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The Agent Profitability Conundrum in India – Time for Differentiated Agents?

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Recent research from MicroSave suggests that although agents report their dissatisfaction as high, dormancy or dropouts are still relatively low at 20%. The low dormancy or dropouts are potentially due to the following factors:

  1. Hope – agents believe that the national financial inclusion drive (PMJDY) will increase the volume of business;
  2. Prestige – agents feel proud of their association with banks, especially public sector banks;
  3. Connect – agents feel a better connection with people in the village or area they operate in, as they typically come belong to that area.

However, agent profitability has to reach sustainable levels or else, agent dormancy and dropout will rise.

A significant proportion of agents in India continue to make losses. Of the agents, 46% report median monthly profits below USD 18 and 42% report profits below USD 11. This equals the PPP-adjusted monthly equivalents of the UN-defined poverty line of USD 2 and extreme poverty line of USD 1.25 per day respectively.

Previous studies indicate that agents in India expect a minimum income of USD 118 per month to consider their business sustainable. However, in part because of liquidity management challenges, operating expenses in India are higher (USD 62) than in other South Asian countries (Pakistan: USD 28; Bangladesh: USD 13) and East African nations (Kenya: USD 35; Tanzania: USD 25) and is comparable only to Uganda (USD 58).

Past MicroSave research indicates that rent of shop, electricity, and travel expenses for liquidity management constitute the bulk of operational expenses for agents.  The expenses for agents in India are high when compared to other South Asian countries. This is because half of the agents in India are dedicated as opposed to Pakistan (77% non-dedicated) and Bangladesh (96% non-dedicated) and Indian agents have to allocate full costs of the outlet to the agency business.

However, a significant proportion of expenses are driven by devices to conduct transactions – front-end devices for biometrics (Aadhaar), supplemented in some cases by computers. Unlike in other countries, agents in India typically use a multitude of front-end devices for agency banking operations.

Expenses at the agent-point further increase due to power backup systems required in areas where power-outs and load-shedding are common. See Transaction Economics for Technology Enabled Branchless Banking. The median monthly operating expenses for agency banking vary according to the devices used by the agent.

For several years now, MicroSave has advocated differentiated agent outlets. Differentiation involves:

  1. Relatively sophisticated sales agents, who are usually exclusive and dedicated. These agents are responsible for selling products, onboarding customers, and conducting larger value  transactions;
  2. Basic service agents, who are usually non-exclusive and non-dedicated. These agents are responsible for conducting typically smaller cash-in and cash-out (CICO) transactions.

Uber-ising CICO Agents

One idea worth exploring is to reduce the dependence on agents by empowering every customer to act as a CICO point. This is akin to the app-based transport model of Uber, where users can avail cab services at almost any point. The CICO system will increase cash accessibility for customers and ensure less dependence on the scarce number of available agents. For providers, this would mean an increased outreach of CICO points and reduced agency management costs.

Customers may also get the benefit of convenient and proximate cash-out, leading to a lesser need to cash-out in bulk. Fintech companies can develop smartphone applications that enable users to act as liquidity merchants ― mimicking what Uber has done for transportation. Similar initiatives can help address the cash-needs in the ‘last few hundred yards,’ while agents provide the ‘last-mile’ backup underpinning a more decentralised cash market. To make this work effectively, the idea of Uber-ising CICO agents needs to be ubiquitous and interoperable across providers. However, at the moment, the idea can face regulatory hurdles, as RBI does not allow individuals to act as cash-out points. Another potential risk could arise from unscrupulous individuals acting as cash-out points, which could become a security risk. -Re-Imagining the Last Mile – Agent Networks, 2016

Sales agents are usually located in towns with higher footfall and with easier access to bank branches for rebalancing and support. This is because their location allows them to manage transactions of higher value and sale of sophisticated products. These sales agents are likely to be (but not necessarily)  exclusive to a specific bank and are linked through computers to that bank’s core banking system.

