DATE: 31 October 2016 1 By On Time Transcribers

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00:06 IGNACIO: Today we're going to be talking about agent networks.

00:09 We need bridges between physical cash and digital money.
00:12 In developed markets, we need largely one-way bridges, because we’re paid digitally and yet
need cash to buy some things, which is why banks provide an ATM infrastructure for us.
00:21 But in the markets where people are paid mostly in cash, the bridges need to be two ways.
00:27 This is what a fancy bridge looks like, but there's other less fancy types of bridges, which
work equally well.

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00:33 Understand that the bottom bridge is no less safe than the top one, for the little stream that it
is crossing, just don't put the bottom bridge crossing the top river.
00:42 Equally, in financial services, we need different quality of bridges between the physical cash
and the digital money clouds.

00:50 The top one is a very fancy branch, except it's all filled with people, because there are so few
of them, everybody needs to find them, to do their deposits and withdrawals.

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00:59 Why not diverge some of those people into the agents that are depicted in the other two
pictures?
01:05 These are normal retail stores that offer deposit withdrawal services.
01:10 How does that work?
01:13 Well, it works no different to the normal business of a store. A store might be selling rice and
what it does is buy a stock of rice, and exchanges it for cash.
01:21 In the store, you never find rice or cash that does not belong to the store.

01:25 If the store becomes an agent for a financial service provider, it's the same thing, except that
now, what it sells instead of rice, is the balance in the store’s own digital account.
01:35 So if the customer walks in to make a deposit, the store will sell it electronic money in return
for the customer’s cash.
01:43 A difference is of course, that now the store can play it both ways.
01:47 It can also sell cash to the customer, in exchange for electronic value, now we call that a
withdrawal.

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01:54 But again, how can we be sure that this is going to be a safe transaction?
01:58 Consider this customer wants to make a deposit at this store, the customer is going to hand
in cash,
02:03 and in exchange, the store is going to send electronic value, essentially a P2P transfer, from
the store’s account to the customer’s account.
02:12 All transactions are done against the store’s own electronic account.
02:16 Transactions are authorized and registered in real time, and for that they use the mobile or a
POS infrastructure of the financial service provider.
02:23 The customer of course needs to be aware of the process for making this transaction, and
importantly, needs to be able to initiate claims.
02:31 It should be able to call the financial institution behind it and report any problems.
02:37 A store that repeatedly presents problems, should be blacklisted by the provider.
02:43 Finally, there should be transaction limits just like there are for ATM withdrawals, to limit the
amount of risk that can happen at the store.

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02:50 And importantly, all transactions need to be final.

02:53 When the customer walks away from that store, there shouldn't be a way for the store, nor for
the customer to renege on the transaction: the transaction is done.
03:02 By being able to facilitate deposit withdrawals at these kinds of shops, financial service
providers can increase their points of presence very dramatically.
03:11 Branches are costly to build and operate, where stores are much cheaper.
03:16 So you can increase your number of cash-in, cash-out points by hundreds or even
thousands.
03:21 There's a lot of locations you can open, though the question then becomes where.

03:27 If you're a bank with these branches, you can follow a number of strategies.
03:29 The first one is to arrange your agents around your branch, in order to decongest them.

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03:35 This way you can direct people queued up at the branch, into nearby agents that can do the
low value of cash-in, cash-out functions, liberating the branch staff to do more sophisticated
transactions.
03:48 Alternatively, you can put agents to serve the more outlying people around the branches,
03:53 to give them the convenience of not having to go to the branch, every time they want to do a
deposit withdrawal.
03:59 That's by arranging the agents as a donut around the branch.
04:03 You can put agents in more distant towns to establish some presence there. It might be a
rural market town, for example.
04:10 Or, you can concentrate your agents in a new area that you want to develop in the future.
04:15 Test the waters to establish an early customer base, and then, eventually, you might want to
put a branch there.
04:22 With these deployment strategies, the number of agents that you might want to deploy, can
increase very dramatically.

