It pays to use prepaid cards to deliver services to MFI clients: study

There is good scope for the use of prepaid cards for delivery of value-added financial services to the clients of micro-finance institutions (MFIs), says a new study.

Funded by the Institute for Money, Technology and Financial Inclusion (IMTFI), University of California, Irvine, the study was conducted by Debashis Acharya, a professor in the School of Economics, University of Hyderabad, and Tapas Kumar Parida, an economist with State Bank of India.

It focussed on assessing the feasibility of prepaid card technology by examining the use of prepaid cards by Bajaj Allianz Life Insurance Company to pay micro-insurance claim settlements for the clients of Utkarsh Micro Finance in select regions of Uttar Pradesh.

“On the supply side, this innovation by Bajaj Allianz Insurance India, M2P Solutions and Utkarsh Micro Finance has been successful in including those excluded earlier due to lack of access to formal banking,” Acharya, Principal Investigator, told BusinessLine here on Monday.

The study showed that cards had facilitated smooth settlement of insurance claims for micro-finance clients while meeting the regulatory requirements. There are some suggestions, too. “Some factors, such as access, anxiety, perception of risk protection, and image in the society/community, are important in designing such innovative products,” he said.

The financial literacy level among micro-finance borrowers was “high” for the study. “The financial literacy efforts made by the MFI has been enhanced by this pre-paid card innovation. There is enough potential for scaling up this innovation in the micro-finance sector in India at present,” he added.

The study assumes relevance as technology is often cited as one of the greatest challenges faced by MFIs in India. Most of the MFIs use their management information system (MIS) for internal management but not in customer dealings/transactions.

One can see many similarities between credit cards used by middle- and upper-income individuals and micro-credit services delivered to the poor. Some of the common characteristics include unsecured credit for unspecified purposes, small transactions, and pre-defined credit limits.

Other salient features of credit cards that many micro-finance clients would like their providers to duplicate include on-demand borrowing, repayment flexibility within pre-defined guidelines and some added services like micro insurance.

“Hence, prepaid card-based services for micro-finance customers can prove to be a good alternative to cash transactions or even mobile-based transactions,” Acharya said.

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