Software as a service: An opportunity for disruptive innovation in the microfinance software market?

SOFTWARE AS A SERVICE: AN OPPORTUNITY FOR DISRUPTIVEINNOVATION IN THE MICROFINANCE SOFTWARE MARKET? Arvind Ashta et Jiten Patel De Boeck Supérieur | Journal of Innovation Economics & Management 2013/1 - n°11pages 55 à 82

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--------------------------------------------------------------------------------------------------------------------Ashta Arvind et Patel Jiten, « Software as a service: An opportunity for disruptive innovation in the microfinance

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Journal of Innovation Economics & Management, 2013/1 n°11, p. 55-82. DOI : 10.3917/jie.011.0055

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n° 11 – Journal of Innovation Economics – 2013/1 55

SOFTWARE AS A SERvICE: AN OPPORTUNITy

FOR dISRUPTIvE INNOvATION IN THE MICROFINANCE SOFTWARE MARKET?

Arvind ASHTABanque Populaire Chair in Microfinance of the Burgundy School

of Business ESC Dijon-Bourgogne, CEREN, [email protected]

Jiten PATEL1

Co-founder, MicroPlanet [email protected]

Microfinance is the provision of small financial services to poor people in a bid to promote financial inclusion. This sector has been growing fast and is serving over 200 million customers through over 10000 Microfinance institutions (MFIs). However, only 800 MFIs reporting to the Microfinance Information Exchange (MiX) are large enough to break-even. The millions of transactions of small amounts require a lot of information processing, if transaction costs are to be reduced. While the large MFIs have adequate Management Information Systems (MIS), the smaller ones may be finding it expensive to build or buy their own MIS software.

The question is what innovation is required to disrupt the market by providing MIS packages to the long tail of small MFIs who are yet to break even? This paper discusses one such disruptive innovation in the making: Software as a Service (SaaS). We are looking at this innovation from the institutional entrepreneurial viewpoint of institution building.

The paper is presented as follows: The next section provides a brief note on innovation and institutional entrepreneurship. Thereafter, we present our re-

1. Our thanks to Alberto Jimenez and Rafael Ysaga of IBM, Siddharth Sharma of Intellecap, Eugene Danilkis of Mambu, Jatinder Handoo of FINO, and Snehal Fulzele of MFiFlex for pro-viding information and confirming our use of it.

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Arvind ASHTA and Jiten PATEL

56 Journal of Innovation Economics – 2013/1 – n° 11

search methodology. Our first level case study is on the meso level: the chang-ing structure of the business model being proposed by SaaS manufacturers to offset the needs which are not met by the existing proprietary off-the-shelf softwares. We then present the microenterprise level case studies to under-stand what kind of actors are emerging in the SaaS for microfinance market.

LITERATURE REVIEW / THEORETICAL POSITIONING

Traditionally, innovation has been classified into incremental innovation and radical innovation (Abernathy, 1978). In radical innovation, the tech-nology changes (Christensen et al., 1998). Within the radical innovation category, a distinction is maintained between disruptive innovation which disrupts the field of the incumbent players (Christensen et al., 2000), as op-posed to sustaining innovations which permit incumbents to keep their dominant position. Disruptive innovation usually requires changing the price-product equation so that the new markets are created (Christensen et al., 2002) and the business model itself is changed (Christensen, 2006).

Specific to information technologies in the virtual world, the radical in-novation is leading to business model innovation such as crowdsourcing, democratized innovation, eco-systems and co-creation (Ashta and Assadi, 2010; Shuen, 2008). All these should therefore be disruptive.

This disruptive innovation requires institutional change. Within insti-tutional change, some work has been done on institutional work, a field which broadens new institutional economics by giving the actors a change agent role in mobilising embedded actors and disruption of norms and be-liefs (Lawrence et al., 2009).

In this paper, we see how existing and new entrepreneurs try to disrupt the MIS market in order to better serve the long tail of Microfinance Institu-tions (MFIs). We will try to see if the disruptive innovation requires product technology to change.

RESEARCH METHODOLOGY

Research Question

For disruptive innovation, does the technology of the product need to change? Or is business model change sufficient? And does the business

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Software as a service: an opportunity for disruptive innovation…


model need to change just if new technology, not necessarily linked to the product, changes? A second application question would be to study some of the early innovators to see if they all develop the same strategy or different strategies.

Research Method

This paper presents case studies at two levels. The first meso level case study is of Management Information Systems in microfinance sector. It deals with answering the first question: when is the business model change required and when is technology change required? The second micro level looks at a few of the early players who entered the SaaS for microfinance market and their strategies to understand how they try to market their new innovation. We present here the six case studies we were aware of at the time of this research (2010): MicroPlanet Technologies, Mambu, IBM, Fino, Intellcap’s MOSTFIT, and MFiFlex. For each of these operators, since this is a new rela-tively undefined field with limited information from competing firms, we re-quested the firms to provide the information it chose to reveal for this study.

Research Context

To appreciate the research, it is important therefore to understand the con-cept of MIS and its relevance to microfinance as well as the peculiarities of the Microfinance sector. Microfinance, with its millions of small loans, has high volume of transactions. Paper proliferates across the MFI’s operations. Since loans are for short durations, often less than a year, there could be high customer churn unless the MFI tries to provide bigger loans to retain their customers as their business expands. The cost of recording and processing this information is itself very high. To reduce these costs, MFIs require good MIS. These systems essentially record or capture data and transform it into useful or usable information for management decision making as well as for reporting internally or externally. In the microfinance world, one of the key success factors in up-scaling an MFI from a few customers (say a few hun-dred) to many (say, a hundred thousand) is the quality of its MIS.

