The Missing Truth on the Agent Banking Business Case in Nigeria

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Agent banking is increasingly popular in many developing countries. From Brazil to Kenya and many other emerging markets, agent banking has increased the use of transactional financial services among financially excluded adults. In Nigeria, the Central Bank introduced agent banking guidelines in 2013 to contribute towards achieving the objectives of the National Financial Inclusion Strategy. According to the EFInA 2016 Financial Access Survey, only 38.3% of the adult population in the country has access to formal financial services. This is characterised as having access to deposit money banks, microfinance banks, mobile money, insurance and/or pensions.

Since 2013, and increasingly through 2017, leading banks have embarked on a revolution in agent banking. These deposit money banks believe agent banking would enable them to reach more customers with increased profitability through better efficiency and cost-reduction. In the case of agents, the revolution is expected to ensure financial remuneration, increased customer traffic to pre-existing businesses of the agents, and improved community status through bank brand affiliation. For customers, the expected benefits are convenience and cheaper transaction costs. While this understanding of bankers is indeed appropriate – they often fail to consider critical elements of agent banking. Some of these misunderstandings are as follows:

Lack of Appreciation that Agent Banking is an Evolution

Agent banking plays an important part in the evolution of digital financial services. It is a critical step in the movement towards user-initiated transactions. Agent banking requires strategies that appreciate the element of time, therefore, the objectives and benefits need to be split into the short-run and medium-term. In the short-run, agent banking should mainly be perceived as an additional channel for the provision of products and services beyond the existing branch channels. Existing banks currently have only transactional relationships with customers from the bottom of the pyramid and not true banking relationships. This is partly attributed to existing products not being fashioned for the lower-income segments.

Having a network of agents does not guarantee the attraction of customers. It calls for developing products that target customers consider useful. These are products that can address their daily money management pain-points. The network cannot be expected to be the main driver for customer acquisition without considering the prevailing challenges around the creation of Biometric Verification Number (BVN), which constrain the ability of the banks to on-board new customers. Until these challenges are resolved, banks would need to migrate their existing lower value transactions from branches to agents to reinforce the business-case of agents.

In the medium-term, the case for agent banking is about providing value-added services. This involves the development of products that enable customers to easily associate and build relationships with a bank through increased transactions, which is necessary for market penetration. As an objective of financial inclusion, the focus should be on making financial services relevant to the unbanked on a daily basis. This would call for two critical steps. The first step is to build low cost ‘bridges’ to cash, that is, in the form of a ubiquitous, well-supported agent network. This would allow Nigerians to easily convert cash into electronic value (e-value). The second step is to make the e-value directly useful for customers, to encourage them to maintain their money in this form. Banks should, therefore, identify compelling use-cases and tap into relevant opportunities that exist in Nigeria.

Distended Expectations on Agent Banking Profitability

Agent banking is fundamentally not about the banks making huge direct profits through a low-cost channel. It is about what the additional channels can do to change the business model over time, shifting the banks’ customers from using more expensive channels like branches, service centres and ATMs. The channel itself may not generate significant profits. It can, however, facilitate additional business for the bank, as well as additional deposits. Some institutions with exaggerated expectations intend to deploy huge agent networks at the start. This poses a challenge to adequately managing and supporting agents and/or eroding the expected benefits to agents. With this understanding, the institutions will not engage in ‘spray and pray’ agent acquisition strategies but progressively and strategically grow their networks region by region..

From high-profit expectations come inflated financial models, which then translate to unrealistic Key Performance Indicators (KPIs) for the operational or branch staff members. These KPIs are unrealistic due to the incorrect metrics that generate them. This leads to poor buy-in among the expected foot-soldiers as the KPIs would be deemed unrealistic. This understanding is critical to enable the senior management to prepare appropriate budgets and KPIs for the operational staff driving the business.

Fear of Co-opetition

Co-opetition is the ability of players to cooperate with each other for the benefit of each business while remaining competitors. It calls for close partnerships that leverage the comparative advantages of the partners. There is a fear of these partnerships by leading banks, which could slow down the prospects of agent banking. For instance, the various agent banking operations, network deployment, and product development are struggling. This is because of their nature of high-involvement, yet there is minimal individual bandwidth within the banks to effectively run the operations. This is coupled with ignorance of the fact that agent banking requires focus. Strategic partnerships within shared agent networks and close tie-ups with the FinTech players could transform the agent banking business-case in Nigeria. It would allow partners to play their roles on the basis of their core strength. FinTechs have been seen to even attract the more traditional banking customers with services tailored to their needs, while banks struggle to innovate. This is despite existing gaps in technology development and understanding in the market.

