Understanding Agent Banking Paper€¦ · 1Swiss Contact (blog) “Sarathi and Bank Asia Launch First RMG Digital Banking Booth” ( 2 Video interview conducted by the author with

FOREWORD

It ismyhonourtopresentthisCEFIpaperonUnderstandingAgentBankingStrategyastheExecutive Director of Centre for Excellence in Financial Inclusion (CEFI). The centre isimplementing the Papua New Guinea Financial Inclusion Strategies (NFIS) since 2014 and iscurrentlyexpandingthesecond(NFIS)2016-2020toprogresstowardfinancialinclusivityandbestpracticestocreateeconomicopportunityforall,wherecitizenscanaccess,use,andbenefitfromthehigh-quality,affordablefinancialservicestheyneedtobuildbetterlives.

CEFIisproudtobeaninnovative,member-drivenorganizationthatcoordinatesseventechnicalworkinggroupscomprisingofgovernment,regulators,industrybodies,developmentpartners,financial serviceproviders, financial infrastructures, andconsumers.Collectively, the industrysupports the improvement and uptake of formal financial services, products and moneymanagementskillsforcitizensandbusinessesinthecountry.

CEFI is increasingly placing emphasis on measuring attributable outcomes of the financialinclusion dimensions of access, usage and quality, the centre facilitates contribution to thecountry’sfinancialinclusionindustrypeerlearninginitiatives,aswellaswellasstrengtheningmembers’abilitytopursueandimplementreformsinPapuaNewGuinea.

Thisreportpresentsasnapshotofthedevelopinganagentbankingstrategy,itsapplicationinPapuaNewGuineaandalignmenttostrategiesonfinancialinclusion.Itprovidesapproachestooptimisevolumeandothervaluabledriverstobuildagentnetworkthatisviableandprofitable.

Todate,CEFIaccounts250bankingagentsacrossPapuaNewGuinea,withfurtheropportunitiesyet to be maximised. Through an expanded network of Sub Branches, Agents and PaymentProcessors, and in collaboration with local communities, CEFI is confident a suitable agentbanking will deliver the best banking services for a range of diverse customers - close tocustomers'homesinruralareas.

Thepaperprovides invaluable insight into the evolutionof agentbankingproducts, technicaldesign to test the eco-system, andpreparatorywork to allow customers accessibility to theiraccountsindistrictsandward-councillocalities.

IwishtoacknowledgetheBankofPapuaNewGuinea,CEFITechnicalworkinggroups,thedevelopmentpartners,partnerfinancialintuitionsandDavidCracknellfromFirstPrinciplesConsultingforcollatinganddraftingthisimportantdocument.

[email protected]

SaliyaJRanasinghe,

CEFIExecutiveDirector

UnderstandingAgentBankingStrategy

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ContentsAcronyms...........................................................................................................................................5

UnderstandingAgentBankingStrategy.................................................................................................6

ExpectationsofAgentBanking...........................................................................................................6WhereistheMoneyMadeinAgentBanking?...................................................................................7BuildAgentBankingAroundYourBusinessModeld..........................................................................8VolumeDrivers-IncreasingTransactions..........................................................................................9ValueDrivers–BeyondTransactions.................................................................................................9MNOsAddValuetoAgentBanking..................................................................................................11BuildingtheAgentNetwork.............................................................................................................11Evolution–Drivingvalueandvolumeovertime.............................................................................12RuralFinanceandAgentBanking.....................................................................................................13

Rethinkingruralbranchinfrastructure.........................................................................................15

BuildingaFinancialModel...............................................................................................................15Settingassumptions.....................................................................................................................15

Understandingtheindirectbenefitsofagentbanking................................................................16

AgentBankinginDigitalTransformation.........................................................................................17Conclusions......................................................................................................................................18References........................................................................................................................................20


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AcronymsATM: AutomatedTellerMachineB2P: BusinesstoPersonCICO: CashinCashOutKYC: KnowYourCustomerMNO: MobileNetworkOperatorOTC: OvertheCounterP2P: PersontoPersonPOS: PointofSaleDeviceRMG: ReadyMadeGarmentsUNCDF:UnitedNationsCapitalDevelopment

Appreciations:TheauthorwouldliketothanktheUNCDFMM4Pprogrammethatfundedsomeoftheassignments conducted, and the team atMicroSave and themany retail bankerswithwhom theauthorworkedandlearnedwith.


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UnderstandingAgentBankingStrategyManycountrieshaveintroducedagentbanking.Alongsidemobilemoney,agentbankinghasbeenakey factor in driving up levels of financial inclusionbybringing affordable and accessible financialservicesclosertocustomers.However,progresshasbeenfarfromuniform–areasonwaslimitedunderstandingofthestrategiclimitationsofmobilemoneyimplementedbybanks,andthestrategicdimensionsoffullagentbanking.Incasesfailuretodeliverontheexpectationsofmobilemoney,hasdelayedorderailedlatereffortstoimplementagentbanking.

Thispapersetsoutkeyaspectstoconsiderindevelopinganagentbankingstrategy.Itexploreshowexpectationsforagentbankingareset,andhowthestrategyforagentbankingmustalignwiththefinancial institutions’ own strategy. It details how financial institutions makes money from agentbankingbyconsideringvolumeandvaluedriversalongsidearangeofstrategiestobuildtheagentnetwork.Afteragentbankingislaunched,itmustcontinuetoevolvethroughnewproducts,strategicpartnershipsandsupportingnewusecases.Whilst ruralareasareespecially challenging foragentbankingmanylocationscansuccessfullyreachedthroughcarefuldesignandimplementation.

Once the initial strategy has been prepared financial projectionsmust be created to present thepotential direct and indirect financial impacts of agent banking. The study outlines the desirablecharacteristicsofagentbankingfinancialmodels,includingsensitivityanalysis,scenarioanalysis,andnewproducts.Theindirectbenefitsofagentbankingareexplored.Lastly,thecontextofagentbankingaspartofdigitaltransformationisgiven.

