44588 Banking through Networks of Retail Agents O nly about one-quarter of households in cards with appropriate personal identification number developing countries have any form of financial (PIN)-based or biometric security features, and the savings with formal banking institutions: 10 percent local store--the "banking agent"--can be equipped in Kenya, 20 percent in Macedonia, 25 percent in with a point-of-sale (POS) device controlled by and Mexico, 32 percent in Bangladesh. Yet access to connected to the bank using a phone line or wireless financial services--whether in the form of savings, or satellite technology. Infrastructure requirements payments, credit, or insurance--is a fundamental tool can be further reduced by using mobile phones both for managing a family's well-being and productive to hold "virtual cards" for customers and as a POS NOTES capacity: to smooth expenditure when inflows are device at the store.1 erratic (occasional work, seasonality of crops), to be able to build up purchasing power when expenditures If a customer wishes to make a deposit at a store, are large and sporadic (school fees, buying seeds), swiping a bank-issued card puts the customer in direct or to protect against emergencies (natural disasters, communication with the bank. The bank automatically death in the family). withdraws the equivalent amount from the banking agent's bank account to fund the deposit and issues But in the same way that access to clean water a paper receipt to the customer through the POS is more than being able to buy a bottle of water, device. The agent keeps the cash in compensation for access to finance is more than being able to get the amount taken out of its bank account. the occasional loan. Access to finance really involves being connected to a national payments system, Technology can enable banks and their much like the national electricity network. Once I customers to interact remotely in a trusted have a transactional account in a "payment grid," I can receive and repay loans, save up and withdraw way through existing local retail outlets. from a savings account, and use the proceeds to pay for what I need. This transactional account is If a customer wishes to make a cash withdrawal, the my gateway to a range of financial services, it gives opposite happens: the agent provides cash from the me a financial history, and it is the basis from which till, but is compensated by an equivalent increase in I can manage my financial life. Note a key difference its bank account. Of course, the store manager will between savings/payment/transfer and credit at some point need to go to the bank to balance the FOCUS services: although many people, especially the very till. In effect, bank customers have delegated to the poor, cannot absorb debt and benefit from a loan, store manager the bothersome (and, in some cases, a great majority can benefit from client-responsive risky) job of having to go to the bank to balance savings, payment, and transfer services. the community's net cash requirements, and for that the store manager gets a commission based on the Why do so few people have accounts with formal, number of transactions. authorized institutions? One key constraint is the No. 47 sheer cost to banks of building and maintaining An agent network is indeed fundamentally a technology May 2008 branch networks to reach dispersed or low-income play for a bank. It is similar to the millions of existing populations. To achieve universal access, banks will Visa, Mastercard, and debit card merchants, except that Ignacio Mas and need to adapt their systems to a low-value, high- in this case the card payments at retail stores would be Hannah Siedek volume transactional environment and to build more not only for sale of goods but also for handing out and flexible, scalable retail networks of points at which taking in cash on behalf of banks. With appropriate people can conveniently pay into or cash out from technology, the bank (and, by extension, bank their transactional accounts. supervisors) can afford to be a little bit more relaxed about how customer transactions are captured--as Technology can enable banks and their customers to they are with existing payment merchants. The costs interact remotely in a trusted way through existing of bank service distribution can be reduced, while still local retail outlets. Customers can be issued bank effectively controlling banking risks. 1 In this paper we consider primarily the more traditional card/POS systems, but the discussion carries over entirely to mobile phone-based systems. Annex 1 includes a detailed list of POS technology options. 