Conclusion

For agent banking to prosper in Nigeria there needs to be a deeper understanding of the true business-case. A better understanding of the business-case calls for top executive/management alignment, a paradigm shift in organisational culture and structure, and specific customer segment orientation and differentiation. The actual business-case needs to be clearly articulated to all stakeholders to ensure meaningful partnerships that would make things work. The uncomfortable truth that patience should be a virtue with this engagement is inevitable. It is for the banks to find a way to convince and address the no surulere mentality, meaning ‘no to patience’ for this business model to be effectively implemented, especially for the bank teams and agents.

Foresight in a FinTech Forest – Financial Technology Drives a Digital Banking Response

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We’ve reached an inflexion point in banking, more pronounced and more fundamental than any which has preceded. The financial technology (FinTech) revolution promises dramatic improvements in customer experience and fundamental changes in how banking is informed and how it is conducted.  Financial institutions must make critical choices if they are to compete in the new digital finance world.

1. Given the pace of change financial institutions can no longer take a passive view towards the digital future. A point made by leading authors such as Chris Skinner in his book: “Digital Bank: Strategies to Launch of Become a Digital Bank”. Today, the number of fully digital banks is growing, the product range that they offer is typically limited but is evolving largely on business to consumer lines. These banks are starting to appear in Africa, after being based mainly in Asia, Europe and America. For traditional ‘brick and mortar’ banks, the question is how best to respond.

2. Foresight in a forest. It’s not easy for bankers to see what is happening, and therefore, how banks should respond; bankers in Africa have asked us – “How should we be concerned about the innovations happening in London or Europe, given our different banking and regulatory environment”. The FinTech world is vast, changing and growing rapidly, this makes it much more difficult to determine digital trends when observing a single market1, a single time-period or a single FinTech solution or type of solution. However, by comparing markets temporally and spatially, and grouping solutions, it is possible to determine tends, and through isolating these to derive insights.

3. There is a growing maturity in successful FinTechs. Two years ago, we would see FinTech ‘solutions’ pass through our offices which seemed to be looking for a problem to solve. Successful FinTechs are built around real, demonstrated customer needs that have a commercial use case, often filling a gap in the market which banks have failed to adequately address.

4. The business case of successful FinTech’s is evolving, to second generation use cases, typically these are evolutions around the core theme. Kopo Kopo, for example, in their first generation, processed payments for merchants and provided a user-friendly merchant dashboard. In later enhancements, Kopo Kopo used data gathered to offer loans to merchants based around their cash flows. After establishing a loyal merchant base Kopo Kopo rolled out QR codes. Today, Kopo Kopo offers their business operating system and intellectual property internationally.

5. Fintech’s struggle financially until they reach scale and/or multiple use cases, though investments are flowing into FinTech companies at an increasing rate – Disrupt Africa for example, reports an 84% increase in African FinTech start-ups securing funding. Nevertheless, the investments required for scaling financial technology offers opportunities for financial institutions to collaborate with FinTechs to build a unique solution for their customer base. Financial concerns can mean that some FinTechs initially opt to target customer segments where a high return can be guaranteed.

6. Beyond the fully digital banks many financial institutions are struggling with how to change. Many changes are not fundamental, but merely digitisations of the customer facing front end. However, this usually implies that aspects of the customer experience are lost, specifically turn-around time. Fast turn-around time invariably means straight through processing and digitisation of as much of the underlying process as is practical.

7. Many banks are poorly structured to exploit data. Data often exists in silos, held in legacy systems, data needs to be liberated so that it can be used. This point is clearly demonstrated when considering a FinTech’s approach to data – Fintech’s often take many more data points than banks in coming to their digital decisions – merging data from multiple sources to improve their algorithms, though sometimes they simply manage data better.  Leading banks are already responding to this challenge, by combining their huge internal datasets with data derived externally, cleaning data and analysing before warehousing it for further analysis and use. The question is whether banks will be nimble enough to exploit their data archives.

8. Bank’s often fight their own internal culture. Fundamental questions exist related to whether banks have the right drive, culture, and people, to support the data driven approach to drive efficiencies and develop and improve products and services based on data.

