5Box 8.2 Regulatory and Policy Guidelines for Branchless BankingThe guidelines provide the following:• Permit nonbank retail outlets to serve as agents, and consider carefully any restricons on the rangeof permissible agents and types of relaonships.• Develop a counterterrorism and an-money-laundering approach adapted to the realies of small,remote transacons conducted through network agents.• Clarify the legal boundaries between retail payments, e-money, and other stored-value instrumentsand bank deposits.• Create a regulatory category for electronically stored value that allows nonbank parcipaon ondefined terms.• Create robust but simple mechanisms for consumer protecon, covering problems with retailagents, redress of grievances, price transparency, and consumer data privacy.• Consider the likely longer-range compeve landscape today and the way to reach the goal ofinteroperability implicaons.Source: Adapted by authors from Lyman, Pickens, and Porteous (2008).5. The Philippines’ low-cost, competitive market is a favorable environment for mobile phone solutions. See Ivatury and Pasricha(2005) and Ivatury and Pickens (2006b).
Managing Risk and Creating Value with Microfinance111The introduction of a new technology in microfinance must meet regulatory concerns. For example, the use ofretail agents equipped with POS terminals for cash transactions (both cash in and cash out) must be regulatedcarefully to avoid abuses. Also, with the advent of risk-based anti-money laundering rules and regulationscaused by the risk of financing terrorism or the illicit drug trade, new financial transaction technologies suchas mobile banking can become an area of concern. It can be challenging to adapt existing regulatory practicesto the realities of rapidly evolving microfinance technologies, especially given the low-value, high-volumetransactions involved. The current discussion of regulatory frameworks for financial transactions covers storedvalue devices (such as mobile phones), consumer protection, payment systems oversight, and ways to increasecompetition among providers of similar services.ConclusionMFIs are adopting a number of different technological innovations with demonstrated potential to dramaticallylower the cost of serving a large number of clients with low-value financial transactions, and new applicationsare being developed constantly. In the best cases, as Banco Solidario of Ecuador found, the adoption of newdelivery technologies can improve earnings and can expand outreach to new clients. Deploying technologysuccessfully involves much more than simply acquiring the equipment. As the Compartamos case reveals, itrequires a clear understanding of business goals, priorities, and requirements—and careful evaluation of costsand benefits. Even then, many challenges are associated with the successful adoption of such technologies,including (1) institutional and client capacity, (2) access to reliable communications infrastructure, (3) sufficienteconomies of scale, and (4) ways to enable regulatory environments.From the government’s perspective, new technologies applied to financial transactions can raise seriousregulatory concerns and can challenge standard supervision approaches. However, as experiences from severalcountries have shown, clients and MFIs can gain dramatically from the application of new technologies tofinancial service provision. The benefits for the MFI in using those agents include reduced costs; greaterproductivity and efficiency; improved convenience and lower transactions costs for the clients; and, ultimately,a larger client base.
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