ExpectationsofAgentBankingThe first challenge for any agent banking strategy is establish realistic expectations. Realisticexpectationsarenotbasedonthe ‘hype’ofproponents,orthenarrowcaseofagentbankingasachannel–alowcostchannelcannotbeexpectedtoderivehugeprofitsthroughchannelfees.Realisticexpectationsarebestbuiltbyconsideringtheimpactthatagentbankingcanhaveonthecorebusinessofthebank,andcriticallyonthebankingbehaviourofitscustomers.Thisdeterminationisfarfromeasy.Itrequiresadeepunderstandingofexistingcustomersandhowagentbankingcanbeusefulforthem. It requires a willingness to extend into new business opportunities that agent bankingfacilitates.Itfacilitates,inpart,atransitionofthecustomerbasetowardsdigitalbanking.

Expectationsofagentbankingcanbebuiltaroundthreerealisations:

Thefirstrealisationisthatagentbankingisbuiltonbehaviourchange.Agentbankingasachannelwillimpactonourcustomers’behaviour.Itchangeshowgroupsofcustomersinteractwiththebank.

Thesecondrealisationisthatmostbenefitsderivedfromagentbankingare‘indirect’–intermsofeaseofcustomeracquisition,depositmobilisation,digitalproductfacilitation,andtransitioningthecustomerbasetowardsretailbanking.

Thethirdrealisationisthatthetraditionaldemarcationsof‘retail’and‘corporate’bankingbecomelessclearoncethepotentialofagentbankingisrealised.Thisisbecauseoftheabilityofagentbankingtohandlethe‘retail’requirementsof‘corporate’customershelpingcorporateclientsmanagecashintheirbusinessesandthroughoutcorporatevaluechains.


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WhereistheMoneyMadeinAgentBanking?Transactions:Agentbankingprovidesalow-costchannelforfinancialservices.Asalow-costchannel,itprovidesrelativelylowcost,butvaluedservices.Ofitself,basedontransactionincomealone,itisunlikelytoreturnaprofit,butthenneither,inthecontextofthebank,isthechannellikelytocosthugeamountsofmoney.Outsidethesystems,aheadofficeagencyteamandagencyofficers,agentsarepaidonacommissionbasis,andinmanyagentbankingimplementationstheyevensharethecostofPointofSale(POS)devicesorphones.Thisisnotanunusualscenarioforbankchannels,afterall,ATMsasachannel,oftenhandletoofewtransactionstoreturnaprofit,butneverthelessareofferedasanimportantchannelduetocustomerexpectationsandtheneedtoprovideacompetitiveservice.

However,whilsttransactionsareunlikelytomakeagentbankingprofitableonitsownforafinancialinstitution,astrongstreamoftransactionsisimportantforagents,ascommissionsfromtransactionsaretheirprincipleincomestream.

CICOasaService:Agentbankingcanprovidecashmanagementasaservice.CICOservicescanbeimportantparticularly in the retail sector, fordistributors, for fast-moving consumergoods,or forpayrolls. An example of this are the services that Bank Asia in Bangladesh provides to garmentmanufacturers,thebankprocessesworkerspayrollwiththeworkerswithdrawingcashfromagentsplacedinandaroundthefactory1.Similarly,agentsaroundtheworldareusedtoprovideCICOservicesforgovernmenttransfers,forrefugeesandforsubsidies.

DepositMobilisation:Making it easier andmore convenient for customers to depositmoney cansignificantlyincreasedepositmobilisation.In2018,ninemonthsafterCentenaryBankhadlauncheditsagentbankinginUganda–whenitwasstillinrollout,thebankwasabletoretire75%ofitsfixeddepositsandreplacethesewithlowcostfundsacquiredthroughtheagentchannel2.ThisisdespiteCentenaryBankhavingoneofthelargestbranchnetworksinUganda.Itisimportanttorecognisethisincreaseindepositsasabenefitofthechannelthroughapplyingtransferpricing.

Agent assisted services: In some markets, either due to the nature of the market, or regulatoryrequirements,orpricingdisincentivesagentassistedservicesareimportant.InPakistan,manymobilemoneyagenttransactionsaredrivenbyagents3-whoprovideoverthecounter(OTC)servicestoassistcustomers.InUgandaagentassistedmobilemoneytransactionsarecommon,driveninpartbypriceincentiveswhichdiscourage ‘OnUs’ transactions.Thepointhere– is inmarketswherecustomersrequiremore assistance, then designing for agent assisted services is important to keep revenuewithinthechannelandtomaintainqualityofservices.

Lowcostexpansion:Givenasupportivestrategyonaccountopeningandproductdiversification,andanappropriateregulatoryenvironment-agentbankingcanprovideawaytoonboardlargenumbersofnewcustomers. InUgandaagentsarenotallowedtocompleteonboardingthemselves,this isabankactivity,buttheyperformmostoftheaccountopeningprocess. In2018duringthefirstninemonths of agent banking operations, Centenary Bank was able to open 400,000 new accounts(throughbranchesandagents)–itshighestnumberofannualaccountopeningsinitshistory.Toputthisachievement inperspective in2017 itwasestimatedthattherewere5millionbankaccounts,

1SwissContact(blog)“SarathiandBankAsiaLaunchFirstRMGDigitalBankingBooth”(https://bit.ly/3fSbTDA)2VideointerviewconductedbytheauthorwiththeHeadofChannelsatCentenaryBank.3Karandaz(blog)“MobileMoneyandtheOTCDilemma”(https://bit.ly/3eBauB7)


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across24banksinUganda–accountingforperhaps2millionuniqueindividuals.4InthecaseofStanbicBankUganda5afteropeningagentbankingthebankwasabletoresizesomeof itsruralbranches,reducingitscosts,butnotitsfootprint.