2 This is happening now. Brazil has seen 95,000 banking We have analyzed the structure and performance of agents open up, most in the past five years, with the agent networks in a variety of countries and how they result that all municipalities are now covered by the support the goals and objectives of policy makers, formal banking system. In the Philippines and Kenya, banks, mobile network operators, and specialized payment services by mobile operators rely on their agent acquirers. This Focus Note explains in detail broad prepaid card distribution networks to double how the banking agent model works and how up as cash-in/cash-out points. This model is being specifically it can help banks achieve much broader adopted in Bolivia, Colombia, India, Mexico, Pakistan, and deeper reach into underserved communities.We Peru, and South Africa.2 Table 1 shows the current go from the conceptual to the practical: status of agent network deployments across a range of countries. · What are agents? What is their main economic role? The term "bank" is used in this paper to refer to any · In what ways can they support banks' commercial type of licensed deposit-taking institution and hence and channel strategies? would generally include some forms of nonbanks, · How do you set up and grow agent networks? cooperatives, and microfinance institutions. In some · What is the business case and remuneration model countries it might also include other actors authorized for agents? to issue stored-value accounts, such as mobile network operators. The term "banking agent" is used A trust infrastructure for banking in this paper to describe a retail outlet processing agents banking transactions (i.e., withdrawals, deposits, and account transfers) on behalf of banks. In its most basic form, a retail outlet serving as an agent for a bank is a transactional channel permitting Developing an agent channel for a bank presents a bank customers to deposit and withdraw cash into or range of technological and operational challenges from their account, as well as to perform a range of that may be new for a bank. However, the main electronic transactions, including inquiries on account challenge is strategic: understanding specifically how balances or recent movements and money transfers this new channel fits within its customer segmentation, between accounts. service proposition, and branding objectives. The challenge is particularly important for banks pursuing The agent business can be set up so that neither the agents as a way to offer banking services to those customer nor the bank needs to incur settlement risk previously with no bank account. Banks will need to with, or otherwise financially trust, the agent when do the following: transacting through it. Trust between the bank and the customer can be created through the following · Tackle basic financial education barriers of these transaction process. potential customers. · Develop appropriate products that target their Electronic recording of all transactions. All needs and economic means. transactions should be done through a POS terminal · Find efficient ways to reach them with effective deployed and managed--and hence trusted--by the marketing messages. bank. All transactions must be initiated by the customer · Put in place a mechanism for checking customer and are automatically recorded electronically by the identities (because many of them may not have any bank through the POS terminal--no transactions formal form of identification). should be processed "on behalf of" the client or "over the store counter" without using the POS The agent, by itself, cannot do these things. It needs device. The terminal is typically a dedicated device adequate support from the bank in all of these located at the retail establishment, but could also be aspects. Otherwise, the bank may have outposts, based on the store operator's mobile phone. but there will be no outreach. 2 This paper draws on selected examples of commercial strategies around the use of banking agents primarily from Brazil, because Brazil is where modern agents were first developed and where the model has seen its most success. For a detailed description of the Brazilian experience with banking agents, see Kumar, Nair, Parsons, and Urdapilleta (2006). For a more comprehensive review of the experience in developing countries to date with agent networks, see Ivatury and Mas (2008). 3 Table 1. Agent networks in selected countriesa # of agents Mobile operators (cash in/ Banks with largest agent with largest Countryb out) network agent networkc Retailers acting as agents Brazil 95,000 Bradesco (Banco Postal), Banco -- Correios (post), Lotéricas Popular, Lemon Bank, Banco (lottery), Pague Menos Nossa Caixa, Caixa Econômica (pharmacy) Federal, ABN Amro, HSBC Colombia 185 (+3251 AV Villas, Banagrario, -- Baloto (lottery) for cash Bancolombia, Banco de Bogota, out only)d Banco de Occidente, Banco Popular, BBVA, BCSC, Citibank, HSBC Ecuador 63 Produbanco, Citibank, -- Servipagos (bill payment Unibanco, Banco Amazonas, outlet) Banco Ecuatoriano de la Vivienda, Banco Solidario, MM Jaramillo Arteaga India 460 ICICI, SBI -- India Post, Zero Mass Foundation, FINO Foundatione Kenya 2,700 Equity Bank Safaricom G4S Security Services (courier, security, etc.), Nakumatt (supermarket), post offices Peru 2,303 Banco de Credito de Peru, -- Boticas y Salud (pharmacy), BBVA Banco Continental, Boticas Felicidad (pharmacy) Interbank, Scotiabank Pakistan 30 Tameer Bank Philippines 6,500 -- Globe Telecom, VideoCity, SM Department Smart (with Banco Stores, Jollibee (fast food de Oro and 4 chain) other banks) South ~5,000 Discovery Life, First National MTN (with Pick'n'Pay (department store), Africa Bank, WIZZIT, South African Standard Bank), Shoprite (supermarket) Bank of Athens Smartcell/ Vodacom aTo find more