MICROFINANCE MATTERS - HP's Remote Transaction System

In August 2002, the Hewlett-Packard Company convened a consortium of eight public and private organizations[1], which came together to determine how technology could be applied to achieve a breakthrough in the scale of microfinance services. The team envisioned an end-to-end system that would create a link for microfinance clients to the formal financial sector, providing easier and more affordable points of access for the customers. In addition, this type of financial/payment system would provide timely and accurate transaction data for microfinance institutions, which would enable improved risk management, market segmentation, and new product development. Through a methodical process of analysis and strategic thinking, the concept of a "Data Transaction Backbone" for the industry that would support 100 million to 250 million customers emerged. This processing backbone, similar to the credit card industry today would allow microfinance transactions to be captured anywhere and transmitted to back-end systems, such as microfinance institutions' MIS, central switches, credit reference bureaus, and other financial system and services.

The creation of this data transacting backbone, similar to the evolution of other financial systems, would require time, resources and a variety of providers and users. Regardless of the connected systems on the back-side, the first area of need was a common front-end point of access. In the industry, when discussing rural access to microfinance services, this is often referred to as the last mile. Hence, it was determined that the first and most critical component that could create the necessary standardization across the transactions backbone was the direct point of touch, or access with customer.

In the two and a half years since the consortium was formed, the team has built and pilot tested the first component of the Data Transaction Backbone, which is known as the Remote Transaction System or RTS. The RTS was developed specifically for the unique business needs of microfinance institutions and rural environments where there is limited infrastructure. The value of the RTS solution is a combination of appropriate technology and innovative business processes.

The Technology

The RTS solution utilizes smart cards, point-of-sale (PoS) terminals, a specialized software application for the PoS terminals, a transaction server known as the RTS server and connectors to the microfinance institutions' accounting and general ledger systems.

The RTS solution is currently enabled to process loan payments, as well as savings deposits, withdrawals and transfers. The solution leverages wireless connectivity to transmit transactions from the PoS terminal to the RTS server, then local internet access to the MIS application. The solution operates in either offline or online modes. In the offline mode transactions are bundled and sent through in a single batch, decreasing the amount of time it takes to complete the transaction. In online mode, the solution confirms account balances prior to authorizing a transaction.

Although the original design of the RTS was to be methodology neutral and adaptable to both group and individual lending approaches, during the implementation of the solution two versions evolved - one for institutions that utilize internal agents and group lending practices (Internal Agent Model) and another for institutions that wish to leverage independent third-party agents (External Agent Model).

As noted earlier, the RTS solution was built specifically for microfinance institutions and was optimized for reduced cost, reliability, and simple technical requirements, uniquely positioning the technology relative to other PoS solutions in the marketplace today. Many applications that were developed for, and used in more sophisticated financial markets, are optimized for increased functionality and flexibility and rely on infrastructure heavy environments, which results in higher costs and the need for more advanced technical support. The low entry point to take up this solution enables all institutions interested in providing microfinance services a viable and sustainable means to gain a return on investment while expanding customer services.

In addition, the connectors between the RTS were constructed to work with existing MIS systems for microfinance, such as Banker's Realm and Loan Performer. A minimal level of development effort is required for any MIS vendor to build the code required for their software to accept transactions from the RTS server. This approach will allow all MIS vendors to quickly adapt their solutions to work with the RTS, building interoperability between the applications.

Implementation in Uganda

From January 2004 through March 2005, the RTS was piloted in Uganda in three different microfinance institutions - Uganda Microfinance Union, FINCA UGANDA, and FOCCAS Uganda. Each institution deployed the RTS solution in a different manner in order to support distinct business models.

FOCCAS adheres to a group lending methodology and provides non-financial education sessions at their group meetings. Therefore, loan officers must participate in group meetings. When the RTS was implemented, FOCCAS was beginning to look at ways to track financial information at the individual client level. Previously they had only tracked this data at the group level. Loan officers carry the PoS terminal to group meetings where they capture all the loan deposits, savings deposits and other financial transactions related to the group fund.

During the course of the pilot, the team came to understand that the successful and sustainable integration of technology into microfinance requires business process re-engineering to ensure that the business value of the technology is fully realized. If technology is simply applied to existing business processes, then it is likely to increase costs and complexity rather than decrease them.

FOCCAS has taken the opportunity provided by the RTS introduction to streamline their group meetings, improve transparency for all parties, and accelerate their reconciliation processes. We expect that they will achieve significant value from the technology as a result. On-going efforts are looking to gain even further value from the solution over time.

FINCA UGANDA integrated the RTS into one of their sub-branches, a low cost branch closer to targeted clients. A FINCA teller travels to the sub-branch two times a week to collect money from the leaders of the local groups. The teller takes a PoS terminal to the sub-branch where the group information is captured electronically. At the end of the day, the cash is deposited into the nearest commercial bank and the transactions are uploaded in a single batch.

This approach has helped automate the sub-branch work to date, acting as a catalyst for further efficiencies in diversified products and services. Given the cost of cash security required in this model, expanding the volume and diversity of transactions through this point of access is imperative to justify the investment in the technology and achieve the expected value.

Uganda Microfinance Union (UMU) is piloting the RTS solution with independent third-party agents who act as "human ATMs" or virtual extensions of UMU's business providing financial services to UMU clients. The two current agents are local merchants who have some daily financial liquidity through their business operations. Each agent has a PoS terminal and a special agent smartcard, and transactions are handled predominately in an online mode. UMU clients travel to the agent where they perform financial transactions, all of which are captured electronically through the PoS terminal. Cash is exchanged between the agent and the client depending on the type of financial transaction. Maximum and minimum limits are built into the system as they are in an ATM system to control the amount of money that can be withdrawn on a given account in a day.

When a transaction occurs, the agent is actually distributing and collecting cash and a corresponding electronic cash transaction is executed at the microfinance institution. Client and agent accounts are debited and credited as the transaction requires. Since this is done internal to the financial institution no clearinghouse authority or functionality is required. At the end of the day, all the transactions still on the PoS terminal are uploaded to the RTS back-end through the cellular network. Since the agents are also UMU clients, funds are reconciled nightly through UMU accounting procedures. The management information system handles the transaction similar to a teller transaction.

In addition to testing the models at three MFIs, the team also worked with a local technology company, Bushnet, to build capacity to provide ongoing technical support to those organizations in Uganda that wish to continue to use the RTS solution.

Beyond the Pilot

The original goal of the consortium members has been and remains to catalyze a breakthrough in the scale of microfinance. Our guiding principles have also articulated our intentions to share lessons learned and technology with the industry, in order to drive dissemination and create the desired impact of scaling. As a result, members of the team will be releasing a few different papers regarding this work later in the summer. One paper will focus on the details of the pilot, through an independent case study. A second paper will discuss the lessons learned that relate to scaling microfinance service delivery. And a third paper will synthesize what was learned regarding the integration of technology in emerging markets to applications beyond microfinance, such as health, e-government, and business development services.

Even more significant, the team is working toward consensus on providing a free license to the industry so that any microfinance institution interested in using the solution can have free access to the executable code. The team is also planning to use an Open Source license to provide some portions of the source code to those developers that are interested in working with the solution for the benefit of the industry. An announcement about the final packaging of the open source license is expected early this summer.

(1) The Microdevelopment Finance Team (MFT) includes individuals from Accion International, Bizcredit, FINCA International, Grameen Technology Center, Freedom from Hunger, Global eChange, PRIDE AFRICA, and Hewlett-Packard Company.