47972 CGAP April 2006 May 2006 SUPPORTING COMMUNITY-MANAGED LOAN FUNDS USING TECHNOLOGY TO BUILD INCLUSIVE FINANCIAL SYSTEMS Innovative use of information and communications In Brazil, private-sector banks, such as Banco technologies to inexpensively process a large Bradesco and Lemon Bank, and state-owned volume of small transactions and deliver a wide banks such as Banco do Brasil and Caixa range of financial services may help to make Economica Federal, have developed about 30,000 microfinance institutions (MFIs) more efficient so-called "banking correspondents." Lottery and commercial banks more interested in serving outlets, post offices, supermarkets, grocery stores, poor people. Falling hardware costs and petrol stations, and other retail outlets act as growing support infrastructure are making these agents for the bank, using POS terminals or PCs technologies increasingly available. Debit and to distribute a range of banking services, such credit card readers now cost as little as US$125 as savings, credit, money transfers, insurance, and operate wirelessly, according to Santanu and government benefit distribution. Using this Mukherjee, VISA International country director approach, Brazilian banks opened about 10 (South Asia). From 1999 to 2004, the number of million new current accounts since 2000. mobile subscribers in Africa grew from 7.5 million to 76.8 million (LaFraniere 2005). Besides Scaling Up Too Early to Declare Success reducing delivery costs for banks, poor people Will branchless channels be profitable enough to may ultimately prefer using these channels convince banks that low-income customers are a because they are inexpensive and convenient. viable long-term market? It is too early to know. Many who are unbanked now may gain access to To make money, a branchless channel needs to financial services for the first time. serve a critical mass of customers and deliver a How It Works wide range of services. One challenge is building successful long-term client relationships when In a recent CGAP survey, 62 financial institutions customers' main interface is not the bank itself but in 32 countries report using technology channels, a supermarket or drugstore. Banco do Brasil such as automated teller machines (ATMs), point found that 30 percent of the accounts opened at its of sale (POS) card readers,1 and mobile phones,2 banking correspondents never become active to handle transactions for poor customers. Some (Valor Economica 2005). Profitability also hinges are using new technology to better serve existing on banks' ability to make loans to their new customers; others hope to reach new clients in customers. Making good credit decisions on areas where setting up a bank branch may be too borrowers who lack a credit history or any form costly. of collateral requires partnerships with MFIs, new scoring techniques, or other innovative _______________________ approaches. These methodologies are now being 1 POS terminals are devices that handle payments of disburse- tested. ments by reading debit or credit cards or barcodes and commu- nicating transaction information via a telecommunications Are these new branchless channels being used connection. by poor and very poor people? Evidence from 2 Orders for money movements (and records of the transaction) can be sent by mobile phones using a short Brazil is encouraging. Approximately 48 percent messaging service or other protocol. of clients served by Caixa Economica banking correspondents earn less than R$200 (or US$ 75) Conclusions and Avenues for Further Work per month, less than the country's minimum wage (Kumar, Parsons, and Urdapilleta forthcoming). Initial experiences with branchless banking Still, CGAP is doing more research to understand channels point at three areas for further attention. why some poor people do not use these techno- First, policymakers should think broadly about logy delivery channels. ways to balance improved access with appropriate regulation and oversight. Second, further study is Emerging Lessons needed to understand what key design features will render technology channels comfortable, Understanding and communicating with the convenient, and trustworthy to poor customers, customer is the key to a successful channel. and thereby generate the transaction volumes Experiments with offering debit cards to the required to make them profitable for banks. employed poor in India have shown that, unless Finally, MFIs must evaluate the challenges and clients are specifically told not to reveal their opportunities created by technology channels. PINs to others, they often will write these numbers on the debit card itself, rendering n n n account security useless. In Uganda, Stanbic set up tents where bank staff taught customers how to use an ATM. Resources Much of the operational risk involved in LaFraniere. 2005. "For Africa, a Godsend in Cellphones." developing branchless delivery channels emerges The New York Times. 25 August. from the need to accept, store, and dispense cash. Valor Economica. 2005. "Brazil: Banco Popular do Brasil According to Andre Cano, director of Banco Hit by High Levels of Debt Default and High Cost." Valor Postal, Banco Postal eliminated the need to Economica. 11 November. transport large amounts of cash in and out of Kumar, Anjali, Adam Parsons, and Eduardo Urdapilleta. remote communities by working with local Forthcoming. Banking Correspondents and Financial businesses and municipal governments to ensure Access: The Experience of Brazil and Potential for Other Countries. Washington, D.C.: The World Bank. they make timely end-of-month deposits, thereby permitting pension and welfare recipients to Authors: Gautam Ivatury, Mark Pickens, and Hannah withdraw cash at the beginning of each month. Siedek Government plays a critical role. They can pass laws or use influence to stimulate banks to serve For more information on technology and microfinance... poor people, as they have done in Brazil, South n Contact CGAP Specialist Gautam Ivatury at Africa, and India. In Brazil, rules governing use givatury@worldbank.org. of correspondents have steadily evolved since n Visit www.cgap.org to access relevant material, the 1970s, permitting Brazilian banks to cost- including effectively deliver financial services through a dense network of retail and postal outlets. To help l "Using Technology to Build Inclusive Financial Systems," by Gautam Ivatury. banks attract low-income customers, regulators Focus Note 32, January 2006. in South Africa and Brazil relaxed norms on identification requirements to open bank accounts l "Mobile Phones For Microfinance." CGAP Brief, May 2006. with limited maximum balances. CGAP 1818 H Street, NW l Washington, DC 20433 Tel: 202 473 9594lFax: 202 522 3744 E-mail: cgap@worldbank.orglWeb: www.cgap.org