The nonprofit, Arc Finance, is looking into ways to expand access to financing for modern energy, clean water, and other basic needs globally, and is interested to see how mobile payment systems are being used currently to make payments/remittances possible in rural settings. In the email below, Mike MacHarg of Arc Finance highlights some of the issues facing one NGO making mobile payments to farmers in Kenya.

Dear XXXX,

Got some interesting feedback from the group XXXX, that uses Safaricom’s MPesa system to pay its tree farmers (they pay farmers quarterly in Kenya, India and Tanzania for tree planting – through funds raised on the voluntary carbon market).

How it works:

XXXX has small groups of 8-12 farmers each. XXXX makes quarterly payments to the small group, to a single Safaricom (in Kenya) SIM card held by the group. There is a checks and balance system built in, as at least three farmers from the small group have to show up at the meeting when the transfer is made, and one has the SIM card, another the PIN number for MPesa collection, and a third has the voucher for the payment (voucher is issued beforehand when it is confirmed the trees were actually planted?).

Issues and challenges:

1) Transaction fees are high relative to the small payments to the farmers. One issue has been that the transfer fees within Safaricom/MPesa are high relative to the small payments being made to the group. Either XXXX has to absorb that cost, or pass it onto the farmers. In Safaricom’s case, it does not pay to make very small payments.

2) SIM card deactivation over time: In the small group model, the SIM card is only used quarterly by the group for the money transfer, and for no other purpose. Unfortunately, Safaricom deactivates SIM cards that are dormant for long periods (like 3mo) – so XXXX has faced the issue of having to reactivate all of their small group SIM cards prior to each money transfer. Causes major delay in transfer, and can cause farmer payment meetings to take up to 6 hours.

Deactivation may be different with different vendors (MTN, Orange), but something to consider. XXXX is trying to determine other ways to keep cards active, such as sending a negligible amount of airtime, say 1 Ksh (there is no fee for transferring air time) – so that the SIMs stay active.

3) SIM card registration: this may play into the regulatory environments for mobile payment systems, but XXXX has recently found out that it is “illegal” to register the SIM cards to small groups – and not to an actual business or individual. This probably has to do with “know your customer” regulations that have to do with banking – that are being carried over to mobile money transfer operations. Another thing to consider if you use the small group model.

4) Transfer time: XXXX brings its small groups together on a certain day, and meets with them physically to do the mobile money transfer. While you might think it would be easier to just pay out cash in this setting – there is enough of a security issue that the mobile payments still make more sense. But transfers are not often instantaneous – and intermittent cell phone connections in rural areas can drag out the transfer process for up to 3-4 hours, as each transfer has to be uploaded to MPesa, and then farmers will wait to verify the payment has indeed made it back to their SIM card.

5) SIM credit limits: XXXX has to use up to 4 of their own SIM cards to make the payments from, since there are limits (with Safaricom) as to how much credit any individual SIM card can hold at one time. So to make $400 in payments, XXXX might use four SIM cards that have a limit of $100 each.

6) Record keeping: To date, Safaricom has been resistant to providing XXXX with records of their individual transfers to each of the small group’s SIM cards. Obviously valuable data for XXXX to have to keep track of payments to farmers, and for now they are reliant on paper based records to keep track of data that Safaricom is already keeping. Safaricom has said that they are looking into making such data available, but has resisted in helping XXXX to date (as it sees no great profit incentive to supply such data).

Individual and organization names have been redacted for privacy purposes. The email author, Mike MacHarg, is available for comment and can be reached at
mike.macharg “AT” gmail.com.

The microfinance sector has arrived at a fork in the road. For a long while it has sought to raise awareness and publicity for the plight of the poor and for funding of its operations.

With the award of the Nobel Peace Prize in 2006 to Prof Muhammad Yunus of the Grameen Bank, the sector has been basking in its glow and has been able to attract a lot of attention and funding for the very good work that it does.

And this glow has decreased considerably in the past year due to the global economic downturn. MFI’s both big and small have been struggling due to lack of funding and dearth of funding sources. The issue of operational inefficiencies, high operating costs at MFI’s big and small has heightened. The MFI’s customers are also hurting from higher energy, fuel, and food costs. That’s the macro picture.

MFI’s have limited set of choices to make to improve their financial plight / viability:

1. To grow and scale their operations – adding new customers more rapidly and retaining existing ones,
2. To increase the interest rates and fees that they charge customers – which allows them to generate more revenue and would help improve their financial bottom-line, i.e. to be more profitable,
3. To reduce customer and staffing “churn”, i.e. to increase retention rates of existing customers, and of their staff,
4. To lower their operating costs

Confronted with these choices, all MFI’s want to grow and scale their operations. However given the limited funding available, social investors and capital markets only target those MFI’s that are profitable and well managed. And even these MFI’s do not get all of the funding that they may want or desire.