Basic service agents do not need sophisticated front-end devices to conduct CICO transactions. In such cases, a smartphone and a basic fingerprint or card reader is adequate. Indeed, at the extreme, anyone could become a CICO point. This is happening informally across the globe. Wherever CICO agents are not easily available or liquidity is an issue, people exchange e-value for cash and vice versa among themselves for a mutually-agreed commission. Some service agents could also become mobile agents who can cater to the demand in sparsely populated and remote areas.

If this is too radical an idea, another alternative would be to permit ‘white label’ agents to operate. White label agents act as agent networks for banks or financial service providers with direct access to settlement systems. Our 2017 Agent Network Accelerator survey indicates that 94% of agents remain exclusive and tightly coupled to one bank. Utilising white label agents can de-link agents from specific banks and thus reduce exclusivity across India. The Reserve Bank of India’s Committee on Comprehensive Financial Services for Small Businesses and Low-income Households recommends such ‘white label business correspondents’. DFS expert Ignacio Mas also supports this idea.

Given the predominance of cash-out transactions in rural areas, agent outlets act as human ATMs. India has already permitted white label ATMs, wherein a third-party owns and operates a network of ATMs under its own brand and not necessarily for or by a particular bank. Indeed, they are already relatively common, due to high costs of running proprietary ATMs. Similarly, white label agents would be able to serve a large number of customers of various banks at a lower cost, thus bringing economies of scale.

This will also help establish a network shared by multiple banks and free up agents and agent network managers from depending on sponsor banks for operational decisions and for expansion of outreach. It will also eliminate the need for individual banks to set up parallel BC networks. Finally, and perhaps most importantly, this could result in better returns for front-line agents, and lead to a viable and sustainable financial ecosystem, which in turn would improve both outreach and customer convenience.

Understanding Demand for Financial Products Among Young Women in Central Java

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Indonesia has the world’s third-largest youth population of 15–25-year-olds. Estimated at around 43 million, these youths represent 17% of the national population. Over the past few decades, the country has made phenomenal progress in achieving full literacy. Although this is encouraging, we must also consider the worrisome fact that the unemployment rate for this cohort of the population is 19%, with a slightly higher percentage in the case of women in this age-group. Furthermore, Indonesia is among countries with the lowest average marriage age across the globe, at 19.7 years, while the median age for expectant mothers is just 23 years. These factors bring enormous responsibilities at an age where the journey to financial independence has just begun. This paper understands the demand for financial products among young women in Central Java.

MicroSave’s Government and Social Impact domain: Aiding governance, bettering lives

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In the past five years the domain’s work has spanned a great width, right from scheme based assessment and evaluation to policy design and implementation. We believe that the most effective knowledge is shared knowledge. Therefore, GSI domain is also leveraging years of experience from India to assist countries in other geographies to better design their financial inclusion and implementation policies.

India Needs More Women Business Correspondent Agents

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The 2018 budget of the Government of India has taken a number of initiatives to empower women in the country. These include increased gas connections through subsidies to 80 million women under the Pradhan Mantri Ujjwala Yojana (from the earlier 50 million) and a 37% increase in loans to women Self-Help Groups (SHGs).

These initiatives are expected to contribute towards women’s social and economic empowerment. However, it is critical that the government strengthens its commitment to women empowerment and continues to introduce and support programmes that enable greater financial inclusion for women. The Financial Inclusion Insights Wave IV India report reveals a significant gender gap in terms of access to formal financial services. As of June, 2017, 33% of women had active bank accounts as compared to 47% of men.

The agency banking channel, which has been the backbone of financial inclusion efforts in India, is yet to succeed in serving as many women as men. As per the ANA India Wave II study1, women comprise 43% of the customer base of agents. The study highlights a vast gender imbalance in the agency banking channel with only 8% of agents being women2.

