MICROFINANCE 1

FINANCIAL RESEARCH

MICROPAYMENTS AND MICROFINANCE

TABLE OF CONTENTS
INTRODUCTION..................................................................................1
MICROFINANCE..................................................................................1
MICROPAYMENTS..............................................................................3
IMPACT OF MICROPAYMENTS AND MICROFINANCE ON
PEER TO PEER LENDING INDUSTRY............................................3
BENEFITS OF MICROPAYMENTS AND MICROFINANCE........5
CROWD FUNDING...............................................................................7
APPENDIX..............................................................................................9
REFRENCES........................................................................................11

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INTRODUCTION
Microfinance is a broad term which is related to the low income clients. New techniques
are being developed under this broad term to deliver financial services that are especially
developed for low income clients specifically for women. Low income clients have no long
access to these services; therefore, these services are especially created for these low income
clients. There are also many actors and institutions in different countries of the world such as the
microfinance institutions (MFIs) and other government officials along with the international
development agencies who are focusing to mitigate the risks related to the financial systems of
the world. However, the interests of all of these groups also vary considerably. Microfinance is a
broad term and included within it is microcredit which is simply the provision of credit to low
income clients. This paper focuses on the role of micropayments and microfinance in the lending
industry with respect to low income clients. The second focus of this paper is on crowd funding
and its relation with peer to peer financing.

MICROFINANCE
Small businesses need capital and money to grow their businesses but they lack the
necessary resources to access the banking services and other types of services related to the
banks. Therefore, microfinance is basically a source for these small businesses to avail the
financial services which otherwise are not possible for them to achieve. The microfinance serves
to be the source of the financial services for these low income clients in two ways. The small low
income clients can avail these services by forming group based models. Under the group based
models many entrepreneurs or low income clients form a larger group and then they apply for a

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loan together. In this way these acquire all the financial services. The other way is that they apply
for these services through relationship based banking for small businesses and individual
entrepreneurs.

The concept of microfinance in some of the countries states that it relates to the provision
of financial services to low income employees. This concept is more common in South Africa
and this is also very much similar to retail finance models that are prevailing in mainstream
banking. Apart from this concept, microfinance in some countries is defined as a separate world
which is related to not only the provision of financial services to low income clients, but this also
means the permanent access of near-poor households to appropriate and a vast variety of
financial services and other such services which include funds transfer, insurance and savings.
Most of the people also have the belief that such efforts will help the poor people to come out of
poverty. The emergence of microfinance has also led to the development of the economy and it
proves to be a strong support for the small businesses and the entrepreneurs. Refer to the figure
in Appendix 1.

MICROPAYMENTS
Micropayment is defined as a very small transaction that usually occurs online and this is
for a very small sum of money. This is basically a financial transaction. There are also different
meanings of micropayments with respect to Visa, Paypal and other practical systems. For
instance, Visa defines a micropayment as that transaction that are under the limit of 20 US

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FINANCIAL RESEARCH
dollars. On the other hand Paypal defines a micropayment transaction as that one which is under
the limit of 12 us dollars. In this way the costs of the individual transactions is reduced.

Micropayments can only be made through a special type of system which are too small
and that are not processed through the credit card companies. Micropayments have long emerged
in the e-commerce area. The micropayments concept has replaced other subscription models that
normally demand huge upfront payments. Therefore, the usage of micropayments concept is
gaining popularity. To make this system more successful it is essential for these schemes to be
more secure, easy to use and reliable. Due to the difficulties that are encountered in
authenticating bank accounts, downloading software and the constant monitoring of all the
charges, the implementation of these micropayment schemes seems to be more easy and
beneficial.

IMPACT OF MICROPAYMENTS AND MICROFINANCE ON PEER

TO PEER LENDING INDUSTRY
Studies have shown that the concepts of micropayments and the provision of the financial
services to the poor under the term of microfinance helps the poor people to meet their basic
needs and also overcome the risks they are facing. It mitigates the exposure of these risks for
these people. When the low income clients use these services, it leads towars the improvements
in the economy, the betterment of the economic welfare, the growth of the enterprises and the
stability of the enterprise is also achieved. Specifically related to the women, the concept of
microfinance and the services that are being provided under this umbrella term all help to
enhance the participation of the women in the economic development of their country. The

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concept of microfinance also empowers the women. Poor people can then have the access to the
financial services and they are better able to cope and are also resilient to face the crises that
arise every day. This helps the poor people in the better smooth consumption and they also dont
have to sell the assets to meet the basic needs of their daily lives. This improves the economic
welfare of the society.

This all has impacted the peer to peer lending industry, for example, if we talk about the cheap
online digital cryptographic currencies and under that if we take example of Bitcoin, so it can be
seen that Bitcoin has gained a new ground as a form of currency in the year 2014. Also the time
is not far away when the todays services will take the advantage of this new concept which will
create benefits that could be offered by money transmissions, lending and ATM machines.

In the initial years when the online lending industry began in 1990s most of the
consumers felt uncomfortable to provide the details related to their personal information or the
banking information on the online websites. Along with this the banking industry has also grown
rapidly on the areas of business, personal and auto loans including the mortgages also. Now, the
internet users feel more comfortable and secure to provide their personal information when they
are filling the online application forms or any other banking details. However, now in as the
Bitcoin and other such cryptographic products are gaining popularity, therefore, there is going to
be a demand created in the future regarding the online Bitcoin lending services. For instance, if
the digital currencies will be accepted by the car dealerships than the auto lending services will
be needed and their demand will also increase.