9. Bank-Fintech collaborations are increasing. Banks frequently sponsor FinTech labs to have the first opportunity to work with or invest in FinTech, for example, in May 2017 Barclays’ opened their flagship start-up incubator at The Rise, as Europe’s largest FinTech co-working site. DBS in Singapore has established its own FinTech innovation centres. The thirteen largest European banks are investing heavily in mature FinTech. Others like Equity Bank, in Kenya collaborated with a mobile network operator to launch a mobile virtual network.

10. Managing the culture divide is the key partnership challenge. However, while partnerships are logically the next steps managing partnerships and bringing vastly different cultures together in a sustainable way is the key challenge. Attempts to bridge this cultural divide are being made by creating platforms bringing together potential partners such as the FMO’s FinTech platform for African Banks.

11. The lack of human touch creates limitations for FinTech solutions as well as opportunities. Despite growing maturity, there is a recognition that solutions designed around the absence of human touch can create limitations on the type of solution which can be successfully delivered – particularly in the context of low income, often illiterate/innumerate communities, and in FinTech lending.

12. FinTech lending has limitations which are still being resolved. FinTech solutions are excellent at disbursing credit, but they suffer when it comes to collections – they simply don’t have the physical footprint of financial institutions. This is one reason why draconian measures are taken by the FinTechs to blacklist customers who fail to pay small loans – FinTech’s offering small loans simply don’t have the mechanisms to cost effectively enforce collection. Because of this inherent limitation millions of people are potentially blocked from accessing future credit because of failing to pay a $10 loan. For these microloans much work is required to consider repayment dynamics, whitelisting mechanisms and consumer education and protection in this space. These lending limitations will become more pronounced for larger loans, particularly those outside a natural repayment structure like a value chain. In the short to medium term, this may define a collaborative space between the FinTechs and financial institutions, or will result in FinTech’s investing in collection mechanisms for larger loans, such as Funding Circle in the UK.

13. FinTechs talk of User Experience – Banks of Customer Service. FinTech’s solution is digital end to end – their point of contact with the consumer is vital, hence they ensure that the interface is very easy to use. Compared with this, financial institutions strive to deliver customer service, which is much broader in nature with the cause of the service issue often opaque. Banks may struggle to replicate FinTech user experience through their own legacy systems.

14. FinTech’s apply Agile approaches to product development. FinTechs usually apply an Agile approach to developing financial services, a core focus in this approach is to learn & fail quickly, innovate the fail again until the solution is perfect. Fintech’s often compare the Agile approach to the Waterfall methodology which is to get everything right first before testing. These approaches are derived from the software development world. In contrast conservative financial institutions pilot test products and services with more rigour, typically preferring to succeed rather than to fail fast. Certainly, financial institutions need to be nimbler in product development. But in our view, a hybrid approach which combines slightly more in depth front end market research, user based pilot testing, and agile approaches can derive products faster and better than either approach on its own. It’s worth noting that the mobile payments doyen M-PESA was pilot tested for 18 months before it was launched, and was considerably more successful that its later – supposedly agile – imitators.

15. FinTech’s exploit social media. FinTech’s are a product of the digital age, much like social media. FinTech’s exploit social media, for communications, for marketing, for data analytics and in the case of some peer-to-peer lending methodologies for determining credit limits through social media contacts. Leading banks are already embracing social media as a key communication channel.

16. Social media is set to exploit FinTech. One of the biggest banking revolutions is set to take place as and when social media/technology platforms exploit their reach to absorb FinTech services – whether this is person to person remittances by WhatsApp, Facebook Bank, Amazon or Alibaba vertically integrating from e-commerce into payments.

17. Policy changes will make it easier for many FinTech’s to compete. Policy changes including biometric identity, eKYC, and open data standards (PSB2) will make it easier for FinTech’s to sign up large numbers of customers with confidence, and in some cases using bank acquired data. There are huge systemic implications – which will flow from this, conferring significant competitive advantages to institutions able to make strategic use of data – of any type.

18. Interest in regulatory sandboxes is increasing. Regulatory sandboxes are applied in the UK and in Singapore, however, regulatory interest in sandboxes is increasing with sandboxes being discussed in Nigeria, by the BNM in Malaysia, by the Bank of Uganda and in other African countries.