The other option is to increase rates and fees. With the banks also hurting, they are also seeking other sources for customer growth, and are moving downstream to target customers that have been the domain of MFI’s. The competitive landscape has changed in some geographies and/or is changing in others. If MFI’s were to adopt this option they would do so at their own peril. Customers would vote with their feet and run to another MFI or bank that offers lower rates and fees.

Most MFI’s have very high “churn” rates of their customers, i.e. they lose customers after being with them for one loan cycle. And coupled with this they lose lot of staff which means they are constantly losing operational and customer knowledge.

This then brings us to the last option, to lower operating costs. How? MFI’s need to focus and work on the low-hanging fruit to try and reduce their costs. First by adopting policies and practices (e.g. to provide on-going training on policies, products, processes, and customer service) to retain their “good” performing staff, and to improve customer retention (i.e. to adopt practices that makes the customer not want to go elsewhere – and customers even these ones do not all move because of price). Secondly, to improve, streamline and automate their operational processes, to ensure that these processes are properly documented and maintained, and to provide on-going training on these processes to their staff. Most MFI’s, big and small, pay little attention to effectively managing their operational practices and processes.

This is where we, the technology solutions and service providers, can play a critical role to help MFI’s not just lower their operating costs but can also help them to scale their operations and retain customers.

The bulk of the MFI’s front-end processes are manual, and fraught with errors, i.e. loan officers (LOs) use pen & paper to collect customer information, and then this “hieroglyphics” is given to a person in the branch to enter into a system or an Excel spreadsheet; LOs again use pen & paper to track and manage customer repayments, etc … There is little or no credit scoring or credit decisioning capability available to the LO. The time it takes from the initial conversation with the customer to being approved for a loan to loan disbursement is too long. There is little or no info captured on micro businesses in the 2 mile, 5 mile, 10 mile radius of a specfic village or market – such info would be useful to predict the viability of the customer’s business when it comes to making a loan approve or decline decision rather than leaving it to the gut or experience of the LO.

At the end of the day, MFI’s performance comes down to what their PAR (portfolio at risk) is at day 30, 60, 90, etc. Proactive management of loan repayments is a critical element to keeping PAR low. By providing hand-held or mobile solutions to MFI’s to give to their LO’s that can help manage and track “like” businesses in the area, customer repayment history, being able to print receipts, etc can significantly assist to not just improve PAR but also to help streamline and improve their processes.

We within the technology sector, and especially at FrontlineSMS:Credit, have a wonderful opportunity to play a significant and a meaningful role to help ease some of the cost burdens faced by MFI’s. I am looking forward to learn more about FrontlineSMS:Credit and to work with the team to help shape its roadmap.

Jiten Patel is the Director of Product Development for FrontlineSMS:Credit. He has experience working for both for-profits and non-profits and most recently served as Chief Information Officer of FINCA International. To contact Jiten, email Jiten@credit.frontlinesms.com or follow him on Twitter at @nomadic_cio.

Hillmer Reyes is a consultant and entrepreneur in Lima, Peru. His recent work includes project management for a Peruvian telecom firm, financial analysis of a rural telcom project, business plans for his own telecom startup and Peruvian business services company, and ICT strategy and implementation for small business.

You previously attempted to start an SMS-based initiative in Peru.  Would you mind telling me about it?  For example, what demand did you hope to meet and who was the target market?

The solution was based on a POS card terminal connected to a centralized processing center over the mobile GPRS network. I started thinking about the solution during a course at MIT’s media lab in the fall of 2004. The challenge was to conceive a for-profit solution which would have a big impact on the economic development of a geographic region or segment of the population.

The idea was to help unbanked Peruvians gain access to the financial system.  Our business model was based on the agent banking model but with a twist: instead of having a closed, exclusive network for one bank, we would have an open system where any financial institution could join-in; the economies of scale would allow us to reach rural areas and keep fees to a minimum, thus lowering transaction costs, in particular for microfinance institutions and their customers.

When I returned to Peru in 2005 I started to research the idea in earnest. I conducted surveys in rural areas and saw that there was a strong need, and real demand for such a service.  I wrote the business plan and Rural Smart SAC was launched in 2006.

What obstacles did you encounter during the startup phase of your initiative?

Getting innovations through the regulator is very difficult if you are a small player. The good news is that the agent banking model was approved by the regulator in late 2005 with a push from Banco de Crédito (the largest bank in Peru). But the concept of the open agent banking model we proposed was new. We tried to get some innovations through but given our small size, we could not make much headway. In the end, our solution had to conform to the current law at the time.

Another difficulty we faced was getting financial institutions to formally sign-on to our solution. Everyone was interested, in particular the small financial institutions with no budget or know-how to implement an agent network of their own.  But moving from interest to an actual contract or trial was very slow. The fact we were a small start-up trying to change the way things were done was met with skepticism.  We finally did convince one financial institution to the point of contract negotiations, and another to the point of a formal evaluation. And we did sign a contract with the largest telecommunications provider to collect payment for their bills.  But all of this took about a year and a half: too long in my view.