MIS is an aid to control and performance measurement, but they also yield information for strategic decision making. In some cases, the MIS is even considered a strategic strength enabling a firm to outcompete (Barua et al., 1991; Brown et al., 1995). While MIS technology by itself is not the panacea (Clemons et al., 1993) except in certain sectors (Clemons, Row, 1991), but when coupled with strong and effective operational process man-agement, MFIs can gain significant benefits that flow to its bottom-line,

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strengthening its competitive positioning and improving its ability to meet customer demands.

In fact, MFIs require easy and ready access to real-time information, both operational and financial, on a daily basis that they can query and analyse to run their businesses. There are many benefits of having easy and ready access to the latest data and we can easily provide a few examples. First, operations and branch managers have a clear view of the “pipeline” of loan applica-tions, waiting to be approved and waiting to be disbursed. Second, for loans which are not being reimbursed on due dates, timely information provides strong oversight on managing Portfolio-at-risk (PAR), not from day 30 but effectively from day 1 when a loan is late. Third, the finance and accounting departments also have a view of this “pipeline” to more effectively manage and forecast cash-flow. Fourth, a good MIS allows branch managers and loan officers to view their performance (profitability, loan performance) on a real-time daily basis. Fifth, it allows the finance and accounting department to perform month-end closing and consolidations faster and more accurately. Sixth, since MFIs have to provide a lot of external reporting to donors, fi-nancers, apex bodies and regulatory oversight bodies, a good MIS makes this possible at a much lower cost.

MIS is necessary for scalable innovation. Microfinance is a fertile ground for innovation in both business process and technology. Innovations – branchless banking, mobile payments, mobile banking, ATM integration, new products and business models, for example, need to be tied together in order to achieve network effects and scale. These innovations must plug into and be supported by a robust MIS to transform the innovations into a new baseline of operations for MFIs.

Since the majority of MFIs are very small and most of them are fund-strapped, it is difficult for MFIs to develop their own MIS and thus the need to outsource this activity. Outsourcing comes in multiple flavours – includ-ing purchase of software, managed services, ASP, SaaS.

The specificities of microfinance, especially its differences from banking, its human resource, infrastructure, and support and standardization issues im-pose particular constraints on the MIS that are specific to this sector(Iyengar et al., 2010). As a result, MFIs should not be in the software development business and it is rare that they make their own MIS software. A number of MFIs may start out as an owner or part-owner of a small MIS software vendor and use this software across its operations. Although this vision seems to be excellent, over time execution suffers (software quality is low, each af-filiate evolves over time to using different versions, and support is sub-par). The low performance is primarily because these MFIs do not understand the

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technology and do not know how to properly manage the partner which eventually leads to a decision to sell-off its portion to the partner, a 3rd party or to acquire control of the partner, and in some instances to begin a search for off-the-shelf robust and scalable MIS to support its growth

FIRST LEVEL CASE STUDY: FROM OFF THE SHELF SOFTWARE TO SAAS

In this microfinance niche case study, we present the off-the shelf software as the incumbent product and Software-as-a-service as the challenger and expose their business models.

The Existing product: Off-the shelf software

To help bring down operating costs, one solution would be to bring MIS software in-house by buying it. The business model argument for buying off-the-shelf software rather than making it is that the MFI does not need to devote time; effort and limited funds to software development and can therefore focus on its core business of providing financial services to the poor. The business model of the software manufacturer is based on selling licences for use and charging additional fees for each extra computer which uses the software.

The selection of software is not an easy task and the MFIs are faced by the paradox of choice: too much choice enforces high transaction costs in selec-tion (Schwartz, 2004). The Consultancy Group to Assist the Poor (CGAP) lists MIS vendors on its website – and the list has over 100 vendors. Of this list, MFIs don’t know how many would offer good, robust and scalable MIS that would be useful to a mid-to-large MFI. MFIs must undertake a com-prehensive due diligence on these vendors on their functional capabilities, customer support – (the calibre, level and number of staff), quality assurance practices, success rate to implement in a timely manner, and the financial condition and viability (of the vendor). Figure 1 illustrates the software mar-ket with hundreds of vendors chasing thousands of MFIs, compounding the choice problem for the MFI.

Previous research, based on the CGAP reviews, informs us that these MIS vendors come in all shapes and sizes (Ashta, 2010). The size could vary from a one-man shop to vendors with technical staff of 32. The software that they offer is usually based on proprietary code but a few open source vendors (such as MIFOs) are also present.

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Most software is being updated regularly, reflecting the high rate of obso-lescence in a competitive sector where software vendors imitate competition with minimum time lags. However, not all the software is capable of catering to all the software needs of the MFI.

While most can cater to individual and group lending, savings and remit-tances, others can cater only to individual lending and not to group lending, which is the major specificity of many MFIs. Some software is available only in English, French or Spanish, whereas others have the potential to offer multilingual capabilities. However, the multilingual claim requires careful scrutiny especially if one needs Cyrillic or Chinese language capability, e.g., Russian.

Moreover, pricing is quite opaque since it is grouped under Licensing Cost, Annual Maintenance Cost (expressed in % or $), general Consult-ing Services (per day) and training Cost (per day). This means that it is impossible for an MFI to be able to compare costs. To some extent, CGAP has tried to usher in transparency for the software listed on its site by ask-ing reviewers to indicate approximate costs for three different situations

Proprietary off the shelf software marketFigure 1 –

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with alternative parameters on number of customers, lending methodology, and financial products. Such cost estimates vary from $16,000 to more than $900,000 (Ashta, 2010). However, these cost estimates are often subject to large estimation errors.2

The large diversity of software and the level and opacity of prices lead to difficulties for MFIs to choose appropriate software which would continue to be useful as they scale up. A small MFI may opt to use the MIS software from a vendor who is a one-man shop, tiny vendors with a staff of around 10, or from a small vendor with 10-30 IT staff, essentially because it is cheap and paying little attention to the robustness and scalability capabilities and even if support is less than par. And they can get away with such an invest-ment for a little while until they start growing and get to a certain size and volume. Even mid-to-large MFIs make a huge mistake when they invest in a MIS from a one-man shop or from a “small” sized vendor, largely basing their decisions on immediate cost considerations, and paying little attention to technical staffing and knowledge of their present and future needs.