information on the regulatory environment in Brazil, India, Kenya, Pakistan, and South Africa, visit http://cgap.org/portal/site/Technology/policy/diagnostics/. Reports on Colombia, Mexico, Philippines, and Russia are forthcoming. bBolivia's regulators enabled the use of agents in 2007, but in February 2008 there were no functioning agent outlets. cThis column refers to banking or payments services led by mobile operators rather than banks. Although this paper has been written fundamentally from a bank point of view, similar issues arise for telecoms wanting to offer mobile wallet services. dCitibank established its Vía network in 3,251 Baloto lottery outlets, which today process only utility bill payments and cash withdrawals. eZero Mass Foundation and FINO Foundation act as business correspondents under Indian regulation, but they engage a network of customer service points (in practice, retail outlets) to offer services to bank customers on their behalf. 4 Authentication of all parties. There are three parties Alternatively, in an offline transaction, the POS to a transaction: the customer, the agent's employee terminal and the bank card hold the information who operates the POS device, and the bank. Each on bank balances (on the agent's and the client's should authenticate itself before initiating any accounts), so the POS terminal itself has enough transaction, preferably with two factors of security information to authorize the transaction locally. (chosen among the categories of personal attributes This requires the use of smartcards (which can store of something you own, something you know, and information dynamically) and more sophisticated something you are). Hence, the customer and the POS terminals with suitable memory and processing authorized employee of the agent each have a power. From time to time, the POS terminal will need personal card (which could possibly be embedded to communicate with the bank to upload transactions, into their mobile phones) plus a secret PIN.3 To avoid so that the bank can update the bank balances it fraudulent POS terminals, a bank could also announce holds in its systems. Annex 1 describes the offline a unique secret key to each of its clients through solution in more detail. which the bank identifies itself to its clients before each transaction.4 Automatic receipt generation. A final element of the trust infrastructure is the automatic issuing Customer cash transactions are offset against the of a receipt to the client. The receipt preferably agent's bank account. All customer transactions would be produced by a printer integrated into the are done against an account the agent has with the POS terminal, although it could be a storable text bank. This account may be funded with the agent's message sent to the customer's mobile phone. The own money or from a preagreed (finite) credit line or receipt should be made in the bank's name, because overdraft facility granted by the bank. In the case of it represents a claim against a bank transaction.5 The a cash deposit by a customer, the bank automatically receipt is the ultimate protection for the customer: withdraws the equivalent amount from the store's once issued a receipt, the customer should be legally bank account to fund the deposit, and the store keeps entitled to whatever bank claim is specified in the the cash in compensation for the amount taken out receipt. It denotes transactional finality and the point of its bank account. In the case of a cash withdrawal, at which the customer should be able to leave the the opposite happens: the store provides cash from store with peace of mind. the till, but is compensated by an equivalent increase in its bank account. In this way, the customer always Through this mechanism, the banking agent becomes bears the bank's--not the agent's--credit risk. a channel for exchange of cash and bank obligations between the customer and the bank. These Real-time authorization of transactions. Before transactions pass through the agent's bank account authorizing a cash transaction, the bank needs to in a way that exactly offsets the cash it has taken in check that there are enough funds in the agent's or handed out to the customer. account (in the case of a deposit) or the client's account (in the case of a withdrawal). This needs to be Trust in transactions flowing through agents is ensured done in real time to eliminate credit risks. Card/POS primarily through the deployment of an appropriate systems can do so in two ways. technology, backed by a contract between the agent and its bank that specifies how the technology is to be Online, there is a direct communication link used and their respective roles and responsibilities. (via standard phone line or wireless or satellite But the bank needs to support this process with a few connectivity) between the POS and the bank, so that other elements: the POS terminal can simply request authorization from the bank. The "intelligence" is bank-side, but · Basic financial education. The entire technology- this process incurs higher communications costs. based trust mechanism outlined above breaks down if bank customers cannot be assumed to 3 In many deployments, the agent employee does not have a card and only enters a username and password. This person's access to the POS terminal is taken to be the second authenticating factor (i.e., the POS terminal as the "something you have"). 