But the biggest challenge, the one that ended up pushing us over the edge was competing head to head with a company with a lot more resources at their disposal – and being unprepared for such a scenario.  A competitor came to the Peruvian market in 2007 and they hired a star-studded team in the Peruvian financial sector.  They were able to move quickly and position themselves as a more credible alternative given their size and international agreements.  We tried to raise money to solidify our position, but it we were not able to do it in time.  Rural Smart ceased operations in January 2008.

If given the opportunity to start over, what would you do differently?

One thing that I would do differently is work harder and smarter to sign the first customer in a shorter amount of time. After the first customer, it gets much easier, as you have something real to present to other potential clients.  This would have allowed us to get additional funding sooner (and at a reasonable valuation) so that we could have been better prepared to face the competition that always comes if the market is promising.

Although the SMS format has proven successful across myriad environments and circumstances, what are the limitations of SMS with regard to development?

SMS is a great tool and people and organizations are finding new ways to use it on development inititiatives because of the popularity of mobile phones throughout the world.  Two perfect examples are Frontline SMS and the upcoming CreditSMS.

The challenge is that SMS was not designed for secure communications required by financial transactions.  This is one of the reasons we decided against SMS technology in 2006.  Much work and research has taken place in SMS security since then, and SMS solutions are being implemented in various parts of the world now. For instance, some basic transactions like paying bills and checking balances are available now in Peru, with more sophisticated transactions set to be approved by the regulator next year.

The impact potential is both broad and deep particularly in rural areas where people are mobile and broadband Internet is expensive and out of reach for most.

What are your thoughts on information communication technology for development (ICT4D)?

As the recent World Bank report on Information and Communicatons for Development concludes, ICT has a direct impact on economic development.  Therefore, all countries must have a communications infrastructure roadmap aimed at universal access, so that individuals, businesses and other organizations can have access to the tools they need to compete for a better life.

But more important than access is what we do with it.  Education is the must-have complement to enable people to develop solutions to everyday problems.  There is no better way to achieve sustainable development than to get people to use ICT to address their own problems (opportunities), and not have to rely on outside intervention. In Peru, we are at the very start of this process.

Thanks to Hernando de Soto and the Institute for Liberty and Democracy, Peru is now widely known for its massive informal economy.  In your opinion, how should entrepreneurs and development practitioners respond to the realities of the informal sector?

The informal sector must be taken into account in any development initiative. But I believe the end goal should be formalization.  The beauty of ICT is that it makes this transition easier. ICT provides easy and cheap ways to track electronic trails.  This is particularly true in financial transactions, where details must be stored for settlements, auditing, billing, etc.

In the case of financial services, the mere use of information and communications technologies will start pushing informal entities to the formal economy. Therefore, mechanisms and incentives must be put in place to help make this transition smooth, so that it does not deter people from adopting these technologies.  That is the balancing act that practitioners need to implement in order to keep moving toward formalization.

Somehow, our story began with Twitter, coffee and several tremendous leaps of faith.  From jokingly drawing a \$/ symbol in the basement of a bookstore to writing a concept article with Ken Banks, our entire journey up to this point – in retrospect – seems either improbable or inspired.  Either way, we proudly stand before you today to announce the launch of FrontlineSMS:Credit, the third iteration of the FrontlineSMS family and a new chapter in inclusive finance.

Our mission is simple: leverage the mobile space to extend access to affordable financial services to rural, disconnected and impoverished communities.  To achieve this end, we are constructing a series of free and open source financial modules that will allow FrontlineSMS to communicate with mobile payment systems in real time, turning FrontlineSMS in to a microfinance management information system, a payroll center for small & medium enterprises (SMEs), a collection and distribution center for micro-insurance premiums and payouts, and a detailed center for individual credit histories and scores.

By integrating mobile payment systems in to the core management platforms of microfinance institutions (MFIs) and SMEs, FrontlineSMS:Credit will allow implementers to cut operational costs, increase geographic reach, lower interest on credit and automatically maintain detailed accounting records.  MFIs, for instance, will be able to distribute microcredit loans and receive scheduled repayments via text message, allowing loan officers to manage larger client portfolios and pay for travel less frequently.  In return, implementing MFIs will be able to reduce interest rates commensurate with the amount saved while simultaneously gaining access to larger client portfolios and, therefore, increased revenue.

Our first module, Savings & Credit, will be available within the next three to five months.  It will allow users to issue credit, hold client savings and record client credit histories.  By linking individual profiles to their respective phone numbers, Savings & Credit will automatically track loan dispersals and adjust outstanding balances as mobile payments are received.  Any mobile payment in excess of an outstanding balance will be attached to the appropriate profile in the form of mobile savings, which an end user will be able to withdraw to their handset via text message.

Later modules are likely to include Insurance, Payroll, Islamic Banking, and Mortgage.  Ideally, we aim to make every formal financial service available to the informal sector in 160 characters or less.  Of course, none of this would be possible without help – LOTS of help.  If you would like to join or contribute to FrontlineSMS:Credit, please don’t hesitate to contact us.

by Ben Lyon