Figure 2 clearly depicts the basic problem faced by MFIs when it comes to purchasing off-the-shelf software. MFIs still see the MIS as a major con-straint. The systems MFIs use are often inflexible, expensive, hard to sup-port, and incapable of enabling innovation for the MFIs. On the other hand MIS vendors are looking for high margins and low support costs.

Thus, what we are showing is that the existing solution of off-the-shelf product was not technologically inefficient, but had a business model gap which kept it from serving the needs of the market.

The innovation: Software as a Service

The foregoing discussion pointed out that MFIs have low financial resources but need a high level of support services in view of the low skills of its per-sonnel. A possible solution is to pool together the MIS with other MFIs and share the software and the cost of information systems. The problem is that most individual software is sold as a proprietary license protected by intellectual property rights which does not permit users to share with other organizations.

However, a number of paradigm changes over the last few years are now permitting new models of co-creation of experiences with firms networking

2. In a recent conference, where one of the authors was presenting a paper ASHTA, A. (2010), MIS Software for the Microfinance Market: An Analysis Available at SSRN: http://ssrn.com/abstract=1583131. Using this data from the CGAP reviews, a representative from FERN indi-cated that he would be able to offer deep discounts on the prices quoted for its Abacus software

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together to provide solutions to other businesses and consumers through a nodal firm (Prahalad and Ramaswamy, 2004). Within the IT world, a new model called SaaS has been developing quickly for reasons related to both demand and supply. According to Updegrove (2008), on the demand side, younger consumers have become psychologically independent of famous proprietary solutions, people are using multiple software, and more data-based management is being sought by business customers. All these are pro-viding people the confidence to experiment with new outsourced software and the market size for on-the-cloud computing has become much larger than desk-top computing. On the supply side, there is an increase in inde-pendent operating software and development of open source, development of new business models based on freeware (loss leaders), increase in broad band, decrease in cost of servers (Updegrove, 2008) as well as better security and application programming interfaces (Murphy, Samir, 2009) and the si-multaneous growth of Application Infrastructure Providers (Demirkan et al., 2010).

In essence, SaaS the solution requires hosting the software in the cloud. SaaS is based on a multi-tenant service oriented architecture (Guptill, McNee, 2008) hosted in the cloud. A Berkeley research paper (Armbrust

The business model gap in the Off-the-shelf solutionFigure 2 –

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et al., 2009) considers cloud computing to be the sum of SaaS and public clouds (also called utility computing) and we have summarised their expla-nation in figure 3 below. In this view, cloud computing does not include pri-vate clouds which a firm may set up for its own internal global information. In addition to SaaS, it concerns public clouds which include the hardware and systems software being shared with the public in a pay-as-you go man-ner. It also includes SaaS as well as application software hosted in these clouds. SaaS providers are Cloud Users.

Cloud computing terminologyFigure 3 –

A SaaS provider would host the Infrastructure in the cloud, most likely using a 3rd party hosting provider, and make the service available via the internet and would provide daily management and support for the MIS soft-ware and the server infrastructure, namely the end of day process, report generation, backups, Start-of-Day processes, monitoring of the server and network infrastructure in the hosting facility, and Help Desk support during business hours. The SaaS provider either owns its own MIS software or con-tracts with one MIS microfinance/banking software provider (preferably one who can offer software attractive to both small-to-mid size MFIs, and to mid-to-large MFIs) and purchases a number of software licenses with an option to buy more down the road. This operating model is indicated in Figure 4.

The SaaS provider hosts the MIS software (that it has either bought or in some limited instances built it) either using its own facilities or at a 3rd party hosting facility, and offers access to this service via the Internet to the

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MFI. Since the hosting is done on the Internet, there is no need for the SaaS provider to be physically present with its own technicians in every regional zone (Fortune, Aldrich, 2003). The SaaS provider would technically help the MFI to connect to the MIS software via the Internet since the MFI per-sonnel may not be competent to do this.

Thereafter, the SaaS provider depending on whether it owns the MIS software would either provide all requisite levels of support, or offers the first and second level of support for the MIS software indicated in table 1, and would turn to the software vendor for third level support to address bug fixes, and new enhancements.

Ideally, the architecture of SaaS is scalable, configurable and multi-tenant efficient. This software is then available to different users on the basis of a user fee. As a result, small customers with little usage pay only a small fee to access the system. Larger customers get a lower usage fee, but since they use much more, they pay more in aggregate. At the same time, all the users, big and small, benefit from all updating of the system hosted in the cloud. New and small entrepreneurs benefit from increased efficiency in terms of main-tenance and upgrades, lower initial costs and ready deployment ( Fortune, Aldrich, 2003; Elafatatry, Lazell, 2004; Enslow, 2006) as well as being able

SaaS Operating ModelFigure 4 –

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to focus on their core businesses (Fortune, Aldrich, 2003). On the side of the software vendor, there are economies of reaching out to a wider audience (Elafatatry, Lazell, 2004).

As opposed to a software application provider who sells the software for an initial lump sum fee, the SaaS provider charges the MFI on a usage basis (Elafatatry, Lazell, 2004; Choudhary, 2007), usually either a per customer or a per account basis and this would be charged on either a monthly or a quarterly basis (Enslow, 2006) although annual up-front fees may also be required (Brodkin, 2007). However, Susarla et al. (2009) examine monthly fees in two alternative settings: a fixed monthly rental and a usage based charge.

