October 23, 2015
By Raunak Kapoor and Sharada Ramanathan
Editor's note: This is the second post in a series on our journey with an Indian microfinance institution, Margdarshak Financial Services Pvt. Ltd (Margdarshak), as we help it transform from an organization focused on credit alone into a sustainable and scalable business correspondent of a commercial bank. You can read the first post here.
Technology plays a critical role in the business correspondent model. Microfinance institutions (MFIs) using this model need a robust technology platform to support a large volume of small transactions—facilitated by individual agents—quickly, securely, and at scale. Likewise, a bank’s technology platform must be able to interface adequately with the systems of a partner MFI, which may be of varying capability and complexity. With the business correspondent model accounting for an increasing proportion of overall business for small to mid-sized MFIs, there is growing interest in using technology to rapidly expand this channel.
To be effective, technology solutions must integrate seamlessly into existing workflows of both the bank and the MFI. Rather than making ad-hoc changes to process workflows, both entities would benefit from identifying these opportunities in advance, ideally during the negotiation phase, and making the appropriate technology modifications.
Below, we identify six interventions that banks and MFIs should consider -
1. Develop a robust front-end data capturing system
The business correspondent model involves a significant flow of data including application forms, Know Your Customer (KYC) documents and financial reconciliations between MFIs and their banking partners. To efficiently manage high volumes of data, MFIs must invest in robust data capture systems that can process client-level data digitally at the field level. This reduces the time and effort spent collecting and transporting physical documents, and also decreases the probability of errors.
Many MFIs are now adopting mobile (or tab-based) management information system (MIS) solutions that enable real-time digital data capture and management, and report generation for field operations. When designing data capture interfaces, MFIs should prioritize and group datasets that are mandatory, for ease of use. As MFIs expand business correspondent operations and develop relationships with multiple banking partners, they must maintain a uniform user interface for these remote data capturing applications instead of modifying the interface for each bank. With appropriate checks in place, the data can easily be customized and consolidated prior to sharing with partners.
2. Seamlessly integrate back-end systems
Banks and MFIs should develop processes that facilitate real-time upload and download of data through seamless integration of their back-end systems. Ideally, banks should use a single back-end system for both mainstream banking operations and financial inclusion initiatives under the business correspondent model. Maintaining different back-end systems can create reconciliation and reporting challenges.
Data flow between the two partners’ respective back-end systems should be automated through secured file transfer protocol. As part of the technology integration process, MFIs and banks should develop simple, user-friendly intermediary applications that validate the inflow and outflow of data to and from their back-end systems. Though manual validation checks can be a quick fix, they must be transitioned to automated intermediary applications. To ensure that the integrity and sanctity of back-end systems is maintained, direct access to databases should be curtailed and altering database structures in back-end systems should be prohibited.
3. Pre-populate forms where possible
High rejection rates of application forms and the effort required to recreate them drive up operational costs for business correspondents. With banks increasingly adopting more stringent KYC protocols, manual completion of application forms by field agents results in a high rejection rate because they are more prone to errors. One way to minimize mistakes is to design processes to pre-populate critical application forms with data that was collected at the time of account origination. For such a system to be error-free, the maker-checker principle of authorization should be strictly adhered to. Digitized data collected at the source must be carefully matched with KYC details of the client before pre-populating savings or loan documents.
4. Design a reliable document tracking system
Systems should be developed to track the flow of documents between MFIs and banks to ensure that they are received in a timely manner by the correct recipients. The system should permit quick digitization and transfer of files, identification of key documents and secure access to status and accountability reports. Technologies like bar codes can be used to automate and record the movement of documents. Without tracking systems, MFIs struggle with file processing delays and costs, and assigning accountability related to document flows. Document tracking systems can be easily integrated into the intermediary applications discussed above, or can be standalone applications integrated into the core solution.
5. Invest in a dedicated IT Team
Trouble-shooting and fixing IT related problems account for a significant portion of management time and bandwidth at banks and MFIs. Investing in one or two dedicated IT executives, particularly at MFIs, can help manage the information flow between the two partners and enable quicker resolution of issues. These executives should be dedicated to a specific banking relationship and be given the responsibility of end-to-end coordination with the bank’s technology teams, including trouble shooting issues as they arise.
6. Set up real-time dashboards
Timely and accurate reconciliation of data such as the number of accounts and loans, savings balances, repayment schedules, and loan collections and disbursement is critical for banks and MFIs. Manual reconciliation of reports and consequent adjustments can be time-consuming, particularly when the MFI or bank is working with multiple partners. Both entities should therefore, implement systems to automate the reconciliation process at fixed intervals. Real-time dashboards which offer a synchronized snapshot of key performance indicators to facilitate easy decision-making must be set up. Financial and operational reporting for individual business correspondent channels must be segregated at the outset. This will ease the overall reconciliation process and allow management to easily assess cost and revenue trade-offs for specific business correspondent relationships.
Leveraged well, technology can reduce processing times, improve efficiency, lower transaction costs and enhance customer experience – all critical to be an effective business correspondent. However, for this to happen, MFIs and banks must mutually agree on specific aspects of business process flows that require customization for this new model, and be open to making appropriate modifications.