Defensive positioning: In some markets, its important to operate agent banking as a defensiveposition,toensurethatcustomersarenotlosttootherfinancialinstitutions.Inthiscase,thisisoftensmallerfinancialinstitutions,joiningnetworksofpre-existingagentsprovidingagreaterrevenuesharetothoseagents.Muchasinearliertimes,smallerbankswouldjoinATMnetworksonlyhavingafewATMsoftheirown.

Digitaltransformation:Acompellingrationaleforagentbankingistheongoingandpervasivedigitaltransformationoffinancialservices.Throughdigitalfinancialservicesbankcustomersareprovidedanincreasingrangeofservicesandusecases.However,forthemtousetheseservices,manycustomers,especiallythoseintheinformalsectorneedmechanismstocash-inandcashout.

Information: Information drives digital transformation in financial services. Capturing transactionflows enablesmore reliable data analytics, better decisionmaking and hence lower losses. Agentbankingfacilitatesdatacapturebyonboardingcashintothedigitalecosystem.

BuildAgentBankingAroundYourBusinessModelEachfinancialinstitutionhasacorecustomerbase,andabusinessmodeldirectedatmeetingtheirneeds.Howagentbankingisimplementedinabankshouldreflectthatbase,evenifitisanticipatedtochangeovertime.

StanbicBankUganda6,7istheUgandansubsidiaryofStandardBankofSouthAfrica.WhenStandardBankacquiredthebusinessofUgandaCommercialBank,thepurchaseagreementstipulatedthatthenewbankwouldberequiredtomaintainitsbranchnetwork.Thismandatedalarge,retailpresenceacrossthecountry.However,StandardBank’sbusinessmodel,outsideSouthAfricawasfocusedoncommercial banking. InUganda Stanbic’s rural brancheswere expensive to run and returned lowmargins.Somethinghadtochange.

StanbicBankUgandaexploredagentbanking. It lookedtotheneedsof itscorporatecustomerstoanswer the question “How can agent banking support the business needs of our corporatecustomers?”. A number of use cases were identified including, payroll management, cashmanagement,anddigitisationofvaluechains.

CentenaryBank8,9 inUgandawaspositioneddifferentlytoStanbicBank,whilstithadacommercialbankingdivision,itscorefocuswasonmassretailbanking.Its largebranchnetworkwasbusy,andduringpeakperiods,branchesandATMscouldbeoverwhelmed.Customerswereaccustomedtooverthecountertransactionsandthepersonalsupportprovidedbythebank.However,branchcongestion4FSD-Uganda(blog)“Quick!Let’sTripletheNumberofBankAccountsinUganda”https://bit.ly/3fSgG82-withauthorsestimateonuniqueindividuals.5BasedonvideoandpersonalinterviewsbytheauthorwiththeHeadofChannels6BasedonvideoandpersonalinterviewsbytheauthorwiththeHeadofChannels7CirprianPanturu(2019),“IntroducingAgencyBankinginUganda:ANewChanneltoIncreaseFinancialInclusion8Basedonvideoandpersonalinterviewswiththeauthor9CentenaryBank(presentation)“AgentBankingasaDigitalOfferbyCentenaryBanktoMeetCustomerNeedsinUganda”(https://bit.ly/31kMoXs)


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hadbecomeaconstrainttobusinessgrowth.Growingbusinesseithermeantopeningmorebranchesor finding ways to decongest the branch network. Within 9 months of opening agent banking,CentenaryBankhadreducedcongestioninbranchesby15-20%.

VolumeDrivers-IncreasingTransactionsAgentbankingworksbestatvolume,whereagentscanbeassuredof15-20transactionsperday,evenif takes time to build to this level. However, its also important that the bank generates valuablebusinessthroughitsagentnetworkorreduceoperationalcosts.Agentbankingrequiresbothvolumedriversandvaluedrivers.However,thesedriversareoftenpoorlyunderstood.

WhenM-PesarolledoutitsmobilemoneyservicesinKenyasosuccessfully,itsservicemenuanditschannelbuildwereinitiallyseenasarolemodelforimplementationselsewhere.Vodafone/VodacomopenedoperationsinTanzania,Pakistan,andAfghanistan.However,itwassoonseenthattheheavyemphasisonpersontoperson,urbantoruraltransactionswasnotthesamesuccessfulvolumedriveroutsideKenya.

The importance here is understanding, demographics and the needs of your customers.M-Pesa’s“Send Money Home” campaign was built on understanding Kenyan demographics which wereconfirmed during pilot testing. Many Kenyan families are split generationally, with the youngergenerationemployedoractiveinurbancentres,andtheoldergenerationlivingtheirretirementinruralvillages.Withlimitedpensions,theoldergenerationsaresupportedbytheirchildrenthroughmonthlyremittances.StudiesbyMicroSave10showedthatthesetransferscouldcostupto10%ofthevaluetransferred.WhenM-Pesalaunched,itfacilitatedimmediateandreliabletransferoffundsatfarreducedprice.

Similarlocalisationofvolumedriverscanbeseenelsewhere.InAfghanistanwithlargenumbersoflowpaidworkerscashmanagementoverlongdistanceswasasignificantissueforemployers.However,usingmobilemoneyemployerswereabletoutilisecashthatwasalreadyinthecommunitytopaytheirstaff.InthePhilippinestherewasasignificantvaluepropositionforGlobeandSmartintermsofhandlingthelocalcomponentofinwardremittances.IntheDemocraticRepublicoftheCongo–theCongoleseFrancandtheUSDollarareincommonuseagentbankingcanfacilitatetheconversionofthesecurrenciesevendirectlybetweenindividuals.

Awiderangeofservicescanprovidetransactionvolumes:theseincludepersontopersontransfers,bill payments, merchant payments, airtime top up, government to person payments, person togovernment payments, online betting, e-commerce payments and payments for digital credit.However,someservicesrequirethedevelopmentofthepaymentecosystem,ortheprovisionofanappropriatelegalorregulatoryinfrastructurebeforetruescalecanbeachieved.