Chowdhary (2007) finds that the perpetual licensing fee model of In-dependent Software Vendors (ISV) slows down the diffusion of upgrades because the ISV cannot charge for small patches of modification and slows down the adoption of upgrades since users have to pay for them. As opposed to this, the SaaS provider includes the upgrades and incorporates them in the rent. Our research indicate that ASP is now being extended to the mi-crofinance sector, as SaaS fills up the business model gap, aptly illustrated in figure 5.

Software Services required by the userTable 1 –

Level Description Examples

Level 1 daily services to help MFI run the application

Providing access to a Service desk during the MFI’s business hours

24*7 Monitoring of all production components (i.e. servers, firewalls, database, etc.)

Responding to MFI User queries and needs

Running daily / Monthly End-of-day processes

Performing daily backups of all server environments

daily Report generation

Running daily Start-of-day processes

Level 2 Periodic services to initiate and maintain the existing application

Performing regular system maintenance & optimization tasks

Regular interaction and follow-ups with the software vendor

Testing bug fixes to Application, database, Middleware, OS and other system related components

Testing of new application and OS software releases

Providing access to a Training environment on a time-share basis

Providing access to a Reporting Server (optional)

Level 3 Improving the application

Bug fixes

New enhancements

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Benefits of SaaS for microfinance

All these trends are creating an enabling trend for outsourced shared solu-tions. The reasons for outsourcing include cost savings, access to technology, time to market, managing applications and revenue growth rates (Susarla et al., 2009). These solutions are especially useful for attracting the long tail of small and medium business customers who are faced with increasing complexity of IT and do not have the internal resources to do it themselves (Murphy, Samir, 2009). As we mentioned earlier, Microfiance is inherently characterised by a long tail of small institutions. SaaS makes accessibility to robust and scalable MIS software affordable for MFIs, irrespective of their size. MFIs can derive a number of benefits from adopting a SaaS solution, which can be regrouped under efficiency, risk, cost and strategic innovation considerations, indicated in Table 2.

SaaS fills up the Business Model GapFigure 5 –

Benefits and difficulties with SaaS compared Table 2 – to proprietary software.

Benefits to MFIs Difficulties, particularly in Microfinance context

Efficiency in operations Infrastructure availability

Lower adverse selection risks Security of data and privacy issues

Lower costs or Higher financial returns on operations

What happens if SaaS provider disappears?

Faster innovationLegal issues: Aligning contracts and incentives, multi-country jurisdiction

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Firstly, MFIs would get a more efficient IT operation. The solution would be readily deployable, with limited skills and with limited in-house resources. This is because of increased portability of applications. Since the basic application is hosted in the clouds, there would be improved interop-erability and easier system and network management, especially for MFIs which are working in networks in different corners of the world. There would therefore be reduced complexity in IT infrastructure. All this would help MFIs improve the quality and timeliness of their services, leading to greater outreach. If an apex body changes reporting requirements, all the MFIs using a particular SaaS network become immediately compliant if the software provider incorporates the changes. Having outsourced its MIS, the MFI can focus on core competencies. One reason for adopting an innova-tion is that its value increases if others in a network are using it. This is especially true of ASPs in supply chain networks (Enslow, 2006). In micro-finance, the supply chain networks would be the Microfinance Investment Vehicles which are supplying funds to different MFIs and may therefore be interested in standardized information reporting from the different recipi-ents of their funds.

Secondly, MFIs would also benefit from lower risks. The SaaS provider, being an expert, would be able to select or build the best software to host, to address security issues, and all the small and large MFIs would get im-proved ability to address critical enterprise-wide issues like security. In fact, the SaaS solution affords MFIs the best of all worlds. The buying deci-sions are simpler, because the MFI no longer has to select the appropriate software from among hundreds of software available in the market: the information governing procurement is readily available in a coherent plan. The procurement process is faster - maximizing procurement speed and flexibility without sacrificing architectural coherence, on which the MFI would have no knowledge. The SaaS provider could be a nodal operator offering different software and would thus provide the MFI the ability to procure heterogeneous, multi-vendor open systems, a one-stop shop (Mur-phy, Samir, 2009). This eliminates negotiating with a number of individual service providers for different software applications, especially if the dif-ferent software have to be compatible with each other (Elafatatry, Lazell, 2004).

Thirdly, costs would reduce and financial returns on investments would improve. This is because the cost of lump-sum IT ownership are eliminated and replaced with usage fees, to share the costs of the shared infrastructure. This benefits, especially, smaller MFIs who are limited by indivisibilities to get economies of scale. All MFIs, including the larger ones, also benefit as they can focus on their core business rather than on Information Systems.

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All MFIs would benefit from lower software development, support, and maintenance costs since these are also now being shared across all the users. The SaaS option significantly reduces the upfront costs that an MFI would ordinarily incur; the only up-front costs that the MFI would incur are the implementation costs of migrating data from the legacy system to the new MIS software, training related costs, costs for a local server in a branch, if absolutely necessary, and the reporting server and any requisite software for both.

Finally, innovation is inbuilt into the system. As soon as bugs are report-ed by one user and fixed by the software vendor, all the users would benefit from the improvement. The upgrading and exchange of system components would be easier, since it would be taken care of by the SaaS provider. Since in most instances the software vendor does not need to interact with more than one customer (the SaaS provider), his own marketing and distribu-tion costs come down and he can therefore devote more time and energy to improving products or passing on his economies to customers (the MFIs). MFIs, in turn, can use these savings to lower interest rates or achieve fi-nancial sustainability. As a result, innovation diffusion is faster since the software manufacturer does not need to wait to diffuse and the customer does not need to wait to adopt. Chowdhary (2007) finds that under the SaaS model, the software vendor will invest more in development and will get higher returns from doing so.

For all these reasons, we can say that the model shows great promise for the microfinance sector and offers a high potential provided the services are priced reasonably and is affordable by MFIs. It would allow MFIs to focus on their core business of providing credit at reasonable rates to the poor and ensuring that repayment rates are improved.