 

As per the Global Gender Gap Report 2016 published by the World Economic Forum (WEF), India ranks 87 out of the 144 countries on its overall global index. The rank is dismally low at 136 for the sub-index of ‘Economic Participation and Opportunity’ for Women. There is a high unmet need for women entrepreneurs in India to get adequate access to finance for their business. However, various studies across the world have established that women make ‘good banking customers’ with lower risk.

 The Financial Inclusion Insights Wave IV  India report reveals that only 6% of Indian women are advanced active account users3. This indicates that in India, women with bank accounts do not utilise them to their full potential. Women find female agents easier to approach, more trustworthy, and better at maintaining confidentiality as compared to male agents. ANA data shows that half the customers served by a woman agent are women, while two-fifths of customers that male agents serve are women. This shows that a woman agent is more likely to have women customers than a male agent. Clearly, more women agents on the ground are likely to boost the agenda of financial inclusion.

Women Agents in India – Current Status

The ANA Wave II study finds that women agents have a mean age of 31 years. More than half have a bachelor’s or a higher degree. Predominantly, it is women agents who serve rural areas, with a presence of 71% as opposed to 54% male agents. Approximately 65% of these women agents are dedicated solely to agency banking 4 as opposed to 44% male agents. The ANA Wave II findings also reveal the following:

a) Women agents perform at par with the male agents in terms of running the business

There is a myth that women are less enterprising than men. The ANA data reveals a contrary reality. The portfolio of services that women agents provide is quite exhaustive. At the country-level, the median number of services that women agents provide is seven, which is slightly more than male agents, who provide six services. The proportion of women agents who provide various services is roughly equivalent to, or greater than the services that male agents provide (see below graph). The one exception is domestic remittance, which is mainly an urban phenomenon. The presence of women agents in these areas is much lesser (metros – 4%, non-metro urban – 6%) compared to rural areas (10%).

Eighty percent of women agents provide a Government-to-Person (G2P) facilitation service, such as insurance registration, pension registration, scholarship registration, subsidy registration, and linking the Aadhaar card, among others. The range of services is much higher when compared to male agents (68%). This indicates that women agents are more likely to serve customers even if the transaction does not generate as much revenue 5.

In terms of business viability, at the country-level, women agents generate less revenue. However, they also incur less operating expenses when compared to their male counterparts. In rural areas, where almost 71% of the women agents operate, there is almost no difference in their profitability levels as opposed to male agents (see below graph).

Additionally, the proportion of women agents (33%) who incur losses or achieve break-even is actually a little lower than male agents (34%).

b) Providers do not offer similar levels of support to women agents

Women agents receive much less support from service providers. Only 8% of women agents have cash or e-money delivered to them (that is, they do not travel for it) as compared to 16% of male agents. A widowed woman agent in Kapurthala, Punjab observed, “there are training sessions that service providers conduct, but there is no such regular monitoring. I think it is important to be regularly monitored by the service providers. It is all the more important, especially for women – it makes things easier for us.”

c) Women agents face a lot more challenges

MicroSave’s research indicates that women agents find it difficult to establish a good rapport with the staff of service providers, who are mostly male. For example, women agents cited instances where they struggle to get answers to their queries from the support staff. This results in forfeiting new opportunities that may arise from new services and products. Furthermore, women agents often cite challenges in handling a difficult customer, particularly men. Women agents emphasise that previous experience of dealing with customers is a prerequisite for running a successful agency business 6.

Way forward

It is time for financial service providers and policymakers to put policies and practices in place to ensure higher participation of women in their agent workforce. Here are a few points that could potentially make it happen:

  • More research will help us get granular data on women agents and the advantages they bring to the industry. There is a need to understand this space to create a more effective business and support case for women agents.

  • SHGs in the country offer value in terms of outreach and have a history of financial inclusion. Digital finance channels can make use of the SHG model, at scale, to get more women agents in villages. GIZ’s Rural Financial Institutions Programme’s (RFIP) and NABARD’s Bank Sakhi pilot has indicated positive results. However, neither initiative has scaled the engagement and management of SHGs as banking agents.