4 This feature, a "reverse PIN," has been introduced in some Internet banking applications, but to our knowledge has not been used in POS systems. It might be difficult for users to understand and complex for banks to roll out. This should be mandated only in situations where there is high risk of fraud. 5 The receipt should contain all the details of the transaction: type of transaction, amount, and sending and/or beneficiary account numbers. It should fully identify the transaction process itself: date and time, as well as name of agent and unique POS device identifier through which the transaction was made. 5 bear personal responsibility on two key aspects: The economic role of the necessity of not sharing their bank card and banking agents keeping their PINs secret, and checking the POS- issued receipt before leaving the store to ensure its The banking agent's role can be summarized as accuracy. The bank needs to ensure its customers providing three elements of service: understand these two fundamental points. · Transparency and disclosure. The customer 1. The agent offers front-line customer service should know about the respective responsibilities (including physical space and operation of the of the agent and the bank; the financial services POS device). that can and cannot be performed by the agent; 2. The agent intermediates bank transactions the commissions costs per transaction, and whether through its balance sheet, transforming cash- these are payable in cash to the agent or are directly in-the-till into money-in-the-bank, and vice- charged by the bank; and the process for initiating versa. This is actually not so different from a complaint or claim. The customer also should be the normal business of a store: transforming aware that cash transactions may not be available inventory into cash (or receivables) and back at all times (e.g., if the agent has no remaining (i.e., a store stocks goods, which ties up its liquidity or bank balance, the real-time connection working capital until the goods are sold). In the with the bank is down, or the printer is out of agent mechanism described, the store also ties paper). Banks should ensure their agents disclose up working capital, but in the form of cash-in- such information in customer-friendly language on the-till and balance-in-its-account rather than in a clearly visible sign near the POS terminal. the form of physical inventory. · A complaints capture and claims redress 3. The agent needs to go to the bank from time to mechanism. Customers who believe the process time to rebalance its cash in the till versus its money has not worked fairly for them should be able in the bank account. The agent absorbs/provides to request clarification, complain, or otherwise excess liquidity from/to the community of bank seek redress. Customers should not feel they customers and deposits that into/withdraws from are trapped in a technological limbo. Claims the bank on their behalf. In effect, the community should be made directly to the bank rather than delegates the bothersome business of going to through the agent, and they should be dealt with the bank to the agent. This delegation introduces through a well-defined process that specifies roles, economic efficiencies. By netting the community's responsibilities, and expected timelines. overall net cash position (offsetting withdrawals · Adequate internal controls. The bank should against deposits), the total amount of cash that maintain a record of incidents reported at each needs to be transported to/from the bank is agent, with a view to identifying suspicious reduced. And by pooling the cash requirements patterns and monitoring service quality from the of all customers, the required number of trips to complaints. It should maintain a blacklist of agents the bank is reduced. (See Box 1.) it has terminated, which it could share with other banks and the authorities. Seen in this light, the fundamental role of the agent is to aggregate the cash requirements of the Theft, errors, and fraud will and do occur through community. The agent is indeed a cash-storing and agent channels--just like sometimes branches are transport business; it absorbs the fundamental risk of robbed, banks find rogue employees, and banks are cash handling. The main business choice the agent defrauded through the Internet, the key in each case needs to make is how often to go the bank--trading is to understand the nature of the risks, take steps off the working capital cost and physical security to contain their magnitude to manageable levels, of cash held in the store against the cost of more and be legally and contractually clear on who bears frequent trips to the bank. In making this decision, it residual losses when these risks materialize. Annex will face some limiting factors (mainly the size of its 2 lists the main risks that can potentially arise in a bank balance, including any overdrafts it has received customer transaction through an agent. In each case, from the bank). The greater security risk to a retail it specifies which