ValueDrivers–BeyondTransactionsAfinancialinstitutionrequiresmorethanlowmarginproductsatvolume.Itneedsagentbankingtodeliverorsupporthighvalueservices.

10Reference:CerstinSander,“PassingtheBuckinEastAfrica:TheMoneyTransferPracticeandPotentialforServicesinKenya,Tanzania,andUganda”


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Deposits:So,forexample,inUgandaitwasfoundagentbankingwasbeingusedbyretailerstodeposittheirdailyproceeds.Whilstthiscreatedcashmanagementissuesforagentsitresultedinsignificantlow-cost deposits for the financial institution. Similarly, since launching agent banking in Kenya in2010,EquityBankhasconsistentlyraiseddepositsthroughitsagentchannel.

Digitalnanocredit isfacilitatedbyagentbanking.Undernanocredit loansareprovideddigitallytobankcustomersondemandsubjecttoalgorithmswhichpredictthelikelihoodofrepayment.Thesesmallloansaretypicallyrepaidthroughlocallybasedagentsorthroughmobiletobanktransfers,giventheconvenienceofthesemechanismsforrepayingsmallloans.Ascustomersrepaysuccessiveloans,loansizesincrease.Thevaluetotheinstitutionisthemarginonveryshort-termloans.Forexample,M-Pesa’sM-ShwariofferedthroughNCBABankcharges7.5%permonthonaloanrenewableforonemonth.Whilstloanlossesarehigherthanonnormallending,themarginsaresufficienttoreturnahealthyprofit.

Paybill and Merchant Services: Bill payment and merchant services are a valued addition forcustomers,buttheseservicesrequirecertainmarketdynamics.Billpaymentwaspopular inKenyabecausepeopletraditionallypaidtheirbillsoncepermonththroughoverthecountertransactions.Billpaymentservicessavedconsiderabletimeandeffort.Incountrieswithmultiple,convenientbillpaymentmechanismsitisunlikelytobeassuccessful.

GrowingtheCustomerBase:Agentbanking’struevaluetoafinancialinstitutionisthatfacilitatesthegrowthofamuchlargercustomerbasewithoutrequiringextensiveadditionalinfrastructure.EquityBankhas173branchesinKenyain2020,ithad165branchesin2010whenitlaunchedagentbanking.Duringthistimecustomernumbersincreasedover250%.

Equitywasabletogrowcustomernumberspartlythroughagentbanking.Agentsfacilitatedaccountopening, by collecting information sufficient to meet Know Your Customer requirements andtransmittingittotheirbranch.EquityBankwasfortunatethatKenyahadanationalidentitydatabasewhichthebankwasalreadylinkedto.

Thepresenceof anational identity is anecessary condition for efficientonboardingof customersthroughagentnetworks–fortunately,digitalidentityisspreadingthroughouttheworld.InUgandadigitalidentityprecededthelaunchofagentbanking.InIndia,theUniqueIdentityAuthorityofIndia11issueduniqueAadhaarnumberstoalmostallIndians–thisfacilitatesaccesstoawiderangeofservicesincludingthoseissuedbyfinancialinstitutionsandpaymentbanks.

Whereanationaldigitalidentitydoesnotexist,thenatieredapproachtoKYCissometimesadopted.This enables the registered user to access a narrower permitted range of services prior withoutmeeting the requirements of full KYC. However, tiered KYC has hadmixed results in practice, inNigerianmobilemoney,thelowesttierlimitswereoriginallysetsolow–approximately$5maximumtransactionsize,thatthecustomervaluepropositionwasseverelylimited12.TieredKYC,istherefore,aninterim,notafinalsolution.

Tomaximisetakeup,theonboardingprocessmustbepainlessforthecustomer.Insomecountrieslanguageandliteracylevelscanmakethismorechallenging.However,thesechallengescannormally

11https://uidai.gov.in/12CentralBankofNigeriaCircularonintroductionoftieredKYC(https://bit.ly/3eSjCBA)


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be addressed through a combination of technology – in the form of apps, and assistance ofintermediariessuchasagents.

Onboardingfeesforagentscanbecreateasignificantincentiveforagentstogrowtheirnetworkofcustomers, particularly during agent role out. In the case of M-Pesa in Kenya, Safaricom initiallyofferedagentsKsh.100or$1toonboardanewcustomer.Asthecustomerbaseexpandedandagentsearnedmoreintransactionfees,theonboardingcommissionwascuttoKsh.40percustomer.

MNOsAddValuetoAgentBankingInternationally,mobilenetworkoperators,MNOshaveplayedanimportantroleinsupportingagentbanking,indirectly,inthefollowingways:

a) Sensitisingthecustomerbasetomobilemoney:Creatingtrustindigitaltransactionsandtheconceptofagency.

b) Trainingcustomersinhowtoperformtransactions:Creatingacustomerbasewhichismorefinanciallyliterate.

c) Creatinglargenumbersofretailerswhoarefamiliarwithrunningagencies.d) OnboardinglargenumbersofcustomerswithsimplifiedKYC.e) Creatingaliquiditymanagementinfrastructurealongsidefinancialinstitutionswhichcanbe

utilisedtosupportagentbanking.

BuildingtheAgentNetworkHubandspoke:Withacorevaluepropositionrollingouttothemarket,thereneedstobeanongoinginvestmentintheagentnetwork.Themostcommonapproachforbankagencyisahubandspokemechanism13whereasinglebranchisatthecentreofanagentnetwork,inurbanareas50-100agentscouldbemappedtoasinglebranch.Inruralareastypicallymuchless.Agentswouldbeselectedthatmeetasetofcriteria,includingavailablecash,footfall,positioninthecommunity,lengthofbusinessoperationetc.