  • Policymakers can set gender-centric criteria to define an “adequate number or share” of women agents.

  • To bring parity in terms of onboarding efforts, monitoring, and support offered to male and female agents, we could think of introducing soft skills on gender sensitivity through agent training sessions imparted to male agents.

  • We could develop a model to approach women entrepreneurs from other sectors and motivate them to manage the agency business as non-dedicated agents. A classic example of such a model is the initiative by Karandaaz and Unilever in Pakistan, in which Unilever’s retail agents (Guddi Baajis) serve as agents,

  • It will be crucial to understand how we can utilise various government programmes that focus on women, such as ASHA, Anganwadi workers, and scholarships, to expand the base of women agents in the country.

 

In India, more than 137 million women are still excluded from formal financial services. There is evidence that women agents handle clients more professionally and perform at par with male agents in terms of business. In fact, women agents do more transactions and are preferred by women customers. These developments together indicate a business value proposition that we simply cannot ignore.

1The State of the Agent Network India 2017 report, based on the Agent Network Accelerator (ANA) Wave II survey, is a nationally representative study of the business correspondent (BC) agent network in India.

2Agents who offer digital financial services are known as business correspondent agents in India. We have referred to business correspondent agents (BCA) as agents and women BCAs as women agents.

3 Advanced active account users: Users who use a financial account for services other than basic or P2P services. In the FII study, in the case of mobile money, airtime top-ups are not considered an advanced use.

4 Dedicated agent – An agent who solely conducts agency banking business

5 The commission income from G2P facilitation is lower than CICO charges; MicroSave analysis and review of commission structure of providers in public domain.

6 The team conducted qualitative interaction with women agents during the fieldwork for ANA India Wave II

Indian DFS landscape is changing: Insights from State of the Agent Network India, 2017 (ANA) Wave II Research

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MicroSave recently published its ‘State of the Agent Network, India 2017’ report based on our Agent Network Accelerator (ANA) Wave II research. We conducted the research in 2017, based on a nationally representative sample of 3,048 business correspondent agents. The 2017 India report proposes a significant shift from Wave I in 2015.The report focuses on the operational determinants of success in agent networks. It provides insights on agent network structure and key performance metrics, such as agent viability, quality of provider-support, and compliance and risks related to providers. The report presents changes that have happened over two years, from 2015 (when we had conducted Wave I of the research) to 2017. This blog highlights the ‘change story’ from 2015 to 2017.During this period, a number of changes have happened. New types of financial institutions, such as payments banks have emerged, support systems have improved, while product matrices have widened. Also, agent networks have managed to successfully position themselves as delivery channels for various financial and non-financial services.

Over the past few years, the story of financial inclusion in India has shifted from account opening to account usage. This change has received support from various policy moves by the government, an interoperable payments system, and the ubiquity of Aadhaar. This makes India stand out as a successful example of policy imperatives driving the agenda of financial inclusion. The following section presents key findings from ANA Wave II research including changes from the Wave I study.

1. Banking Services and Government-to-Person (G2P) Facilitation Services have Encouraged Account Usage

ANA research findings suggest that an increasing use of agent points for Cash-In and Cash-Out (CICO) transactions and remittances have led to increased transactions and subsequently, higher revenues and profits for agents. The graph below presents the median number of cash-in and cash-out transactions, as well as remittances in 2015 and 2017. During this time, cash-in transactions have grown more than three times, while cash-out and domestic remittances have grown five times. The growth in transactions, together with G2P facilitation services, have led to a robust use-case for agents across India. This has, in 2017, translated into higher monthly median revenues and profits, which doubled from their 2015 figures (USD 40 to USD 93 and USD 16 to USD 31, respectively).