party bears the risk and the types outlet that takes on the agent business is offset by of steps that can be taken to mitigate the risk with lower security risk to bank customers who no longer appropriate use of technology, bank processes, and need to individually carry cash to the bank. Many customer education. communities will actively contribute to the protection 6 of their agent because they value convenient access outsourced to a directly contracted company), but to payment, savings, and credit services. the operators of the agent's POS need not be. The agent represents a shifting of trust from the teller to It follows from this discussion that an agent's business the technology platform. One can think of agents differs from a bank branch in several important ways: as an "untrusted network"--where the trust that either the customer or the bank needs to place on · The cash balance in the agent's till is always the the individual operating the POS is fairly light. agent's and the agent's alone--even if the cash was generated through the agent business. It Both of these aspects open the possibility for is no business of the bank's managers how that banks to open an agent channel subject to lower cash is spent or even guarded. With a branch, on levels of regulation and at a lower deployment the other hand, the cash in the safe is the bank's, cost than installing their own branches. But, this backing up the liabilities the bank has issued to its comes with some limitations a bank would do well savings customers.6 Therefore, an agent should not to consider carefully: be subject to regulation on the security of cash. · The customers' and the bank's (and, by extension, · The bank has less control over the customer the bank supervisor's) trust in an agent is experience at the agent than at its own branch, fundamentally based on the strength of the bank- for two reasons. First, the agent's staff is not provided technology platform, and much less on subject to the same selection standards and the individual manning the POS terminal at the training as branch employees. Second, in a retail retail outlet. In a branch, on the other hand, trust store, the agent business is sitting alongside a set is vested as much on the infrastructure as on the of other retail products and propositions beyond tellers behind the window (who, after all, keep the the bank's control. cash deposit in their own drawers even though the · The agent performs a much more limited set of money is not theirs in any way). This is why bank transactional activities than a typical branch would; tellers are generally employees of the bank (or this is discussed later in this paper. Box 1. An analysis of Peru's cajeros corresponsales Peruvian banks have been establishing networks of is low. Banks provide signage for their agents, with banking agents, or cajeros corresponsales, since a subbrand to indicate affiliation with the bank (e.g., December 2005. With over 2,400 agents, Peru ranks Agente BCP, Interbank Direct, Agente Express [Banco fourth in number of agents worldwide after Brazil, the Continental], and Cajero Express [Scotiabank]). The Philippines, and South Africa. different generic terms for agents used by each bank limits public awareness of the concept. Indeed, Most banks in Peru tend to use banking agents most people do not seem to be aware of the kind of fundamentally to shift low-value transactions away activities they can conduct at the agent. from the more costly branch channel and to extend the reach of their existing branches. Accordingly, many So where have banks chosen to establish their are located within a block or two of a branch of the agents?a As shown in Table 1-A, agent networks are same bank. Banks do not charge customers to use the dominated by four big banks: 53 percent of agents agent channel (and do not allow agents themselves are in the Lima metropolitan area; 31 percent are to charge customers, either), thus positioning the agent channel as the lowest cost channel. Banco de in the remaining 24 departmental capital cities. BCP Crédito del Peru (BCP) is experimenting aggressively has the highest population coverage in Peru with its with using agents to establish a presence apart branch network (48 percent), but it also has achieved from its existing retail network. It is creating a sales the highest level of population coverage by agents support channel for agents, with some 33 business (64 percent), representing a 33 percent increase in its development people assigned to promote and sell population coverage using the agent channel. This is credit to customers within a set radius of an agent. because 54 percent of its agents are in districts where there is no BCP branch. The other three major banks Because most of the agent traffic is generated from in Peru have a smaller proportion of agents in districts the bank branch, nonclient awareness of the channel without a branch (35­41 percent). aThe geographic analysis in this section has been conducted at the district level. There are 1,800 municipalities in Peru, grouped into 195 provinces, and in turn composing 25 departments. The data on bank branches and agents are from the Superintendencia de Banca, Seguros y AFP. 6 Any credit line or