Agency banking: new frontiers in financial inclusion Thought Paper www.infosys.com/finacle Universal Banking Solution Systems Integration Consulting Business Process Outsourcing
Agency banking Banking today is not restricted to banking organizations alone. Several non-banking institutions from unrelated verticals like telecom and retail are stepping into this space by offering financial products and services like mobile wallets and white-labeled loan products. Despite operating in a niche, non-banking institutions are very much in competition with regular banks. Take Wal-Mart in the United States, for instance. Although it does not run a full-fledged bank, it gives other banks a run for their money by providing personalized financial services at its Money Centers. What is significant is that Wal-Mart attracts not only unbanked customers, but also those with existing bank accounts. While massive organizations like Wal-Mart have the muscle to create their own network, for most other non-banking institutions, going it alone is never an option. In fact, in a very large number of cases, they gain entry into the business by partnering with other banks in a win-win arrangement. Take the example of Bansefi, a state-owned bank in Mexico. It has developed a network of 200 non-bank entities also called Agencies providing remittance services, to supplement its distribution network of 500 branches. In fact, most of Latin America has a highly developed Agency Banking channel, which has contributed significantly not only to the rural financial ecosystem but also to mainstream banking. Outside of Latin America also, agency banking has played a pivotal role in building financial inclusion. And as it evolve d benefiting from the entry of new entities as agents and the emergence of Internet and mobile technology agency banking has expanded the definition of financial inclusion, as explained in the following section. Financial inclusion redefined Thanks to the above developments, financial inclusion has now come to mean much more than just banking the unbanked. It now refers to the convergence of various bank and non-bank players to provide financial services at lower cost, wider reach and greater convenience to all end consumers of financial services, unbanked or otherwise. How does this agency banking-inspired second avatar of financial inclusion make business sense for banks? In one sentence: by opening up new opportunities. All banking consumers are also consumers of other products, which they procure from different channels. By partnering with an agent, banks can participate in these transactions, which may be non-financial in nature, but nonetheless involve the exchange of money. A classic example of this is automobile finance. Years ago, automobile buyers had to fend for themselves to rustle up financing; you could say that in the context of the purchase, they were financially excluded, because they did not have easy access to funding options. Today, practically every automobile dealer has a tie-up with a bank or consumer finance institution to provide vehicle loans to their automobile buyers. Most of the time, there s a representative from the bank or finance company sitting inside the showroom itself, trying to wrap up the financing deal once the purchase decision is made. This is beneficial to all parties. The customer has easy access to funding and is saved the bother and delay of securing a loan 02 Thought Paper
separately; the dealer is able to close the sale right away; and the financing partner has access to a more or less captive market. This is just one example of the linkage between agency banking and new-definition financial inclusion. Banks can enter into similar partnerships with white goods dealers, large retail chains, and so on. They also have the option of entering into different kinds of distribution alliances with a variety of agents, from individuals to post offices to news agents to grocers to regulators even, to serve the unmet financial needs of unbanked as well as banked customers. Why agency banking? The advantages of agency banking are multifold: Distribution strategy Changing customer demographics, competition and a host of economic factors have forced banks to take a relook at their distribution strategy. Agency banking enables them to extend their reach not only into areas with poor branch penetration but also up to the doorstep of those who are reluctant, or otherwise unable, to make a trip to the nearest branch. Channel innovation Channel innovation has revolutionized the face of banking around the world. Consumers adoption of multiple channels has fueled their expectation of true multi-channel banking, which allows them to transition seamlessly between touch points as they fulfill several, or even a single transaction. Agency banking, an important channel innovation that has improved banking penetration in underserved areas in the past, can now help banks tap into other segments, by becoming an integrated component of multi channel banking. Cost effective model The heavy cost of servicing low value accounts and providing physical banking infrastructure to unbanked areas was a major impediment to financial inclusion in the past. Worse, this model was heavy on the pockets of poor customers, who had to spend time and money to travel long distances to the nearest branch. Agency banking rationalized banks operational expenditure, and reduced the cost to customers, while enabling wider reach. In time, agents also took up the responsibility of on-boarding, managing and servicing customers, making agency banking a lucrative option for banking institutions. Agency banking as we see it today Becoming widespread Many banks and non-banking financial companies around the world, from Brazil to India to the Philippines, have discovered the many advantages of agency banking and are increasingly employing agents. That being said, agency banking differs widely in scope, structure and operations across geographies. Could jeopardize banks credibility, if not careful Regulators want to achieve financial inclusion through a profitable, low cost delivery model that simultaneously protects consumers and the integrity of financial services. There might be instances when banking agents fail to provide quality service or compromise customer Thought Paper 03
