Technology is essential if linkage is to work for savings group members and for banks. But what technology?
A soon-to-be-published report for World Renew documents my research on Savings Group linkages to FSPs. One of the areas I explore is the role of technology in creating sustainable, profitable and effective linkage.
Technology to Reduce Costs
For a bank or other formal Financial Services Provider, provision of banking services to the very poor is desirable. But it is also often an unprofitable business proposition. The reason is not an expectation of high loan losses (if anything the reverse
is true). It is simply that acquiring, onboarding and servicing accounts with low balances is expensive. Given relatively little activity the FSP's costs far outweigh any reasonable revenue expectations.
In order for small accounts to become profitable, human intervention must be very limited. This includes:
- Customer acquisition efforts, including direct sales
- Customer verification (KYC) and onboarding
- Ongoing customer service
- Cash-in / cash-out operations (particularly deposits and withdrawals)
- Payments processing (remittances and transfers, government distributions, bill payment)
- Small loan underwriting, origination and servicing
Most banks still have some level of human interaction for each of these functions. When they become automated, per-account and per-transaction costs are very greatly reduced. This is because employee costs form a large portion of account expenses.
Technology to Improve Services
Some services are very difficult to deliver, especially in rural areas. Electronic delivery of services is critical to effective, timely banking services for poor rural communities. However, many areas still have inadequate telecommunications infrastructure
to support mobile banking.
When mobile banking is not a realistic option, banks can still invest in streamlining of banking functions. Individual accounts may not be feasible due to distances from branches. But banks can also consider building out micro-branches with standalone ATM
and basic customer-facing functions only. Or they can create agent networks with store owners, post offices, etc that already need to travel regularly to branches.
Most important of all, perhaps, is product innovation and supporting technology. The FSP m must adapt traditional saving and lending models to meet the needs of savings groups and their members. This will vary between particular geographic and cultural contexts.
(The report goes into more depth on this topic, as will an upcoming blog).
What Technologies Are Most Important?
Mobile banking services will be increasingly vital to successful linkage. They will overcome practical issues of distance between communities and branches. They will also allow for most services to be provided through self-service. These changes will
offer both convenience and cost-savings.
Process automation will remove manual intervention throughout the bank-customer relationship. This is increasingly essential regardless of the banking model. For example, moving the entire loan life cycle online will reduce approval and booking
times for customers. This will in turn allow for profitable booking of small loans.
Development of lighter, more agile and open core banking systems is key. Most legacy cores are unwieldy and expensive to change. They do not easily support effective mobile banking solutions and especially process automation.
As technology, tools and understanding increase, the use of AI (including machine learning)
will increase. This will drive further processing efficiencies, and improved credit scoring models. They will also allow FSPs to adjust product offerings based on usage. They will also be able to suggest additional affordable and relevant products to specific
Savings Groups and members.
In a further extension of AI usage, Natural Language Processing will allow more self-service.
Chatbots will allow for automated customer service the majority of the time. This will further reduce the people costs of operating low balance and low activity accounts. This technology is not yet mature enough but will become so over the next few years.
Is Technology Always Good?
Technology in itself is neutral. If misused, like any other powerful thing, it can cause harm. A particular concern for savings group linkage to FSPs is erosion of the non-economic benefits of savings groups. For example, if an SG member has access to mobile
banking to make a savings deposit to the SG’s account at the FSP, then why do they need to go to an SG meeting? Or if technology is available only to a “privileged” segment of a society, then the have-nots will be further disadvantaged.
In the long term, for wide-ranging adoption of SG to FSP linkage, technology is essential. It will be a key driver of the rate of adoption. Regions that have strong infrastructure, as well as FSPs committed to financial inclusion, will advance much faster.
But technology needs to be applied wisely, with clarity around the benefits to both the FSP and the community being served.