overdraft the bank may have given to the agent is not specifically secured by the cash in the agent's till and hence represents an entirely separate (general) obligation by the agent to the bank. 7 Table 1-A. Number of branches and agents, by bank BCP BBVA Interbank Scotiabank TRBJO Mibanco Total Bank Branches Total 261 198 156 144 96 82 937 In metropolitan Lima 150 129 105 104 42 41 571 In other departmental capital cities 66 45 39 29 32 28 239 In smaller towns/rural areas 45 24 12 11 22 13 127 Population in districts with branches, as % of total population 48% 44% 39% 36% 38% 39% Banking Agents Total 1220 268 586 299 39 3 2415 In metropolitan Lima 595 75 423 155 34 1 1283 In other departmental capital cities 382 133 131 98 4 2 750 In smaller towns/rural areas 243 60 32 46 1 0 382 Population in districts with branches, as % of total population 64% 45% 46% 44% 18% 5% Summary Agents as % of total retail (branch + agent) points of presence 82% 58% 79% 67% 29% 4% 72% % of agents in districts with no branches 54% 41% 43% 35% 22% 0% Note: BCP = Banco de Crédito del Peru; BBVA = BBVA Banco Continental; TRBJO = Banco de Trabajo Table 1-B shows that, at one extreme, 86 percent of now have a banking presence exclusively through districts, accounting for 34 percent of the population, agent channels (sum of cells 0,1 through 0,>3). This have no bank presence at all (cell 0,0). At the other is a pretty good achievement in just over two years; extreme, 4 percent of districts, accounting for 42 but keep in mind that expanded physical coverage percent of the population, have a competitive retail of banking services does not necessarily translate banking presence, with at least three branches and at into take-up of banking services by those previously least three agents (cell >3, >3). As can be expected, unbanked. If we divide these figures by the total the districts in the latter category exhibit the lowest number of districts with an agent (the sum of all average needs index (0.05), whereas the districts in cells except in column 0), we find that 55 percent of the former category exhibit the highest needs index districts where there are agents, corresponding to 24 (0.56). b percent of the population, have no bank branches. This suggests that banks have deliberately targeted So what has been the contribution of agents in underserved areas to a significant degree. Even within terms of increasing the physical presence of banking this subset of districts, we see a larger number of services in the country? Roughly 8 percent of the agents going into districts with a lower needs index. districts, accounting for 16 percent of the population, bThe needs index, which ranges between 0 and 1, is based on principal component analysis across a range of socioeconomic variables. For a description of the methodology, see http://www.foncodes.gob.pe/mapapobreza/. 8 Table 1-B: Impact of agents on banking competition Districts with banking agents 0 1 2 3 >3 86% 4% 1% 1% 1% of districts 0 34% 6% 3% 3% 4% of population 0.56 0.27 0.22 0.19 0.08 Needs index 0% 0% 0% 0% 0% of districts 1 0% 1% 2% 0% 1% of population branches 0.14 0.21 0.13 0.33 0.13 Needs index 0% 0% 0% 0% of districts bank 2 0% 0% 0% 2% of population 0.11 0.20 0.06 0.08 Needs index with 0% 0% 0% of districts 3 0% 1% 0% of population 0.03 0.10 0.06 Needs index Districts 0% 4% of districts >3 0% 42% of population 0.15 0.05 Needs index The strategic role of 3,000 banking agents set up by HSBC in Brazil. This banking agents network primarily targets HSBC's existing clients and people who want to pay their bills in cash only. Banking agents must fit within the distribution strategies of banks, alongside other channels, such as branches or Targeting a new customer segment. The lower automatic teller machines (ATMs). Agents can provide operational cost the agent channel offers relative multiple benefits: increase client convenience, reduce to other existing channels might induce banks to transaction costs, and reach out to new customers. But it use this vehicle to cater to new customer segments is important that the bank has a clear strategic rationale that were previously not sufficiently economically for each agent it sets up, to drive decision making, attractive, for instance lower income customers in ensure appropriate agent setup and channel support, periurban areas. In this case, banks would need to and permit subsequent performance evaluation against develop their agent strategy within an appropriate, the original strategic intent. consistent proposition for new customer segments. Having a channel is not enough: the bank is likely There are four types of agent channels, based on to need to develop a particular product set that their strategic role for a bank: meets the needs and economic means of the new segment, marketing messages that appeal to them, Decongesting branches. Retail agents can be viewed and effective sales development and debt collection merely as "human ATMs" whose role is to provide procedures. Depending on how different the new greater customer convenience (more points, fewer target segment is from the bank's core business queues, more direct interaction with your money) clientele, the bank might go as far as considering and