2. Interoperability of Payment Infrastructure and Licensing of Payments Banks have begun to Reshape the Market.

India has embraced full system interoperability, which has enabled banks and mobile financial service operators to connect to a common platform or switch, thereby facilitating transactions. ANA findings suggest that almost two-thirds of agents conduct interoperable transactions. This trend is similar across locations, be it metro, non-metro, or rural. Approximately 70% of interoperable agents offer cash-in services, while approximately 60% offer cash-out and remittances for other banks. This also explains the reduction in the number of non-exclusive agents in India. Agents are no longer required to be associated with multiple providers to be able to serve more customers. It is widely established that interoperability offers significant benefits for the wider ecosystem. These benefits include wider adoption, higher transaction volumes, and greater velocity of money in the ecosystem.

In 2015, the Reserve Bank of India (RBI) gave “in-principle” approvals to 11 payments banks. These payment banks are able to provide all banking services with the exception of credit. New to the financial system landscape, payments banks are beginning to show their presence. However, they have some distance to travel. Agents of payments banks presently conduct a median of nine transactions compared to 33 conducted by agents of other banks. Payments bank agents earn median monthly revenues of USD 54 as compared to USD 93 earned by agents of other banks at the country-level.

3. Support systems have improved

Providers in India have institutionalised the agent induction process by providing training to agents in the first three months, followed by refresher training. There has been a significant rise in the proportion of agents that received induction and refresher training in 2017 (77% and 87% respectively) as compared to 2015 (59% and 61% respectively). From our earlier assessments, we know that trained agents are able to perform better, are more compliant, and extend better customer service. Evidence from ANA India Wave II further supports this hypothesis. Our findings indicate that trained agents conducted almost 10% more transactions on a daily basis than untrained agents.

However, regular monitoring by providers has seen a dip. With increasing transaction volumes at the agent points, providers need to ensure that monitoring remains a top priority. The findings of the ANA Wave II suggest that agents that were monitored regularly conducted four more transactions per day than those not monitored regularly. Anecdotal evidence further suggests that regular monitoring of agents builds the trust of agents in the provider.

4. Instances of money loss (fraud) have increased

Instances of agents experiencing incidences of money loss (fraud) have increased from 2% in 2015 to 22% in 2017.  New compliance concerns have also emerged from the ANA Wave II study. Among agents, 35% reported assisting  customers by entering transaction PIN or password on their behalf. Moreover, 24% of agents reported that they provide handwritten slips as proof of transaction to customers as opposed to printed receipts. Providers therefore need to incorporate fraud typology and mitigation measures into training modules for agents.

Driven by ever-changing global standards for delivery of financial services, regulators have been updating regulations and enforcing existing rules. In 2015, the Reserve Bank of India (RBI) issued a ‘Master Circular on Frauds – Classification and Reporting’. The circular has placed the primary responsibility for fraud prevention on banks. Providers in India have been upgrading their systems and incorporating recent technological advancements, such as cloud-based systems and adopted SMS or IVR-based payments to prevent instances of fraud.

Agent networks in India have proven to be not only resilient but unique. This can be attributed to policy initiatives, such as interoperable payments systems and market dynamics. While the sector has made positive strides and appears to be stabilising, risk and challenges remain. Provider must therefore address increasing incidence of fraud and compliance issues related to interoperability immediately.

To ensure agent viability, either a more efficient distribution strategy or product matrix or both would be required. Meanwhile, a few issues needs to be understood. Why is it that operating costs at agent points are the highest in India? Does it have anything to do with the multiple front-ends required for acceptance of card and Aadhaar-based transactions? Consequently, agent profitability remains a key concern in India. Agents have not yet managed to get to sustainable levels of profitability. Moreover, the likelihood of agent dormancy and dropout remain high.

In this regard, differentiated agent outlets, as advocated by MicroSave could be a potential solution to address issues of agent profitability. While sales agents would manage higher value transactions and sales of sophisticated products, service agents would do basic, everyday transactions, without requiring any sophisticated backend infrastructure.

Assessment of Direct Benefit Transfer in Fertiliser

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This study captures the research findings from the assessment of DBT in Fertilizer for the Government of India across 14 pilot districts across 11 states.