Technologies for Financial Inclusion: Looking to the Past

The next post in a new series in preparation for the XIV Inter-American Forum on Microenterprise (Foromic) in Costa Rica from 10-12 October. CGAP and the MIF are joining forces to argue about the key challenges in microfinance and distill the game-changing solutions for greater financial inclusion and stronger micro and small enterprises in Latin America and the Caribbean. These posts will also be featured on MIF’s Microfinance Blog in Spanish.

In our work and personal affairs, technology helps us get through tasks that were formerly tedious or complex, such as dealing with many figures, large amounts of information, or communicating with many people at the same time. All of this is now more efficient and easier thanks to laptop computers, the Internet, cell phones, and “smart” phones.

In microfinance, technology clearly has great potential to improve service at a lower cost to more customers. But in the area of financial inclusion, there still have not been great leaps in the use of technologies similar to what has happened in everyday life. While some pioneering microfinance institutions are experimenting with the use of cell phones for payments, transfers, and other services, the most common microfinance processing tasks, such as credit analysis, recording disbursements, payments, and monitoring, are carried out with traditional technology, sometimes combined with manual processing.

Looking back, we find that past failures can teach us a great deal. For example, for many institutions, former innovations that we had hailed as revolutionary ended up in the drawer of oblivion. Examples are the use of Palms or PDAs (personal digital assistants) to capture information in the field, early models for microfinance credit scoring, and the ambitious smartcards.

In many cases, it was not possible to measure how much these solutions increased productivity. At the same time, distinct disadvantages became evident; some were related to the technology itself, such as the high cost of its introduction, rapid obsolescence of hardware and software, incompatibilities between platforms and portfolio management systems, rejection of users and customers, and the disappointing results of the first credit scoring systems that ended up as tools of financial exclusion rather than inclusion. In other cases, the disadvantages were more subtle but no less important, such as the focus of loan officers on the Palm at the expense of interaction with customers that would provide a better understanding of their ability and willingness to make payments. Sometimes officials also lost the palm, resulting in an additional cost.

On the occasion of a new FOROMIC, in the TEC-IN program, we will discuss how and when it will become possible to use technology more intelligently to achieve financial inclusion in the region. How can we overcome the problems of the past? In this regard, the candidate―the friend who we hope will save us―is the mobile phone, a mature technology now accepted by users and clients of microfinance institutions. But the microfinance business model must ensure that the phone will meet the different needs of the agents, which is essential for the convenience of cash in and cash out, as well as to help generate profits, among other considerations. And this will only be possible if the technology is used in an environment suitable for mobile financial services, such as described in the recent report of the World Economic Forum, which we summarize in Spanish in our TEC-IN blog .

We look forward to our workshop on Monday, October 10 at the FOROMIC, which will include most of the institutions that submitted ideas that were judged as finalists in the second round of the TEC-IN contest. Many of the institutions already have had technology projects in the past, and have had experience with technology that does not live up to its promises. Our finalists hope that their ideas can be turned into viable projects to contribute to financial inclusion. To achieve this, we suggest that they look to the past as well as the future.