lower cost to the bank (shifting low revenue- setting up a separate organization and even a generating transactions outside the costly branch separate brand to tackle the new opportunity--a infrastructure). According to this rationale, agents kind of a "bank within a bank." This entity should are likely to cater to existing bank customers and have its own distribution networks and sales channel to be placed in reasonable proximity to the bank's with client-responsive products and marketing existing branch network (which is, after all, where its messages. This is what Banco do Brasil did when it customers are most likely to be). For the bank, the created Banco Popular in 2004. Within only three agent is another channel that requires little or no years, the bank reached more than 1.4 million adaptation to its commercial strategies. By way of previously unbanked people through more than illustration, under this category we would include the 5,000 agents. 9 Expanding geographic coverage. Retail agents can agent is closer to the ATM setup in that it fulfills a be conceived as branch substitutes in areas in which primary role of transaction processing. Yet, in all but transaction numbers and volume might be too low the first model of agents, the strategic intent is to roll to support a full-fledged branch. By piggybacking out agents as part of a broader strategy--to target on existing retail infrastructure, agent networks can new customer segments, to serve new geographies, be a viable solution for banks planning to expand or to avoid having to set up own points of sale and their coverage. Rural populations that previously did service. not have access to financial services or depended on long bus trips to reach the closest branch can now Therefore, banks need to figure out how the broad transact in their neighborhood. Because these agents range of customer requirements can be met in are likely to be in locations where there is little or no the absence of branches. Just placing agents and banking presence, cash management by agents will hoping they will meet all customer requirements pose much bigger operational problems than in the essentially relegates agents to a role of (partial) branch previous cases. They will find that it is costly and time decongestion. This will result in channel substitution, consuming to deposit excess cash at their bank. In with some reduction in total channel costs, but it is not Brazil, Banco Bradesco partnered with the national likely to generate substantial new banking business. post office to create national coverage using post Indeed, the experience internationally has been that offices as agents, creating Banco Postal. bank agents have been sustained by capturing bill paying services for both bank and nonbank customers, Creating a virtual bank without own infrastructure. with little impact on new customer acquisition for core A bank may seek to completely outsource client banking services. contact to retail agents, following a low-value, high- volume strategy. Such a bank is likely to target Banks need to ensure the role of agents fits clearly lower income customers who have little demand for within their broader commercial strategy. The best more sophisticated financial products and for whom way to approach this issue is to notionally unbundle transacting at a local store without the formality the activities of a bank distribution network and of a branch is more appealing. The bank will need identify which can be performed by agents and which to emphasize marketing and branding. It will need are best delivered through a different (but supporting) to design very simple products that are easy to mechanism. The answers depend on the strategic understand to minimize reliance on agent staff. Retail intent behind the roll-out of the agents (according agents will have to deposit or withdraw excess funds at to the four models outlined earlier) and the reality on other banks' branches, which may result in significant the ground. interbank fees for the bank. This is the approach Lemon Bank has followed in Northeast Brazil: it has The activities of a branch distribution network can be 5,700 agents and not a single branch. split in the following way. These scenarios illustrate that the purpose of the retail Transactional channel. This is the main purpose agent network will affect the value both banks and behind an agent network. It liberates the bank from their customers draw from the agent channel. It also delivering and collecting cash from/to each customer conditions the requirements for the agent and, more and from permanently deploying its own staff closer to important, the adjustments the bank will have to make customers. The agent channel may be complemented to its existing operations and product range to take by a mobile banking channel that allows customers advantage of the new agent channel. to effect transfers from their bank account directly, but that would still require agents to fulfill cash Embedding banking agents within transactions. a full channel strategy Marketing and referral channel. Third-party retail A branch is usually a one-stop shop for financial stores may not be a very useful channel to promote services. Customers can come in to