However, in areasof lowpopulationdensity itmaynotmake sense forbanks andMNOs tohavecompetingnetworksofagents,simplybecauseagentscannotperformsufficienttransactionstobeviable.Alternatively, itmaynotmake sense for smaller financial institutions todevelop theirownagentnetworks.So,thereareadditionalstrategicchoices.

Aggregators:Financialinstitutionscanpartnerwithnetworksofagentsthroughaprincipleagentoranaggregator.Anaggregatorusuallyprovidesservicestomultiplefinancialinstitutionsandtomobilemoneyoperators.Inexchangeforashareofcommissiontheaggregatorprovidessupportandtrainingtoagents,andinmanycasesmovesfloatand/orcashbetweenagents.

Sharedagents:Insomecountries,asharedagentplatform,hasbeendeveloped.TheUgandaBanker’sAssociationcreatedajointventurewithasoftwarecompanytolaunchasharedagentnetwork.Thisplatform enables any bank customer on the network to transact at any agent on the network –operatingonan‘On-Us’/‘Off-Us’system.However,thesharedagentnetworkwasalsoincompetitionwithbanks’ownnetworks,soithastakentimefortransactionvolumestobuild.However,thismodel,

13McCaffrey,MikeandIgancioMass,“DesigningSuccessfulDeliveryChannelsforMobileMoney(https://bit.ly/38euxTB)


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couldbeawayforbankstocompeteinurbanareasusingtheirownagentnetworksandtocollaborateinruralareasusing‘OffUs’networks,wherebusinessvolumesarelower.

Evolution–DrivingvalueandvolumeovertimeMobileWalletsvs.BankAccounts:Oftenfinancialinstitutionsintroducemobilemoneywithsignificantexpectationsandfindthatmobilemoneydisappoints,whilstformobilenetworkoperatorsitappearsto work well. This was the experience for First Bank in Nigeria, and Rawbank in the DemocraticRepublic of the Congo. In many cases, disappointing mobile money experiences delay banks’progressionintoagentbanking.

Toexplorethispointfurther,awalletneedstobecomparedwithabankaccount.Amobilewalletisprimarilyatransactionmechanism,ameanstomakepaymentsandtotransfervalue.Abankaccountisprimarilyastoreofvaluewhichcanbeusedtofacilitatetransactionsandmakepayments.Whenanexistingbankcustomerusesabankmobilewallet to facilitate transactions iteffectivelyduplicatessomeoftherolesofabankaccount,butindoingsoitforcesitsexistingcustomerstopullmoneyfromtheirbankaccountandparkthemoneyonamobilewallet.InacasewhereamobilewalletisusedbasedontieredKYCitforcesthesecustomerstooperatearestrictedfunctionalitywallet.Inbothcasesthebankisofferingasolutionwhichworks–poorly.

Inthecaseofamobilenetworkoperator,operatingawallet.Thecustomerisgettingasolutionwhichhasbeenhighlytailoredformakingpayments.Formanypoorerpeoplelivingawayfromabankbranchamobilewalletprovidesabasicaccounttheycanusetostorelimitedamountsofmoneyandthroughwhichtheycanmaketransactions.So,theyobtainlimitedservices,buthavegreateraccessibilitytothesolution.

Forbankstocompetewithmobilenetworkoperatorsoperatingmobilewallets,therefore,banksneedtopipedirectlyintobankaccountsandforagentbankingtobecomeanextensionofthecustomersbankaccountratherthanusingawallet-basedapproach.

Retail vs.CommercialBanking: Fordecades therehasbeenacleardistinctionbetween retail andcommercial banking.Withdigitisationandwith channeldevelopment, thisdistinction isbecomingblurred. Traditional silos are beginning to break down. Digitisation combined with channeldevelopmentenablestheretailneedsofcorporateclientstobemet.Thisiseasiesttoseewithsomeexamples:

a) Distributors:InBangladeshdrugcompaniesdistributetheirproductsthroughrepresentativestothousandsof localpharmacies.Thiscancreateproblemsforrepresentatives inhandlingcash.Agentbankingenablesagentstobankthecashtheyhavecollectedduringthedaydueto longer hours and extensive coverage. Over time, through opening accounts for smallpharmaciesthesetransactionscanbemadedigitally,accounttoaccount.Buthere,asinmanycases,agentbankingoffersatransitionarysteptowardsfulldigitisation.

b) Payroll:BankAsiainBangladesh,providesapayrollservicetogarmentmanufacturers-moneyistransferredintotheaccountsofworkerswhoaccessarangeofservicestailoredtotheirneeds. Customisation for the workers, was envisaged to include – salary advances,remittances(tofamily),andmerchantpaymentservices.Indevelopingthisproduct,BankAsiawanted to provide a retail level solution to the employees of its corporate customer, thegarmentfactory.


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Government: As government digitises, agent banking can become an important channel forgovernment payments. The nature and extent of government payments differs from country tocountry,buttypicallyincludes:

a) Subsidies: In India, for example, fertiliser payments are made to accounts linked to thenational identity of the customer, which can include payment bank accounts. Welfarepayments can bemade directly to refugees, allowing thema choice onwhere to procureprovisions.

b) Pensionsandsalaries:Pensionsandsalariescanbewithdrawnclosetothecustomer,reducingtransactioncostsintimeandtravel,whichcanbeespeciallyimportantforsmalleramounts.Identitycanbeverifiedreducingfraudulentclaims.

c) Taxes,licences,andparkingpayments:Collectionscanbemademoreconvenientincreasingcollectionespeciallyinrelationtosundrytaxes,annuallicences,andparking.

ThestrategiccontextofagentbankingforGovernmentpaymentsmustberecognised.Digitisationofpaymentscanenablegovernmentstouniquelyidentifypayeeandsignificantlyreducepaymentfraud.

