Agency banking offers the prospect of much greater access to financial services for large numbers of currently unbanked or underbanked individuals – through financial institutions rolling out financial services using third party agents. However, agency banking is simply the latest element in a much wider technology-driven revolution in banking.
Technology is redefining banking across the world. In Europe, most transactions happen online, branches have introduced biometric identification of customers, interviews with customers are conducted through video conferencing, documentation is scanned and digitised. In the UK, near field communication has allowed widespread contactless payments, cash in circulation is reducing.
Banking in the developing world is different from Europe. Generically, there are fewer branches, ATMs, and POS devices, lower levels of interoperability, low levels of merchant payments, and much lower percentages of access to financial institutions. Usage of informal or semiformal mechanisms – savings groups, deposit collectors, money lenders, friends and family – is much higher. Interestingly, the technology revolution has gained huge momentum here too.
In 2002, Stijn Claessens and colleagues wrote a paper “E-finance in Emerging Markets: Is Leapfrogging Possible?”, at the time this was a forward-looking paper. Today, we can say with certainty, that it is not only possible, but it is happening; and rapidly.
So, what factors are driving this leapfrogging? Technology and communications have created the launch-pad for change. The mobile phone revolution has enabled customers to have new channel for banking services in their pocket and have underwritten the extension of mobile money. Mobile money, in turn, has acted as proof of concept for agency banking, inasmuch as it has proven that financial services can be delivered through technology, communications and third parties.
However, there are fundamental challenges facing agency banking. Many bankers do not understand the business case for agency banking. Agency banking is channel, it is not, of itself a product, and merely facilitates transactions. For existing customers, agency banking risks being simply an additional channel for transactions the customer would have completed anyway, thereby adding to costs. Furthermore, agency banking is a low-cost channel. It is neither (in the bigger picture) an expensive channel to run, nor does it return massive revenue through just existing transactional business.
So, why do it? Under the right circumstances, agency banking can reduce costs; it can assist a financial institution to on-board new customers. It can reduce overcrowding in branches to clear branches for high value customers or service delivery. It can facilitate the generation of new payment business. Agency banking can facilitate new deposits and enable microloans. The real business case for agency banking is in the change it facilitates.
The right circumstances, probably the most important three words in this blog? So, what are the right circumstances?
Ability to onboard new customers easily: Financial institutions need to be able to use Agency Banking as key component of a strategy to on-board new customers. This will require not only digital identity, but also the ability of these institutions to access, free of charge, or at low cost, the national identity database and to use this to populate account opening forms. India has successfully used the Aadhaar bio-metric identity as a key component of opening hundreds of thousands of new digital accounts. In Kenya, banks have free access to the National Identity database.
Government to person payments: G2P payments have been an important primer for the system in India, and a significant contributor to mobile payments in Northern Kenya as many governments pay pensions, pay fertiliser and gas subsidies.
Interoperability: The ability to move money across the financial system and to link mobile wallets with bank accounts is important in the evolution of merchant payments.
Appropriate pricing: Interoperability will be significantly constrained if there is a significant cost to individual payments, transferring funds, cashing out funds across networks or financial service providers. Experience from Kenya suggests that merchant fees should trend towards 1% in the East African market. Cashing out fees across networks should be modest – if there are high cash out fees, then it restricts functional interoperability.
An enabling regulatory environment: In many markets, there is an uncertain regulatory environment – regulations take long to be drafted, legal amendments take years to pass through parliament. Intra-regulatory dialogue fails to reach consensus on the way forward for the digital finance industry.
A willingness to invest in digitisation of bulk payment streams: Where appropriate payment streams such as those in agriculture, particularly those with regular small payments, coffee, tea, dairy, can be used to drive rural payment systems. In other countries, payments to industrial workers and digitisation of the workers payment streams can stimulate urban uptake.
Managing for the Future
Even with the right circumstances, financial institutions must carefully manage their digital operations. They need to ensure that they have:
Agent networkswhich work with high levels of reliability: Strong agent network management, combining clear agent selection and de-selection standards, liquidity management systems, agent monitoring, clear reversal and complaint mechanisms.
Strong digital processes: Straight through processing, advanced real-time fraud detection and prevention, velocity mapping, clear reversal policies and customer service.
Product development: Successful product development implies a clear understanding of customer value propositions and use cases. It is likely that digital credit will prove popular with financial institutions and their customers, but pitfalls such as portfolio at risk, and potential credit black listing are likely to at once constrain the sector, and stimulate improved informatics.
So, agency banking can create change, but it is part of a strategy which looks externally to the competitive environment, and internally towards opportunities to digitisation.
Competition and cooperation: There are occasions where the digital financial services industry can choose to cooperate. A clear case for this is in the provision of rural agents – where there may be insufficient businesses with liquidity to offer services to many financial institutions individually. This is the concept of shared agents which is being advocated by the Uganda Banker’s Association. A clear challenge for agents serving multiple providers is managing multiple e-floats, effectively dividing the e-float they have amongst many providers. A further case for cooperation is in the extension of a digital finance ecosystem and in the knowledge that making the system as a whole work for the customer can dramatically increase levels of adoption.
Fintech disruption: If there is a single lesson to be learned from the rapid uptake of over the top (smart phone based) lending platforms, it is that financial institutions will need to actively watch and engage with (learning from, collaborating with or co-opting as appropriate) nimble financial technology companies, as they find ways to bring efficiency and effectiveness to aspects of financial services.
Digitising the institution: Agency banking and the systems associated with it, is part of the trend towards digitising multiple aspects of banking internationally. Agency banking holds out a prospect of synergistic developments throughout banking operations, including the use of biometrics, centralisation of key functions such as account opening, strengthening customer service, digitising elements of loan decision making and loan documentation management, integration with national databases etc.
Informatics: A digital future implies digitising information and implies returns to information when properly managed. It implies the need for financial institutions to capture and use information streams, such as payments, to improve decision making, design new products and services, and segment customers by investing in digital finance capacity, data warehousing, and recognising the strategic importance of information.
The clear message from this blog
The time to invest in the digital future is now, tomorrow may be too late. For retail financial institutions, particularly those with a large customer base, agency banking exposes customers to digital channels, and offers a realistic prospect of customer graduation to self-initiated payment transactions, a further value addition for the financial institution.
 The Helix Institute of Digital Finance by MicroSave provides training in Digital Finance for more information see. http://www.helix-institute.com/training-courses
 See Mike McCaffrey and Anabel Schiff Redesigning DFS for Big Data: http://www.helix-institute.com/data-and-insights/redesigning-dfs-big-data