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04:27 So the question is: how do you manage that channel?

04:31 One approach is of course, to have a flat structure, where agents depend from a central key.
04:36 Or, you might have more of a hierarchical structure, where there's more specialized layers in
between the financial institution
04:42 and the agents that do all the management functions around it, to make it more scalable.

04:47 The question then becomes, how do you create and manage this channel?
04:51 You can leverage stores that are already grouped, or you can create it from scratch.
04:55 You can manage the agent channel yourself in-house, or you can outsource it.
05:00 So there's a number of strategies that different providers use.
05:04 Mobile operators might leverage the existing airtime distribution channel, which they already
manage.
05:09 Whereas, a bank might be more interested in creating its own channel around the centralized
theme, or perhaps around each branch.
05:16 Very often, agent networks are pieced together with smaller master agents working with a
reduced set of stores, in a limited geography.

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05:24 You might use a major network that already serves other financial institutions, or you might
outsource your channel entirely to an outside specialist.

05:35 While creating an agent strategy might be relatively straightforward, the day to day operation
of the agent network is not.
05:42 There are five main things you need to get right.
05:44 The first one is the process for agent selection and contracting.
05:48 Which types of stores are you going to go after?
05:51 Who's going to be looking for them? And what is the sign-up process and the documentation
required for each store?
05:57 Once signed up, how are you going to be training the stores?
06:00 Is it on-site or off-site? And to what extent will you be offering ongoing training and business
advice to that store to improve its business?
06:08 How are you going to help that store manage its liquidity?
06:12 That store from time to time will need to rebalance the amount of cash it has in the till, with the
amount of money that is deposited in its account.
06:19 Are commissions going to be flat rate per transaction, or volume based?

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06:23 Are they paid every time a transaction is made, or accumulated till the end of the month?
06:27 Is performance purely going to be based on business volumes?
06:31 Or are you going to be running on-site inspections to check perhaps the brand alignment?
06:34 Finally, what kind of services can the store offer, beyond cash-in, cash-out?
06:41 Are you going to use them for account opening and across selling other financial products?
06:44 And what customer care functions can they perform, and how are you going to support them?

06:50 Make no mistake, operating agent networks can be messy business.

06:53 If you're a bank, now you have to get comfortable that your brand is going to be in little shops,
like this one.
06:59 That shop might be an agent for other financial service providers, not just yourself,
07:03 and that store owner, now needs to deal with five different systems, with five different
providers on five different mobile phones.

07:11 From time to time, the store might put up a sign like this, 'Due to some technical problems,
money transfer is today closed'.
07:17 Maybe, it's a technical problem, but maybe it’s run out of liquidity and it's blaming you.
07:22 Understand, that the cash problem doesn't go away, you're just shifting it from the customers
and delegating it
07:27 to a set of stores that take on the task of moving money between the store and the bank
branch.

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07:33 Think of all the paperwork you'll need to manage with each store.
07:37 These are account opening forms that have accumulated from a vast network of agents.

07:42 So what are the implications for financial service providers?

07:45 In markets with very limited financial infrastructure, if you want to offer digital finance
proposition, you must solve the cash-in, cash-out problem.
07:53 You need to provide a cash channel to your customers, if you want to provide them with a
digital one.
07:59 If you have the appropriate technology and operational systems, cash-in, cash-out to every
day retail stores can be just like any other commercial activity happening at those stores.
08:07 Buying and selling electronic balance is in principle, no different than buying and selling rice.
08:13 But for financial institutions, the shift from direct channels, which are operating through
relatively few own branches,

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08:20 entirely under your control to indirect channels, where you have to manage hundreds and
thousands of agents
08:27 that you may not be visiting very often, can be extremely burdensome, operationally.
08:34 So you prepare for the operational challenge.

08:39 END OF RECORDING

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