Use Case Development: Once core functionalities have been launched and are being used, andattentionhasfocusedonextendingservicestoagreaterrangeofcustomers,focusnaturallyshiftstoaddingvaluetoexistingcustomers.Increasinglythisisachievedthroughdevelopingnew‘usecases’whichencouragecustomerstotransactusingabankingapp.ThelinkintoagentbankingisthroughCash-InandCashOut.Awiderangeofpotentialusecasesexistswhichinclude:

a) Nano-credit:Asearlierdiscussedb) Pay-As-You-Goservices:PAYGservicesareawayofaccessingenergyservices,includingsolar

lighting.c) SavingsGroups:Managingthecollectionsofsavingsgroupsthroughagentsandacollections

appwhichaccountsforcontributionsbygroupmemberd) Savingscollectors:Individualswhocollectsavingsfromcustomersonadailybasisarecommon

insomecountries–thisiscalledSusuinGhana.e) International remittances: Pay-outs through bank agents. This is an increasingly common

practiceinBangladesh

RuralFinanceandAgentBankingForagentbankingtocosteffectivelyservicethebasicneedsofruralcustomerscarefulthoughtandplanningisrequiredtoaddressthefollowingchallenges:

a) Populationdensity:Thereislowerpopulationdensity,fewercustomers,andfeweragents.b) Liquiditymanagement:Cashmanagementcostsarehighergiventhedistancesinvolved.c) Networkcoverageandelectricity:Oftenmorevariableinruralareas.d) Pooragentbusinesscase:Withfewertransactionstheagentbusinesscasecanbeweaker.e) Customerbase:Providingaccesstocustomerswithlowerlevelsoffinancialliteracy,literacy,

andnumeracy.


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Fortunately, with appropriate agent network strategy, liquidity management, and customisingproductsandservices,manyoftheseissuescanbeaddressed.Examiningtheseissuesinturn:

Agentnetworkstrategy:Agentnetworkstrategyforruralareasincludesagentmanagementmodel,carefulselectionofagents,agenttrainingandsupport.

In urban areas financial institutions most often use the hub and spoke model where agents aresupporteddirectlyfromabranch.Inruralareasagentsthehubandspokemodelcanbeapplied,butothermodelssuchasaggregators,orasharedagentnetworkmayalsobeused(aso-calledhybridmodel)14.Anaggregatorhasanetworkofagents,whichoftenworksforseveralfinancialinstitutionssimultaneously. The aggregator manages liquidity and provides training support in return for apercentageoftheagents’fees.

Suitableagentsinruralareaswillbefewerinnumber,theymayalsoplayalargerroleinon-boardingandsupportingcustomers.Ruralagentsneedtohavetrustfromthecommunity,sufficientliquidity,the ability to rebalance and often the willingness to operate as an agent for multiple financialinstitutions.

Agenttrainingandsupportisimportant,ruralagentsareatadisadvantageastheyaretypicallyvisitedmuchlessoftenthaturbanorperi-urbanagents.However,aggregatorrelationships,dedicatedagenthelplines,video-basedtrainingmaterials,WhatsAppnewsgroupscanallbeusedtosupportagents.

Liquiditymanagement15:Liquiditymanagementiskeytothesuccessofanyagentoperation.Liquiditymanagement has two core components; cashmanagement –maintaining sufficient cash to fundwithdrawalsandfloatmanagement;maintainingsufficientfloattofunddeposits.Toanextentfloatmanagementcanbemanagedthroughpushingmorefloattotrustedagentsasashort-termloan,ordirectlyforthosewhohavesufficientbalanceintheirbankaccount.

Itisimportanttoensurethatfloatcanbeconvenientlytoppedthroughtheagentbankingdeposits.Typically,thismeansestablishinganetworkofsuper-agents,whocanexchangee-floatforcash.Superagents can bemicrofinance institutions, cooperatives, or any businesswhich traditionally deals inlargeramountsofcash,forexampledistributorsandlargeragro-dealers.

However,thereismoretoliquiditymanagementthansuperagentsandpushingfloat.Itisimportantto think about how cash balances can be retainedwithin the rural community. To do thismeansstudyingcommunitycashflowsandseeinghowtheflowsfromruraltourbancanbedigitised.Inruralareas,thiscouldmeanenablingretailersandagro-dealerstopayforrestockingusingtheirfloatratherthancash.

Products and services: The financial institution needs to build a range of transactions that ruralcustomerscanmakedigitally,sothatinsteadofcashbeingexchangedforgoodsorservicese-moneyis used. This implies studying spending patterns of the rural community, and onboarding schools,hospitals,andshopsonamerchantplatform.

Usecasesforruralcommunities:Specificproductsorusecasescanbedevelopedthroughappsthatrespondtotheneedsofruralcommunities.Atthelevelofindividualfarmers–integratedproducts

14McCaffrey,ibid15KiarieNancy,IanOdongo,andVeraBersudskaya,FittingthePiecesoftheLiquidityManagementPuzzle(https://bit.ly/38fBHXL)


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havebeendeveloped;KCBBankinKenyahasaproductcalledMobigrow16whichprovidesaccesstosavingsand loans throughagents,and farmingadviceandsupport;Safaricomhas itsownproductrunningonM-Pesacalleddigifarm17.Itisalsopossibletodigitisevaluechains,thoughthisisamorecomplexactivity18,withagentshandlingcashinandcashout.

RethinkingruralbranchinfrastructureAgent banking allows financial institutions to think differently about their branch infrastructure –muchofwhichisrequiredforthepurposesofsecuringcash.Sub-branchesandphysicalagencieshavebeenusedforyears,butnow,itispossibletothinkofanothermodelaservicecentrewhichdoesnotcarrycash.Aservicecentreisanofficeoutofwhichloanofficersandagentmanagementstaffoperate.Itsupportsloanapplications,loanprocessing,agentmanagement,andcustomeronboarding.Inthiswaythebankcanmoveclosertoitscustomerswithouttheexpensiveinfrastructurethattypifiesabranch.