19. Compliance is a FinTech’s minefield particularly when spreading across borders. Successful FinTechs can spread across borders relatively easily in the absence of well-defined regulatory environments. However, compliance standards for FinTechs are evolving and change from market to market. A FinTech operating in a low compliance market may find it very difficult to move across markets, as a result successful FinTechs such as Jumo apply the standards existing in a tough reference market. Despite these constraints it is usually much more challenging for a financial institution to move across borders given the regulatory and capital requirements around new banks. An exception to this would be rapid moves from regulators to regulate FinTech market markers to ensure they can be monitored, in areas which threaten their wider central bank roles, such as crypto-currency.

20. Collaboration within the financial sector country by country appears to be increasing. Financial institutions often struggle to collaborate especially in competitive markets. However, what can be seen is strengthening of Banker’s Associations. The re-birth of the Kenya Banker’s Association with new leadership, effective advocacy and lobbying has been well documented. The Uganda Banker’s Association has also revived, and now meets regularly with the Governor of the Central Bank to discuss issues within the financial sector. Banks are coming together to discuss the issues confronting their industry much more readily and systematically than in the past. The question will be whether they can come to any agreement on industry-wide approaches.

In conclusion, the following stands out: Consumer needs are being and can be met in ways previously unimagined, and this is being done through new digital or digitally focused institutions, whether FinTech’s or financial institutions. Given this, financial institutions must make an active choice to participate in a digital future or risk stagnation and decline. This digital future must combine the best that banking and FinTech’s can offer. Realising the opportunities represented by the digital future requires significant changes in institutional culture – and attitude towards data which will see fundamental shifts driven from an executive level. Regulating this digital future represents a similar seismic shift for Central Banks and policy makers worldwide.

1 Websites or their archives such as Irrational Innovations provide useful infographics on FinTech’s operating in different geographies.

How India has Progressed on No Poverty and Reduced Inequalities

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Manoj Sharma, Director, MicroSave speaks on how India has progressed on SDG 1, or No Poverty and SDG 10, or Reduced Inequalities. Mr Sharma mentions that the JAM Trinity (Jan Dhan, Aadhaar and Mobile) holds the key to some of the biggest reforms ever attempted in the country.

Direct Benefit Transfer (DBT) in Fertiliser – Towards an Efficient Fertiliser Distribution System

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Forty-eight-year-old Devashekhar cultivates paddy twice a year. A resident of Guntur district in Andhra Pradesh, India, Devashekar purchases between 300 and 350 kg of fertiliser from retailers in his village. He is among many farmers who have now started to pay market price for fertiliser. “There has been a reduction in overcharging by retailers as we now pay market price. We also get a transaction receipt that indicates the selling price of fertiliser,” he says. Devashekhar remembers paying more than the maximum retail price (MRP) written on the bags of fertiliser before the introduction of the direct benefit transfer (DBT) system in fertiliser1. The journey, however, has not been easy, he recalls. “During the last Kharif2  season, when I went to buy fertiliser, the retailer refused to sell, citing Aadhaar-based biometric authentication as a mandatory requirement for purchase. I had to go home and return the next day with my Aadhaar number (card). Yet I was unable to purchase fertiliser the following day as well because of a long queue of farmers, whose biometric authentication was taking time due to multiple attempts for authentication. I was finally able to purchase fertiliser on the third day, that too after multiple biometric authentication attempts and waiting in queue for half the day”.

Prior to the introduction of DBT, Devashekhar could ask his friends or family members to purchase fertiliser on his behalf but the new system doesn’t provide for this. This adds to his inconvenience but now he understands the purpose behind this step. “The government now records details of every buyer, so diversion and overcharging will certainly reduce,” he adds. It took Devashekhar about eight months to understand and get used to the new system as there was no communication about the programme. Although issues, such as biometric mismatch, authentication failure, and internet connectivity have reduced over time, farmers like Devashekhar end up spending relatively more time than before while buying fertiliser. They also worry about the performance of the system and the on-time availability of fertiliser, especially during the peak Kharif season.

With time, retailers have also become better at operating the new system. Some have even adopted new practices to reduce the time taken to complete transactions. Some retailers end up saving the Aadhaar number in the respective farmers’ mobile phones and also note it in their registers so that the farmers can come to purchase fertiliser directly from the fields without their Aadhaar card and simply authenticate with their biometrics. Some retailers also keep a record of the ‘best finger’ for authentication purposes to improve their chances of successful authentication in the first attempt. This improves the efficiency of the process but raises questions about privacy and security.

