As Bank of America illustrated when they announced the discontinuation of their e-banking account, one of the challenges to providing financial services to lower-income households is how to lower the cost of delivery the bank needs while still allowing for human interaction that the consumer wants. In Bank of America’s case, they found that a digital-only relationship was not the answer. Others have found that full access to a branch is also not the answer, since the cost to serve a less affluent customer with a small balance and conducting small transactions is simply too great to make such an account financially viable.
Agency banking has dramatically changed the economics of extending banking services to rural and semi-urban areas, bringing the underbanked and unbanked into the formal banking sector. The model entails combining digital and physical engagement using third-party retail agents to act as a proxy bank … thereby making banking services easily accessible to consumers of all economic means.
Agency banking allows traditional banks or other financial services providers to reduce fixed costs and encourage consumers to use banking service more frequently, thereby providing the potential for additional revenue sources for both the bank and the agent. This, in turn, improves the economics for traditional providers compared to branches, especially for high-transaction, low-balance accounts that are common among less affluent users.
Agents can offer basic banking services such as cash deposit and withdrawal, mini statement issuance, opening of accounts, funds transfer services, check book request, and collection, receiving of clearing checks, processing documents with regard to loan applications, utility bill payment, airtime top-ups, and more. In reality, the convergence of both banking and non-banking services lowers the cost, expands the reach and provides greater convenience to both un-banked and traditionally banked households.
Commercial banks in countries like Colombia, Brazil, Kenya, Mexico, Argentina and India have already put agency banking into practice (considering it as commercially viable). In these and other countries, most of them are successfully increasing revenue and accelerating financial inclusion among marginalized sections of society. That said, agency banking structure, success and scope differs widely across geographies.
A study on “The effect of agency banking on the financial performance of commercial banks in Kenya” threw light on the number of active agents in Kenya that have grown exponentially over the past several years, facilitating tens of millions of transactions. The number of commercial banks supporting agency distribution has also increased during the period, becoming a source of inspiration for many countries to follow suit.
What are the Obstacles
Though agency banking has brought significant benefits to some banks, there are several challenges that hinder its universal adoption. Most of the challenges revolve around the quality and consistency of delivery by agents which can impact the credibility of partnering banks. Challenges include:
- Lack of transparency in the agents’ role.
- Inability of agents to deliver services owing to poor training.
- Inadequate supply of cash disrupting cash deposits and withdrawals.
- Unaddressed customer complaints.
- Device/software malfunctioning.
- Insufficient electricity or internet in remote areas to operate PoS devices.
- Agent mishandling of cash.
These problems have to be addressed for banks and other financial institutions to maximize the benefits of adopting agency banking to expand their reach. Another cause for concern is that expanded partnering could create monopoly-like situations, eliminating the potential for competition.
Making Agency Banking More Effective
There are several steps that can be undertaken to ensure greater success of agency banking. Well-defined eligibility criteria while onboarding agents is one of the most important factors that determine the success of agency banking. Agency banking can also be expanded beyond retail products to include investment services, insurance and even small business services. In Australia, close to half of the mortgage distribution business is generated through agent brokers.
The use of digital devices can also positively impact agency banking success. Agents can use smartphones and tablets to expand the customer base, process transactions and lower costs. The digitization of banking beyond the walls can help expand and improve the agent network.
The same logic that supports agents can also be used to expand the functionality and effectiveness of channels like the ATM and even mobile banking. One of the most amazing observations when people visit countries where agent banking is prevalent is the simplicity and efficiency of the model. In some countries, all basic banking services can be done on a flip phone device. By building solutions for the least amount of friction, all consumers can be served more effectively.
In the end, an agency banking model can work in developed as well as developing countries. In the U.S., an agency model already exists in the car financing industry, where financing agents are located in car dealerships, enabled to initiate and close a loan on site.
The Intersection of Agency Banking and Technology
Banking organizations must embrace technological innovations to empower agents with the right technical support. With agents not having access to a banking organization’s IT network, even though they are asked to represent a bank, they must be given the tools to succeed.
Technology should be simple enough for easy deployment and integration, especially for the agents in rural and semi-urban areas. For example, a straightforward user interface/appearance of a device, relevant icons in the device or the content in local languages enable agents to browse the services easily and deliver them fast to the consumer.
The key is to empower agents, supporting activities such as opening accounts, onboarding, cash deposit and withdrawal as well as enabling cross-selling and up-selling. A direct real-time connection to the supported banking organization should be provided to answer questions.
The Future of Agency Banking
Agency Banking provides a scalable model to provide banking services the underserved populations of the world. Deployed in conjunction with today’s digital technology, agency banking can also provide the benefit of increased distribution and accessibility to all demographic segments of the population.
As financial institutions are considering various distribution models to replace the highly inefficient branch-based model of the past, agency banking could be a viable alternative. There are still regulatory issues to address where roles of agents may be expanded in countries less familiar with this model, but organizations need to consider all alternatives.
At a time when some organizations are walking away from basic banking services that were meant to meet the needs of the under-banked and less affluent, agent banking can make these services more financially viable as well as more convenient. The questions is whether organizations that have over-invested in branches can rethink their distribution alternatives.