The degree to which an innovation is adopted depends on relative ad-vantage, compatibility, complexity, trialability and observability (Rogers, 1962). The positive trends, at least until recently, were that the cost of In-ternet service was decreasing, availability had significantly improved in the last three years, and reliability was also improving. At the same time satel-lite providers have also come on-stream to offer broader range of services, making it easier to reach the remote corners of the world. The other driver for this trend is the speed at which cell phones and usage has and continues to proliferate across the globe, and with that comes improved telecommu-nications access. All these factors make SaaS more compatible within the Rogers (1962) criteria. Nevertheless, there are difficulties inherent in the SaaS model, some of which are especially important for the microfinance industry

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Difficulties in adapting SaaS to the Microfinance environment

The preceding discussion has highlighted the relative advantages of SaaS to the MFI, which in turn should lower costs and benefit the poor. However, to understand the relative advantage to the society as a whole, social transac-tion costs need to be factored in. Although the most serious one is lack of the required infrastructure in many developing countries, security, continu-ity and legal issues are also important.

First, a service like SaaS is made possible given the increasing availability and reliability of Internet connectivity around the globe. Lack of bandwidth and electricity reliability are the key constraints to developing SaaS and cloud computing in the developing world (Greengard, 2010). The devel-opment of the infrastructure needed for cloud computing in general, and within it SaaS in particular, would impose transaction costs for the society/ country as a whole. Thus, serving the MFIs which serve the poor, through a SaaS offering, would require a co-creation of multiple support infrastructures. Whether the total transaction costs are reduced for the country as a whole, and whether it would be worthwhile for it to develop such infrastructure, would depend not just on the needs of MFIs but on the diverse needs of the entire country. In some developing countries, such cloud infrastructure has been witnessed as serving needs as diverse as E-governance, E-commerce, E-education, E-health, E-banking and E-environment (Kshetri, 2010).

While Africa still lags behind other continents in Internet connectivity, particularly with respect to broadband, the next few years are likely to see significant changes as new fibre optic cables come on-line, wireless internet begins to converge with expanding mobile phone capabilities, and the rapid expansion of mobile phone usage continues. However, it should be noted that there are challenges specific to the Microfinance sector emanating from the environment they operate in that differentiates SaaS in this sector com-pared to implementing it for developed countries.

Thus, SaaS for microfinance has to overcome the challenges of being in a low infrastructure environment, the customer being a Non-Governmental Organization (NGO) and not having the capacity to pay and the low skills levels of its personnel. However, given the terrain that MFIs operate in, the MFI may need to host a “local” and a reporting server at its own HQ loca-tion in the country, i.e. host locally. The reason to host a local server in the country is to ensure that the business continues to operate in the event of an Internet failure and where GPRS availability is very limited; and the need for a reporting server to be hosted locally is to satisfy central bank regula-tory requirements, to have a local copy of the customer data. Backups need

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to be provided both on the main server and the regional server. All these add to the complexity, within the Rogers (1962) framework, of the SaaS offering and it may not be easy for the CEO of the MFI to understand these technicalities.

Second, microfinance is also characterized by a lot of concerns for data security, confidentiality and privacy. Loss of these features would impose a different kind of transaction costs to people.

A third limitation of SaaS is that the software would need to be incor-porated with a firm’s intranet and other internal software (Braude, 2008). Thus, although a new MFI without software could easily accept a SaaS solu-tion if it provides all forms of software which the firm is likely to use, a firm which has already sunk costs in some software and has data embedded in that software will not find it easy to migrate the data or integrate the exist-ing software with the SaaS offer, without incurring high integration costs. This entry difficulty can be coupled with an exit difficulty of the SaaS model is that it is unclear what happens if the SaaS vendor goes out of business (Braude, 2008). This threat is very real because models of leasing computer time have existed before during the 1950s and 1970s and have been found vulnerable to economic recessions and to technological change within the computer industry (Campbell-Kelly, 2009).

A final difficulty is that of legal issues and those of aligning contracts and incentives: if the contract is a based on fixed monthly rental, there may be few incentives to focus on the customer’s analytical needs, while a contract based on usage rates may not motivate the providers to reduce costs ( Susarla et al., 2009) owing to locked-in protection from competition. These get compounded with multi-country jurisdiction where the SaaS data of MFIs in poor countries is housed in data-centers of rich countries (Barnett, 2011).

The exposé of these difficulties and risks with SaaS would a priori indicate that MFIs would rush to large established companies (Barnett, 2011). Is this happening?

SECOND LEVEL CASE STUDIES: EARLY INNOVATORS

A lot of research has been done on Software as a Service (SaaS) in recent times (for example, Campbell-Kelly, 2009; Choudhary, 2007; Demirkan et al., 2010; Susarla et al., 2010). However, not much is known on how SaaS vendors seek to overcome user fears (a few examples of fears are security, availability, updates, lock in). Moreover, such fears are more important in a

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poor country with limited resources for experimentation. This section pro-vides brief case studies of the few SaaS providers aiming at this market. It discusses possible ways in which each supplier tries to use existing network strengths and competencies to overcome user fears. As with any research in new fast growing undefined industries, it is difficult to predict the end-game. The current list of vendors offering SaaS is small. This helps us look at them more closely. We will first present our case studies and then discuss some strategic aspects.

Description of the case studies

We present here the six cases studies we were aware of at the time of initiat-ing this research (2010): the model proposed by MicroPlanet Technologies, Mambu, IBM, Fino, Intellcap’s MOSTFIT, and MFiFlex. The diversity of the information provided permits an idea of the different issues involved. Some of these firms are well entrenched incumbents such as IBM and Sales-force.com (who started MFiFlex). Intellecap is a major player in develop-ment studies in India and it started MOSTFIT. Fino was started by ICICI bank. Mambu and MicroPlanet are totally new challengers. Table 3 provides a summary to help the reader compare the MFIs. The information has been updated, where available, in April 2012.