MicroSave has been involved in the DBT for fertiliser programme from the beginning and has seen it evolve from two districts in Andhra Pradesh to 14 districts across India. Assessment3  of the programme in February 2017, when only six districts were live,4  helped us to identify key areas for improvement, crucial for the success and national rollout of this programme. These key areas are outlined as follows:

Need for Effective Communication: A strong communication campaign in vernacular, using a mix of Above The Line (ATL) and Below The Line (BTL) communication methods has to be designed to make farmers aware of the objectives and changes. Assessment of the six pilot districts revealed that a majority of the farmers received the information about Aadhaar authentication requirements for purchasing fertiliser only after arriving at the retailer outlet. This leads either to the retailer refusing to sell them fertiliser or to transactions being ‘adjusted’ by the retailers (see box). Moreover, poor communication to farmers allows retailers to continue to overcharge with impunity and leads to the mistaken belief among farmers that the government will somehow transfer the subsidy amount indicated in the (English language) receipt directly into the farmers’ bank accounts rather than to the manufacturer for the fertiliser purchased.

‘Plan B’ for Fertiliser Sales During Peak Season: An ‘early check out’ system to pre-authenticate farmers at designated Points of Authentication (PoA) before they purchase fertiliser can tackle the peak-time transaction load. This would reduce transaction time at the retailer shops. Existing village infrastructures such as Common Service Centres (CSC), Post Offices, Bank Mitrs (BMs), Fair Price Shops (FPS) etc. can be designated as PoAs, where farmers can pre-authenticate the transaction using Aadhaar and book the fertiliser, thus reducing the transaction time on the final purchase day.

Grievance Redress Mechanism (GRM): A formal GRM is important when the DBT in fertiliser is rolled out across India. The GRM should also include the following features:

    1. A toll-free number, which should be well-advertised and communicated to users.
    2. The complainant should receive a complaint ID once the grievance is registered.
    3. The complainant should be able to track the resolution status through the complaint ID.
    4. The government should decide the Turnaround Time (TAT) for grievance resolution.
    5. The mechanism should also provide for an escalation/responsibility matrix, which automatically escalates the grievance to the next level in the matrix if it is not resolved within the pre-defined TAT at a particular level.

The need to devise and test solutions for these challenges in the subsidy distribution system before it is scaled-up is essential, as about INR 70,000 crore (USD 11 billion) is budgeted for fertiliser subsidy in the financial year 2017-18. Only time will tell if the government will continue transferring fertiliser subsidies directly to producers or these are interim steps towards complete DBT i.e. direct subsidy transfer to farmer’s bank account.

1DBT in fertiliser is a modified subsidy payment system, where fertiliser companies are paid subsidy only after retailers sell the fertiliser to farmers/buyers through successful Aadhaar authentication via Point of Sale (PoS) machines.

2Kharif crops are cultivated and harvested during the rainy season, which lasts from April to October, depending on the area.

3At the time of research, DBT live districts were those six districts where the government paid subsidy payment to fertiliser companies on actual sales realised through PoS machines. The other 10 districts were dry-run districts, where subsidy payment to fertiliser companies was yet not linked to actual sales via PoS.

4On request from National Institute for Transforming India (NITI) Aayog, MicroSave conducted a dipstick evaluation in six districts in Andhra Pradesh (Rangareddy, Pali, Una, Hoshangabad, Krishna, and West Godavari), where DBT pilot was running live.

Agent Network Accelerator Research – Pakistan Country Report 2017

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The Agent Network Accelerator (ANA) project is a four-year research project in the following eleven focus countries, managed and conducted by MicroSave/the HelixInstitute of Digital Finance. It is the largest research initiative in the world on mobile money agent networks, designed to determine their success and scale. Pakistan is among 11 African and Asian countries participating in this research project, selected for its contribution to the development of digital financial services globally.

The second wave of the survey for Pakistan, funded by Karandaaz Pakistan, investigates how Pakistan’s mobile money market has evolved since the previous wave of the study in 2014. The survey report is based on over 2,000 mobile money agent interviews that were conducted across Pakistan. The research focuses on operational determinants of success in agent network management, specifically the agent network structure, agent viability, quality of provider support, compliance and risk as well as other important strategic considerations. The study also looked at Pakistan Specific Topics such as BVS Regulations and Gender. The survey is designed to provide valuable insights for the digital financial sector in Pakistan and provide recommendations for developing sustainable networks of mobile money agents. This report highlights the key findings on the mobile money agent landscape in Pakistan.