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 Application
Leveraging technology for micro banking
Introduction
One of the key challenges in extending access to financial services in under-served rural markets has been the high ‘cost to serve’. This includes the costs associated with origination; supervision and continuous monitoring that are incurred in these markets. Increasingly, technology is being viewed as key to a low-cost banking strategy for the rural market. There is need to outline the areas in which technology can impact costs as well as present some international experiences.
Management of cash
In rural areas, the transactions between various parties (banks, traders, input dealers, and farmers/consumers) are predominantly cash based and are very low in value. The cost of cash based transactions is higher as compared to electronic/non-cash based transactions. It is because of the following additional costs involved:
Cost of idle cash
Idle cash, lying either with the bank branch, a merchant or a consumer, does not earn any interest and the party holding it has to bear the cost of interest lost. Thus higher the idle cash, higher the cost of lost interest.
Cost of cash handling infrastructure
It includes cost of branch set up, cost of manpower and the cost of cash security. This cost increases with decrease in value of transaction and decrease in denomination of currency transacted. According to estimates the cost of servicing a transaction is estimated at $1.08* for a branch, $0.54 for telephone, $0.28 for automated teller machines (ATMs) and $0.13 for the Internet.
Geographical spread of customers
If the current structure of the bank branches were to be used to cater to the need and requirement of the rural population, it would mean setting up a bank branch in virtually every village. The cost of such a large network would not justify the revenues generated from it, given the nature of transactions. Thus, the challenge for banks is to innovate a low-cost network/delivery channel with a high outreach and flexibility with respect to the timing of its operation.
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