data. This can affect the credibility of banks, a matter of concern to both banking institutions and their regulators. Hence, banks must take care to sign up the right agents, and regularly monitor their performance. Giving rise to monopoly fears Another cause for concern is that this model involves exclusive partnering between banks with agents and individuals, potentially creating a monopoly like situation, leaving little room for other players. Without a mechanism to keep bank fees and charges in check, there s a real threat to customer interest. Regulators are therefore searching for ways in which they can spread financial inclusion while encouraging market competition. Ideally, agents should be able to replicate most basic banking functions, namely customer onboarding, account opening, transactions like fund transfers, bill payments, cash deposits and withdrawals, and even front office activities like enquiry handling. But this is not the case in reality, due to regulations and control exercised by the authorities as well as operational snags such as the inability to maintain required cash levels or adequate security. Finding opportunity in non-retail products Agent services need not be limited to retail products and can include investment products, as well as services rendered to high net worth individuals, institutional customers and so on. In fact, in Australia, about 40% of the mortgage distribution business is generated through agent brokers. Facing regulatory and operational hurdles Future trends Digitization Banks expect agents to use digital tools and devices like tablets and Smartphones, so that they can expand the customer base as well as shrink costs. The digital revolution will attract and encourage more agents to participate. Channel convergence As part of their multi-channel banking strategy, banks are looking to integrate agency banking so that transactions initiated at agent touch points can be completed at the branch or even on channels like the mobile or ATM. Going forward, agency banking will no longer be a silo extension of the branch or a disparate channel. Changing role of branch As agency banking becomes even more widespread, it will reduce footfalls within branches and enable them to focus on delivering advice and premium services. 04 Thought Paper
Role of technology Agent empowerment Agents, being neither employees nor customers, have no access to banks IT solutions. But having entrusted them with various banking responsibilities, it is the duty of the bank to provide them access. Banks must ensure that the technology platform enables agent empowerment and supports their activities like on-boarding, account opening, cash withdrawal and deposits, as well as their efforts to cross-sell and up-sell. Banks should also provide online help to facilitate real-time solutions to agents problems. Holistic view Agents carry out banking activities on behalf of banks and a few even have sub-agents working for them. Consider the example of a bank agent who on-boards and services customers, but whose sub agent only handles cash deposits and withdrawals. The technology used by the bank should support such a structure and facilitate a holistic view of the entire arrangement and transactions therein. Banks should be able to track the performance of individual agents through a single dashboard view. Conclusion Banks must have a clear view of the powers they would like to devolve upon their agents. Regulators can set the broad rules, but it is the responsibility of individual banks to provide clarity. The regulator should also be coherent on the extent of banks liability in case their agents over-exceed their authority. Going forward, there may be need for regulations enforcing agent accountability. Since agency banking enables banks to save significantly on the cost of setting up and maintaining branches, it is only fair that they pass on some savings downstream. This leaves the tricky issue of how much to pass on to agents, and from them to customers, to be decided. References 1. www.cgap.org/gm/document-1.9.42401/ Updated_Notes_On_Regulating_Branchless_ Banking_Mexico.pdf 2. mobilemoneyafrica.com/agency-bankingruns-into-hurdles-in-kenya/ 3. en.wikipedia.org/wiki/banking_agent 4. www.nytimes.com/2011/11/08/business/walmart-benefits-from-anger-over-banking-fees. html?pagewanted=all Sai Kumar Jayanty Lead Product Manager, Finacle, Infosys Thought Paper 05
About Finacle Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with accelerated innovation that is key to building tomorrow s bank. For more information, contact Finacleweb@infosys.com www.infosys.com/finacle 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.