BuildingaFinancialModelOncethestrategyhasbeendevelopeditmustbereflectedinafinancialmodel.Themodelshouldhavethefollowingfeatures:

i. Scenarioanalyses:High,medium,andlowgrowthscenarios,andpricingandcommissionscheduleswhichprovideseveralpricingandcommissionoptions.

ii. Sensitivityanalysis:Theabilitytochangekeyvariablesinthemodeltoprovidescenario(whatif)analysis.

iii. Variables:Atabulationwheremostofthevariablescanbeadjustedeasily.iv. Keyassumptions:Itsimportanttoclarifythebasisoftheassumptionsunderlyingeachofthe

variables,sothattheseassumptionscanberemodelledduringapilottestingphase.v. Directandindirectbenefits:Adetailedforecastingofthedirectrevenuesandcostsinthe

model,butanadditionalforecastingoftheanticipatedindirectbenefitsofagentbanking.Theseindirectbenefitsdonotnecessarilyaccruetoagentbankingasachannel,butverymuchbenefitthebank.

vi. Productbuild:Anestimateofthedirect/indirectbenefitsofproductsandserviceslaterintroducedtotheagentbankingchannel.Thedirectbenefitscanbeintermsofincreasingthenumberoftransactionsandintransactionfees,butalsoinincreasingthepercentageofcustomerswhoareusingthesolution.

SettingassumptionsOneofthemostdifficultareasinmodellingistosetassumptions,thetendencybymodellersisoftentosettheassumptionsforusageandtakeupquitehigh,buttofocusthemodelonthedirectbenefitsofagentbanking.Thishastwoimpacts–itlaterenhancesperceptionsoffailureifunrealistictargetsarenotmetandfurtherundervaluesagentbanking.Thiscanleadtounderinvestmentinthechannel.

Thereareseveralapproachestomodellingtransactions,thefirstsimplifyingassumption,istoarguethatthenumberoftransactionsisproportionaltothenumberofagents.Thus,followingthislogic,the

16Seehttps://bit.ly/3dRM3y5formoredetails17Seehttps://bit.ly/2NNMFu5formoredetails18SeeGSMAsToolsforDigitisingValueChainshttps://bit.ly/2AkULqR


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moreagents,themoretransactions.However,thisapproachfailstoaccountfortheslowerbuildintransactions as a channel launches, and the fact that consumer behaviour changes as greaterfunctionalityisbuiltintothechannelandintodigitalappslaunchedwiththechannel.

Asecondapproachistomodelconsumerbehaviour–thisapproachhasitschallengestooasitismorecomplextobuild.However,itisbuiltondatapointswhichcanbemeasured,dormancy,transactionsperactiveuseretc.Customerbehaviourassumptionscanbesetinlinewithusageofmobilemoney.Thus,followingthislogic,themorecustomersabankhasonthechannel,andthebettertheservicesthebankprovides,themoretransactions.Transactionsdecidethenumberofagentsrequired.

Thinkingthroughbehaviouralassumptionsishelpfulasthefinancialinstitutionfocusesonwhowilluse the channel andhow. So for example, usagewill be verydifferentbetweenanurbanbankedcustomer,whoalreadyhas access tomultiplebanking channels tomakepayments, and someonelocatedinaruralarea,whohaslessaccesstoestablishedchannels,andforwhomtheagentis‘defacto’therepresentativeofthebanklocally.Customerprofilescanbebuiltintothemodeliftheseimpactsarebelievedtobesignificant.

UnderstandingtheindirectbenefitsofagentbankingMost of the benefits of agent banking are indirect. Agent banking is a low-cost channel, thecommissionsearnedona low-costchannel,almostbydefinitionare relativelysmallanddrivenbyvolume.However,theindirectbenefitsofagentbankingareusuallymuchgreater.Thesecaninclude:

i. Depositmobilisation:depositmobilisationcomesthroughoperatingchannelswhicharemoreconvenientforcustomersresultinginanincreaseinaveragedeposits,throughlowcostcustomeracquisition,andinsomecasesthroughreducingdormancy.

ii. Nano credit: Agent channels facilitate repayment of nano credit which may not bepractical to operate if only through the branch networks due to the cost of makingpayments.

iii. Customer acquisition: Acquiring customers through an agent network resulting inincreased

iv. Branchdecongestion:Buildinghighervaluebusinessthroughbranchdecongestionand/orrestructuringthebranchnetwork,forexample,reducingthesizeofsomebranches.

v. Costreductions:Forexample,StanbicBankUgandareducedthesizeofsomeoftheirruralbranches,whilstmaintainingservices19.

Estimating indirect benefits is challenging, however, logical bases are used to calculate probablebenefit.Indirectbenefitstendtobemultipletimesthebenefitofthedirectchannelrevenuesfromagentbanking.Thisthenestablishesatruism:

“Therealvalueofagentbankingtoafinancialinstitution,isnotinthenetchannelrevenuesreceivedbutratherinhowagentbankingcanbeusedtosupportcustomeracquisition,thedevelopment, delivery and customisation of services, and supporting the geographicextensionofthefinancialinstitution”.

19Discussionsbetweentheauthorandtheheadofchannels.


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AgentBankinginDigitalTransformationFinancialinstitutionsconsideringagentbankingmustalsoconsidertheroleofagentbankinginthetransitionoftheircustomersfromcashtocashlesstransactions.AgentbankingisallaboutCICO–cashinandcashout.Butagentbankingalsotransitionscustomerstousingtheirmobilephones,andcardsandotherpayments.Customerscanonboardcashandwithdrawcashsecurelythroughagents,butthenspendmoneydigitally.

ThistransitioncanbeseenmostclearlythroughthisgraphicfromEquityBankinKenya.Equityopenedagentbankingin2011,thissawaprogressiverise,overtakingbranch,andATMtransactionsinFY2013.However,thedramaticrisehasbeenintheuseofthemobileinterface(inparticular).Whilstagentbanking accounts for 87m transactions in 2019,mobile and internet banking accounted for 595mtransactions.