MicroPlanet Technologies, a 501c3 entity operating on commercial prin-ciples, was formed to offer the much needed affordable access to robust and scalable MIS software using a hybrid SaaS (hySaaS) model to MFIs around the globe. As we saw earlier, a true SaaS offering in some instances would not work for MFIs in the developing countries due to lack of reliable Inter-net connectivity and/or due to lack of GPRS capability, or where regulators demand a local in-country server for backup purposes; whereas a hybrid-SaaS offering takes into account these issues, and addresses it by adding the so-called “local” server that would reside at the MFI’s HQ location whereby they can continue to operate even when there is no Internet connectivity with the cloud where the production servers reside, and satisfying regulators demands, if any.

As shown in figure 5, MicroPlanet presents an opportunity to fill these critical gaps by offering technology solutions under an outsourced services model using SaaS, or under a managed services model. The SaaS model will allow MFIs to purchase software on a subscription basis, significantly lowering upfront purchase costs. It will also allow MicroPlanet to negotiate substantially lower prices from vendors because they will no longer have to bear the cost of the initial sales effort or the on-going support effort, which will be managed by MicroPlanet with its lower non-profit cost structure.

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MicroPlanet’s objective is to offer MFIs the lowest possible pricing whilst ensuring the quality and continuity of its on-going services, and to be the catalyst that helps to strengthen the MFI’s operational capabilities, enable growth through stronger controls, improve portfolio quality, and strengthen bottom-line impact with higher ROE / ROA.

MicroPlanet’s SaaS solution offers MFIs a robust & scalable MIS software platform, OmniEnterprise from their partner Infrasoft Technologies, that al-lows many MFIs to grow on a single platform, and helps to automate all core business processes of their organization on a single technology backbone, thereby assisting to achieve their business growth at lower investments, en-hance customer reach multi-fold in a secure manner and keep track of the profitability, portfolio-at-risk (PAR) and other operational and financial re-porting. The functional features and the service features of the MicroPlanet offer are indicated in Table 4.

Features of the MicroPlanet’s SaaS solutionTable 4 –

Functional Features

Multi-Currency GL Teller, Savings & deposit

Global Accounting Standards Arrears / delinquency

Multiple language support Underwriting capabilities

Real time Transaction Processing Flexible product definition parameters

Multi-Entity Support Regulatory Compliance

Multi-Channel Interfaces Offline processing

Group & Individual Lending 24 x 7 availability

Service Features

End-of-day (EOd) & Start-of-day (SOd )processing,

Report generation & distribution

Management of daily, weekly backups

24 x 7 Management & Monitoring of Server and Network infrastructure

24 x 7 Application Support

24 x 7 Customer Support desk – with local language support

The offering addresses the need for an offline capability which enables the MFI’s remote branch operations to continue to function in geographical regions that have little or unreliable Internet connectivity.

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MicroPlanet has a set-up a processing hub (data centre services) in the US, and will open others around the globe to service Eastern Europe, NIS countries, Africa and Asia.

Mambu – Creating an Online Microfinance Ecosystem. The Mambu of-fering is a pure SaaS solution: fully online, fully transparent and easy to use and get started with. With the software being built the by the team from scratch, it leverages the best practices of the industry and combines it with the latest technologies to offer a modern, easy to use product at an afford-able price based on the number of clients. Being fully online means Mambu is accessible from anywhere at any time and has been used on PCs with broadband, on laptops with USB modems or even on tablets like the iPad using 3G or GPRS. After an initial download of just over a megabyte, the software runs on even the slowest internet connections, allowing it to be used anywhere – even without hard internet lines. With the spread of over-the-air data connections even throughout Africa, Mambu aims to leverage this market. Providing the software fully online in a modern architecture means Mambu is able to keep costs low for each organization by using a multi-tenanted architecture, roll out releases and new features quickly and seamlessly to all its’ clients (currently at a rate of one new release a month) and take advantages of the latest web design and technologies to create an easy-to-use system with a great user interface to overcome poor staff techni-cal skills.

Mambu offers all the core needs of an MIS for small and medium MFIs such as client and group management, loan and savings portfolio tracking, integrated accounting, user management, various individual and group lend-ing methodologies, integrated reporting, historical analysis, multi-language capabilities and more. More than this, Mambu aims to build an online eco-system: already in partnerships with mobile-money providers like KopoKopo and in talks with well-known industry players like MixMarket, MFTranspar-ency and Kiva, Mambu is positioning itself at the heart of microfinance. This is made possible through a modern web-friendly architecture and a comprehensive set of APIs to connect and bring other players in the micro-finance industry online.

IBM – a SaaS offering in Peru leveraging a third-party core banking ap-plication. IBM understood that typical banking software is not applicable to MFIs since the needs of the sector are not the same. For example, credit risk analysis using quantitative-based measures is not useful for financially excluded people with no credit-history in any database. Moreover, since MFIs use inadaptable systems, their operational costs remain high (Jimenez, 2008b). Therefore IBM is adapting the software to the MFIs. IBM’s offer-ing will allow all kind of applications such as accounting, loan portfolio

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management, customer relationship management, collections and recover-ies, risk management, liquidity management, core banking operations and reporting to organizations (Jimenez, 2008a).

IBM has a huge networking advantage: many potential partners who are already using IBM technology can join in the IBM shared processing hubs. For example, Fortent (now part of Actimize) joined the IBM SaaS Specialty to deliver new anti-money laundering (AML), Know Your Customer (KYC) and fraud systems as cloud services to leading large-and mid-sized financial institutions around the world (Source: 2009, “FORTENT Joins IBM SAAS Speciality Partner Program”. Worldwide Databases, 21 (1), 2-4). As MFIs scale up and use mobile banking technology, they could therefore access such services too. The main challenge to IBM would be to integrate diverse software into an integrated one-shop offering (Ferguson, 2005).