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In 2013, Tesla and Lamborghini were completely paid in Bitcoin. The reason for this is
because the use of Bitcoins reduces the costs of spending the money on large purchases. Apart
from this, it also makes it unimportant to use credit cards or wire transfers to makes purchases of
this type. The online lending for Bitcoin is now widely being used and has impacted positively
on the peer to peer lending industry. The advantages of this include cheaper money transfers, an
undeniable public transfer of the transactions, automated payments and crowdfunding. If Bitcoin
is applicable and widely incorporated than any type of loan that is common or uncommon would
be applicable in Bitcoin such as mortgages, cash advances and the personal loans. This is the
advancement in the digital currency lending market. And it is primed for the adoption by the
whole world. However, if we look at the Bitcoin market right now than we can see that the
Bitcoin loans are spread everywhere throughout the internet. This industry is not so big and it is
in the period of infancy. The industry will need a lot of time to grow.

BENEFITS OF MICROPAYMENTS AND MICROFINANCE

Microfinance institutions have raised the flag of business productivity over the last
couple of decades. This has now vast implications for entrepreneurship, investment and also debt
financing. Also, electronic payments not only make the lives of people easy but it is also related
to the productivity. People can make the productive use fo their time through electronic
payments. The concept of microfinance has helped the individuals that belong to the low class
income segment, to grow and avail all the financial services that could be only be availed by the
high income group clients. Some of the specific benefits related to micropayments and
microfinance are stated below:

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Businesses can grow through lower investments.
Customers feel more secure and it enhances them.
It provides the customers living in different geographical regions with real time
information.
Microfinance targets women borrowers because they default less, this gives
empowerment to women.
Those families that receive microfinance will not force their children to leave their
schools.
Micro financing also impacts on health care and better sanitation by improved access to
clean water.
It helps to create new employment opportunities which have a very positive impact on the
economic development.
If the people act under group, then the group is able to pay for someones unemployment,
illness and other such issues.
Micro financing gives the clients enough capital to initiate their plans and then generate
revenues.

CROWD FUNDING
This is a method of raising finance over the internet by asking for small amounts of
money from large number of people. This money is then used to fund ventures or any projects.
Crowd funding has introduced the new idea of talking to thousands of people to raise the funds.
First of all the profile of the project is set up on the websites and the members of the project then
use the social media and other networks to raise the money from their families, friends and
acquaintances. The concept of crowd funding is supported by three classes. First there are the
initiators of the project, second there are the individuals that support the idea proposed by the

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project initiators and the third is the platform that brings the idea in the light to the interested
parties.

Over the passage of time, crowdfunding is impacting significantly on the peer to peer
lending industry. Crowdfunding is gaining popularity in the modern era. However, still the
advantages of the true peer to peer financing can never be neglected. The banking industry offers
a place where the people can meet, there is a peer to peer connection. Peer to peer financiers
offer more services than crowdfunding. They check the credit ratings of the customers and screen
out the un-creditworthy customers that have defaulted previously. Also, there is an unpredictable
significant impact on the quantity of the money that is in the circulation. Banks have the power
to create money by taking deposits. However, this power does not exist in the crowdfunding
market. Looking at all of these factors it could be seen that crowdfunding is not a suitable
alternative to peer to peer financing. Peer to peer financing offers its consumers full security and
conducts all the transactions on a peer to peer basis.

If we compare the peer to peer lending with the crowd funding concept, than it can be
seen that crowd funding is no doubt a larger implementation of peer to peer lending. However,
with regard to the success, the peer to peer lending is also threatened by crowd funding. The
reasons are because crowd funding also offers more control and transparency than the traditional
banks. This is because crowd funding takes this all to a new level.

On one hand if we look at the concept of crowd funding and the peer to peer financing of
the bank, it is clear that both the things overlap each other. Both are a form of raising finance for
projects or ventures. The loan raised will have to be paid back in both the cases. However, there

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are certain things that differentiate crowd funding from the traditional peer to peer financing of
the banks. Crowd funding is more flexible for of bank financing as compared to traditional peer
to peer bank lending. However, still crowd funding has not replaced the bank peer to peer
financing completely. Banks have been a source to acquire loans for businesses since the
beginning and now after the financial collapse in 2008, the banks have started to charge much
higher rates of interests on their loans. These risks have increased and financial institutions want
to have more control over the money that they lend. Although, the concept of both overlaps, but
they are different methods to acquire financing.

If we compare the savings of low income and high income persons made through the
digital currencies such as the bitcoins and on the other hand, if the same person makes the
savings using the traditional financing systems, then there would be a clear difference in that the
digital currency would be more flexible and easy to handle the savings. While on the other hand,
under the traditional financing system there would be more rigid rules and the savings would
yield a fixed rate of return. If we compare both the systems then, the digital currency method
seems to be more beneficial for the low income clients and the traditional financing system
seems to be more beneficial for the high income clients.

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APPENDIX

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REFRENCES
1. http://careers2030.cst.org/jobs/digital-currency-advisor/

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2. http://www.dummies.com/how-to/content/crowdfund-investing-versus-traditional-bankloans.html
3. http://www.forbes.com/sites/freddiedawson/2014/07/31/the-future-of-crowd-fundingwhere-to-from-here/
4. http://www.forbes.com/sites/tanyaprive/2012/11/27/what-is-crowdfunding-and-how5.
6.
7.
8.

does-it-benefit-the-economy/
https://www.dandb.com/smallbusiness/the-benefits-of-microfinance-loans/
http://benefitof.net/benefits-of-microfinance/
https://sites.google.com/site/cs73nmicrocredit/what-is-micro-credit/---of-microfinance
http://blogs.worldbank.org/allaboutfinance/microcredit-microsavings-but-what-aboutmicropayments