Source:EquityBankQ3investorbriefing2019

Atotalof97%ofEquityBankstransactionsnowtakeplaceoutsidethebranch.InKenyaEquityBankhasthe lowestcostto incomeratioofanybankat47.3%.AsEquityhas increasedtherangeof itsdigital offering, agent deposits are growing at an increasingly higher rate than agentwithdrawalshencesupportingdepositmobilisationanddigitisationofpayments.


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Source:EquityBankQ3investorbriefing2019

ConclusionsThisshortbriefonunderstandingagentbankingstrategyhasbeenwrittenacknowledgingtheimpactthat agent banking can have on customers, driving financial inclusion, but also on the positiveexperiencethatmanybankshavehad,eventhosewhohadfoundmobilemoneydisappointing.Theconclusionsarebestsaidthroughexploringtheimpactofagentbanking.

Stanbic Bank in Uganda was initially sceptical about agent banking, but with a network of ruralbranchesstrugglingtomakeprofits,itwaslookingforcosteffectivewaystoservethismarket.AgentbankingallowedStanbictorestructureitsbranchnetwork,whilstmaintainingitsnationwidebranchmandate.Butitalsofacilitatedcustomeronboardingandnewbusinessopportunitiesbothwithinitscorporatecustomerbaseandwiththegovernment.

The most fundamental change, however, is being felt at the group level. Stanbic Bank Uganda’spositiveexperienceinagentbankingis influencing itsparentStandardBankofSouthAfricaanditseight country level operations. A corporate focused bank is finding profitable ways to providesignificantvaluetoitsretailcustomers.

FirstBankNigeriawasdisappointedinitsmobilemoneyproductbutdecidedtorethinkitsstrategyfollowinganexposurevisittoNairobi,whereitsawtheimpactofagentbankingontheKenyanbankingsector. After introducing agent banking First Bankwere able to reach sparsely populatedparts ofNorthernNigeria20withbasicservices.

CentenaryBank,oneofUganda’smostpopularindigenousbankshadbeenstrugglingwithcrowdedbranches, an aging customer base, a rural mandate which was expensive to deliver and lengthyonboarding processes. Agent banking enabled the bank to reduce congestion in its branches,particularlyatpeakperiods,onboardmorecustomers,andprovidebetteraccess in ruralareas. In

20Author’sdiscussionwithheadofchannels


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addition,itraisedsignificantdeposits.InthefirstninemonthsofagentbankingCentenaryBankwasabletoonboardnearly400,000newaccounts,arecordforthebank.

InAsiatoo,agentbankingismovingforward,BracBank,focusedonSMEBankingrecentlylaunchedagentbanking.AgentbankingworksonadifferentmodelinBangladesh,agentsareexclusiveandareexpectedtoofferamuchwiderrangeofservices.Sixmonthsafterlaunchitopenedits300thagent,its310thagentwasintherelativelyremotehilltractsaspartofitscommitmenttoofferservicesintheremoteareasofthecountry.

But the last word on agent banking must go to Equity Bank which faced with competition fromSafaricom’sM-Pesa,agrowingcustomerbase,andexpanding regionaloperations, launchedagentbankingaspartof its vision for the future.Avisionwhichhas seenmostof its transactionsmoveonline,anexpansionintherangeofservicesitprovidestoitscustomers.Butabankthatisalwaysabletooffer‘backtocash’convenientlyforitscustomersthroughitsagentnetwork.

Eachofthesebanksisdifferent,theyhavedifferentstrengthsandweakness,theagentbankingofferiscustomisedtotheirclientbase,theyhavedifferentproductsthatbuildontheagentchannel,theintegrationofretailservicesforcorporatecustomersisspecific.Butineachcase,agentbankinghasbeenatransformationalexperience.

Itcanbewithyourbanktoo.


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ReferencesCentenaryBank(presentation)“AgentBankingasaDigitalOfferbyCentenaryBanktoMeetCustomerNeedsinUganda”(https://bit.ly/31kMoXs)CentralBankofNigeria(2013)“CircularonintroductionoftieredKYC”(https://bit.ly/3eSjCBA)CerstinSander(2004),“PassingtheBuckinEastAfrica:TheMoneyTransferPracticeandPotentialforServicesinKenya,Tanzania,andUganda”,MicroSaveCirprianPanturu(2019),“IntroducingAgencyBankinginUganda:ANewChanneltoIncreaseFinancialInclusion,UNCDF(https://bit.ly/2YLp6sa)EquityBankGroup(2020):“InvestorBriefing–FullYear2019”FSD-Uganda(blog),“Quick!Let’sTripletheNumberofBankAccountsinUganda”https://bit.ly/3fSgG82Karandaz(blog)“MobileMoneyandtheOTCDilemma”(https://bit.ly/3eBauB7)KiarieNancy,IanOdongo,andVeraBersudskaya(2017),FittingthePiecesoftheLiquidityManagementPuzzle(https://bit.ly/38fBHXL),HelixInstituteofDigitalFinanceMcCaffrey,MikeandIgancioMass,“DesigningSuccessfulDeliveryChannelsforMobileMoney(https://bit.ly/38euxTB)MSCConsulting,VideointerviewconductedbytheauthorwiththeHeadofChannelsatCentenaryBank(unpublished)MSCConsulting,VideointerviewconductedbytheauthorwiththeHeadofChannelsatStanbicBankUganda(unpublished)SwissContact(blog)“SarathiandBankAsiaLaunchFirstRMGDigitalBankingBooth”(https://bit.ly/3fSbTDA)

Documents

Understanding Agent Banking Paper€¦ · 1Swiss Contact (blog) “Sarathi and Bank Asia Launch First RMG Digital Banking Booth” ( 2 Video interview conducted by the author with