The network of partners in the hub permits interface with payment net-works, remittance networks, credit bureaus, proprietary applications, ATM networks/ switches, mobile devices and national banking networks. The in-frastructure which is shared includes a data centre, storage facilities, firewalls and connectivity (Jimenez, 2008a).

IBM and its network of partners are establishing five regional, shared processing hubs. The services to the MFIs are web-enabled and charged on a per-use basis, allowing both large and small financial institutions to benefit (Jimenez, 2008b). The benefits to MFIs would include open access of AFIs to ATM, remittances and other national and international payment networks and switches, and at the same time opening access of financial products pro-viders, such as insurance companies, to the distribution network of MFIs (Jimenez, 2008b). Each Hub plans to make its offering available to MFIs by selling directly or through independent resellers (Jimenez, 2008a). Since we first started this case study, we note that IBM is working more with others such as Grameen Foundation to start the Mifos open-source software.

FINO – From off-the-shelf to SaaS. FINO was created by multiple banks and institutions to facilitate the growth of the Microfinance market. To-wards this end, FINO had evaluated, chosen and developed software for the back-end using existing robust proven systems allowing group lending, flexibility in repayment schedule generation, flat Interest rate calculations and reporting as per statutory and stakeholder requirements. Based on its experience, it identified the two key challenges of the Microfinance sector, namely, connectivity in remote geographical areas and the low IT skill set of manpower at branch level. Their SaaS solution, SaaS Core Banking Solu-tion (CBS), keeps this in mind and is capable of dove-tailing into various front-end channels like cards, mobile payments and ATMs, depending on the business architecture.

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The Fino SaaS offering allows three back office applications: core bank-ing, customer relationship management and data analysis. It allows interfac-es with mobile devices, remittance and payment networks, credit bureaus, ATM networks and front office devices. Its infrastructure management pro-vides data centres, storage, performance management, security firewalls, connectivity and redundancy. In many ways, the FINO offering is similar to IBM’s.

Many front office applications are also possible such as interactions with cards, biometric devices, point of sale devices and receipt printing. Thus, if these devices work in online/offline modes, the limited connectivity prob-lem can be overcome if the input or output devices can store the informa-tion for later updating. Many other business applications can be added on, including business planning, regulatory functions such as due diligence, and relationships with entities. While Fino deals with microfinance through self-help groups, this is done for banks, and not for Microfinance Institutions.

MOSTFIT – focusing on the needs of medium MFIs. MOSTFIT has come out with its SaaS offering at the end of 2009, offering a limited pack-age of loan portfolio management, customer relationship management and accounting. It incorporates individual as well as group or village lending. The software is available in English, with multi-lingual capabilities baked in. The software is targeted towards medium sized Microfinance NGOs and Non-Bank financial companies with 5000 to 25000 customers. For big-ger MFIs, it is recommended to run MOSTFIT on a dedicated platform to deal with the heavy volumes. MOSTFIT is being offered in a SaaS model, with a usage charge of Rs. 5 per client per year. So far, one MFI is using the product.

MOSTFIT claims that it is the only open source SaaS where they en-joy development through community while still presenting a viable business model for anyone who wishes to provide these services. Their development team has created a code base which actually does a lot in about 7000 lines of code. Setting it up, customising it and testing it is very simple. Not only is the source code free, Intellecap also offers an unprecedented transparency in the development process with access to the commit logs and the results of the integration and functional tests. In addition, Intellecap will soon be taking active steps to create a vibrant developer community. Once in mo-tion, this program will hopefully lead to thousands of eager eyes hunting for bugs in the software as well as creating test suites to test every possible behaviour of the system. This will, for the first time, allow clients to have confidence that reports and other information they get from the system are 100% correct.

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MOSTFIT is the only MFI MIS that is written by developers sitting in the same company and the same office as microfinance professionals. They have unlimited access to the Microfinance knowledge within Intellecap. Since Intellecap’s interests are aligned to the efficiency of the microfinance sector as a whole, the emphasis is not just on providing individual solutions to MFIs. Rather, they seek to build an open infrastructure for the industry which will benefit everyone.

MOSTFIT is built for extensibility since the only constant is change. To enable this, the software is written in ruby. The software has successfully added mobile integration. MOSTFIT is also extremely modular, allowing a developer to add and remove functionality at will. It also provides a full web-services architecture and so interoperates with all kinds of other prod-ucts such as tally accounting software, core banking systems, and mobile phones.

MFiFlex. MFiFlex is a cloud based low cost and feature rich IT solution for Microfinance Institutes to help them scale and operate efficiently. It provides a complete SaaS business architecture to an MFI as opposed to traditional services that merely provide hosting. It is a complete SaaS solu-tion that includes services, products, technology and tools to build and scale MFI’s business. MFiFlex’s early design decisions were driven by on some of the most compelling problems MFIs experience. They identified and built MFiFlex around following four major requirements that an MFI looks for in a MIS solution:

1. Cheap software and (cheap) quality support

2. Reliable MIS with integrated financial accounting that gives real time picture of financial and operational health of the organization

3. Easily customizable given the high degree of change this industry ex-periences

4. Ability to reduce transaction cost, errors and frauds using better tech-nology

To overcome concerns on security issue, MFiFlex explains to customers that they use Salesforce.com’s cloud platform and its Force.com platform as a service.

MFiFlex’s release management process maintains a balance required by allowing all to benefit from updates and local requirements (Indian MFIs may not have the same requirement as African MFIs). As a result, MFiFlex is designed in a way that allows the core-banking application to be installed in a workspace at client side and they can make local changes which are not shared across all customers. If they feel that the “local” changes can

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benefit other customers too, then they update the main branch, and push the changes online to all other customers. Of course, before any changes are made, they are first tested in a sandbox (mirror site approach).

