Agency banking: new frontiers in

financial inclusion

Thought Paper

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 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
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
02 Thought Paper
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.
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
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
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
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.
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.
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.
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.
Facing regulatory and operational hurdles
Ideally, agents should be able to replicate most
basic banking functions, namely customer on-
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
04 Thought Paper
boarding, 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.
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.
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.
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.
References
1. www.cgap.org/gm/document-1.9.42401/
Updated_Notes_On_Regulating_Branchless_
Banking_Mexico.pdf
2. mobilemoneyafrica.com/agency-banking-
runs-into-hurdles-in-kenya/
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.
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.
3. en.wikipedia.org/wiki/Banking_agent
4. www.nytimes.com/2011/11/08/business/wal-
mart-benefits-from-anger-over-banking-fees.
html?pagewanted=all
Sai Kumar Jayanty
Lead Product Manager, Finacle, Infosys
Thought Paper 05
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