Several approaches to microfinance have been refined over the years, some lending to groups (as at the Grameen Bank), some to individuals (increasingly prevalent in Latin America). All seek to solve a business problem: how do you deliver small-scale financial services to the poor, in countries with weak infrastructure and human capital, while minimizing administrative costs? The various approaches to microcredit are what economists would call technologies: clever ways of producing a service that was once thought impossible, or at least impossibly expensive. But in lay person’s terms, they are low-tech, built around passing around bits of wrinkled paper we call cash and, often, recording each transaction on several pieces of paper. Recent advances in electronics and communications may be creating vast new possibilities for delivering financial services to poor people. They might even make today’s cash-based microfinance “technologies” look archaic. Last week, CGD hosted a seminar on this theme.
David Schwarzbach, Vice President for Business Development at Net1 UEPS Technologies described his company's smart card-based system, which the South African government uses to deliver welfare monthly payments to 3.6 million people. Each card contains a computer chip, a digital record of the owner’s fingerprints, and storage for encrypted data. Unlike in a traditional banking system, where central mainframe computers hold all the client data and do all the processing, the Net1 system is distributed and usually offline. The cards hold the data and can, for example, offer loans on the fly, since they hold data on the owner’s payment history and welfare check stream. The cards can also be used for shopping, paying bus fares, managing medical records of AIDS patients, and tracking whether children enrolled in a government program meant to boost school enrollment are actually attending school. However, the cards currently are designed to work mainly with proprietary card readers that Schwarzbach says cost “under $1,000.”
Gautam Ivatury, manager of the Microfinance Technology Program of Consultative Group to Assist the Poor (CGAP), which is a donor-funded body housed at the World Bank and focusing on microfinance, put the Net1 technology in perspective. Many companies are developing such technologies, some based on cards, some on cell phones. Personally, I find the phone-based technologies particularly intriguing. (Schwarzbach says Net1 is developing a phone-based system. Download his presentation slides) Ivatury reported 2.3 billion earthlings now tote phones. And the number is growing fast, even in the poorest countries such as the Democratic Republic of Congo. Put otherwise, there are now 2.3 billion people carrying around networked computers. What could people do with those besides talk? Financial services seem like a leading candidate. In his presentation (large file 3MB), Ivatury described high-tech examples from Brazil, the Philippines, and South Africa, some using phones, some not.
It is far too soon to know how well these technologies will solve the microfinance business problem and reach the truly poor. But the potential for radical cost reduction and diverse new services is striking. Compared to traditional microcredit, it’s almost like being on a different planet.