MFiFlex is transparent in its pricing, although they are still experimenting with it. The current pricing (April 30, 2012) available on the website is:

$1.0 per client per year for MFI with number of clients between • 0 – 7500

$0.90 per client per year for MFI with number of clients between • 7500 – 25,000

$0.85 per client per year for MFI with number of clients between • 25,000 – 50,000

$0.75 per client per year for MFI with number of clients > 50,000•

Discussion on Strategic Aspects

The adoption of ASP based solutions (Fortune and Aldrich, 2003) requires it to be a viewed as a major innovation leading to lower costs. Such innova-tions should be targeted to younger CEOs who tend to adopt more techno-logically innovative products such as ASPs. For rapid adoption, the ASP should offer possibilities of customer training; availability of online trials; and actions to raise awareness.

For the larger MFIs, operating across multiple geographies, the key is us-ing a standardized MIS software, but they should also consider going one step further. They should create a Regional IT hub with a Regional IT team, and outsource the hosting of the infrastructure that pertains to the MIS soft-ware to a third party hosting provider. The Regional IT team would manage and support the MIS software. Such an approach can derive further benefits and would allow MFIs further economies of scale. It would reduce the com-plexity of IT at the affiliate / partner level. It would minimize the expense on maintaining extensive IT infrastructure at our own location. It would elimi-nate the need for each MFI in the network to test bugs and new software releases. It would strengthen knowledge sharing across the region. It would increase opportunities for pricing discounts from vendors. Finally, regional coordination would enable sharing of IT staffing costs, which in turn offers opportunity to lower IT costs at the affiliate / partner level and can further lower their operating costs.

As a case in point, a large network MFI implemented this strategy (main-taining one legacy software and transitioning over time to a new standardized MIS software) in Africa, Eurasia, and in Latin America which generated immediate benefits in improved management of the legacy MIS software,

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service, knowledge sharing of information, sharing of training and training material, and having the comfort of knowing that there is a team of dedicat-ed resources supporting them 24*7, and having access to these experienced resources at lower cost (with cost being proportionately allocated amongst those in the region).

All other MFIs, must give serious consideration to the adoption of a SaaS service offering that enables them to leverage the use of robust, scalable MIS software which allows them to reduce their operating costs. At the same time, it reduces worry about how they will manage and support such com-plex technologies locally themselves. Finally, it allows the MFI to focus on growing their business without having to worry about technology, and have the benefit of lowering their operating cost through the use of technology and automation.

The benefits from SaaS come from sharing costs. SaaS providers need to look at apex networks and market the SaaS to the entire network for a country. Even if a number of MFIs within the network adopt the SaaS, the pricing would come down and help the SaaS operator to break even. Till then, the risk of disappearance of SaaS operators for a niche segment like Microfinance remains high. Thus, although the SaaS is a technology based service, implementing it may require social innovation (or a change in social architecture) within the microfinance industry as well as within the Micro-finance firm. There is therefore a role for would-be SaaS operators to engage in institutional work (as defined by Lawrence et al., 2009).

CONCLUSION

This paper has approached MIS in general and SaaS in particular as a means of reducing transaction costs in microfinance through the sharing of infra-structure by a number of MFIs.

We have outlined the importance of MIS for reducing interest costs for the poor as well as increasing efficiency and permitting microfinance field agents to upscale by concentrating on their core business of advising existing borrowers and searching new borrowers. The SaaS solution is in continuity of this trend to use MIS and to reduce costs further by allowing MFIs to share software costs, reduce adverse selection, focus on core business and processes and innovate faster. At the same time, offering SaaS imposes a number of risks to end-users, risks that the MFI should be aware of in choosing its SaaS vendor. These risks include security and privacy issues, infrastructure issues, regulatory issues and the risk that the SaaS operator disappears if he is not successful.

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In this new undefined market, we can see that a number of players are now offering SaaS and trying to establish the rules of the game. Each of the cases we reviewed is playing on a different strength. The SaaS offer-ing from MicroPlanet Technologies (MP) is specifically targeted at the MFI sector knowing the vagaries of their operating environments, coupled with excellent support and service from a team with over ten (10) years’ experi-ence supporting MFIs around the globe with microfinance / banking related technologies. Mambu is committed to the full benefits of creating an online ecosystem with an MIS at the heart and have designed their software from the ground up to support this unique environment and its technical chal-lenges. IBM is leveraging their high technology multiple application global strength. FINO is leveraging the experience of the banks and their knowl-edge of the microfinance market. Intellecap’s MOSTFIT is leveraging their in depth knowledge of poverty and development issues, including microfi-nance. The market promises to be competitive and interesting to observe.

MFIs are beginning to adopt SaaS, and as this trend takes hold, future research could look at the same issues by looking at the advantages and inconveniencies of SAAS perceived by MFIs which adopted these tech-nologies. It would then be more appropriate to investigate cases of MFIS which adopted SAAS, to see to what extent this induced transaction cost minimization and improvement in risk management and portfolio quality. It would also be interesting to analyze how organizational architecture of the MFI may influence and be influenced by the introduction of SaaS.

A second area of research could be in developing optimization models to limit agency costs such as hold-ups inherent in co-creation models. The in-terests of the MFIs, the SaaS provider and the software manufacturers have to be aligned not only for profit maximization at a point it time, but as a dynamic strategy of continuous improvement. These profits would also need to be shared with other actors participating in the co-creation of the SaaS experience such as data centers and telecommunication providers. The idea would be to look at possible contracts and incentives to maximize gains for all and distribute these gains in a manner allowing innovation.

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Documents

Software as a service: An opportunity for disruptive innovation in the microfinance software market?