make transactions, and sell banking products for several reasons. Their buy products, solicit financial advice, or record a degree of understanding of financial products may complaint. Branches often also house an outbound be limited, which would limit their effectiveness in team for sales or credit recovery. An ATM, on the other proposing services to customers. Their expertise is hand, is purely a transactional channel. A banking in highly transactional, reactive sales (e.g., product 10 placement on shelves), so they may not perform Credit recovery channel. Agents play a big role in as well in what needs to be a more selective, receiving loan repayments from customers, but they relationship-based, proactive sales process. They would not be in a good position to go after customers may bias the referrals to favor their good commercial who are overdue on their loan payments. Chasing clients, rather than seek out people who might be payments would be very much outside their normal better bank prospects but who do not patronize their range of activities, and they may not want to be seen store. In addition, some clients might not want their as the local enforcers if that could adversely affect merchant to have full knowledge of their financial their normal (nonbanking) commercial activities. needs and banking products. Hence, if the bank wants to develop a local loan portfolio, it needs to develop a mechanism for credit This does not mean that agents must necessarily recovery on overdue loans. fail in generating sales leads: in Colombia there are agents who are strong community leaders and are Customer care. Branches have traditionally been a able to draw people into acquiring banking services. prime touch point for frontline customer care. Banks that But the international evidence is that employees in engage in branchless banking need to use call centers retail stores do not make a very strong channel for or online channels to address customer queries. selling banking services. This discussion highlights that an agent cannot be, by Therefore, banks need to complement the agent itself, the answer to acquiring and developing banking channel with a parallel sales development effort, business when a bank is trying to tackle a new client whether through (a) teams of professional outbound segment or a new geography. The agent channel business development consultants and loan officers needs to be developed in the broader context of a full who can visit the town regularly to identify sales distribution strategy. The power of the agent channel prospects and help drive business into the local is essentially about specializing a set of players in agent; (b) partnerships with strong local community performing transactions on the bank's behalf, but players who can mobilize others, whether through that entails disaggregating traditional distribution associations of producers, supply chain networks, or bank networks. Other (nontransactional) roles still community organizations; or (c) a strong advertising need to be met. A successful branchless banking campaign with a call-to-action directing customers to strategy--whether it is segment or geography a contact center. driven--is one that recreates all these roles in an effective yet affordable manner. Account opening and know your customer (KYC) channel. Account opening poses a special challenge Setting up banking agents because of the KYC requirements imposed by regulations to combat money laundering and the Banking agents can come in very different shapes financing of terrorist activities. Banks are required and sizes: smaller independent merchants; large to verify the identity of their customers, and that retail chains, such as supermarkets or gas stations; often entails personal interviews at which customer post offices; or mobile agents, such as bread or identity is checked against some form of identification milk delivery trucks. Any retail business with a till and other relevant questions are asked. Although can potentially be an agent. In the countries CGAP banks generally are allowed to delegate this task visited, banks typically chose the local supermarket to third parties, they are responsible for any breach or pharmacy, outlets that are frequently visited of KYC procedures. Hence, banks must ensure KYC and trusted by most clients. In the case where the procedures are performed by parties adequately service is provided by a mobile network operator trained for the purpose and whom they can trust to (telecom-led), airtime resellers (typically smaller perform the function diligently. "mom and pop" shops) comprise the majority of the agent network. This may be the agent, but it may be that other people can be more readily trusted by the bank to Each bank needs to define its own agent selection do appropriate KYC procedures--whether the same criteria based on its own commercial strategy and its business development consultants that visit the town risk management rules and systems. However, from from time to time or other prominent authorities or our observations, the following general categories of townspeople. criteria seem to be the most widely used. 11 · Trusted by clients--history of the business, transactions. These are significant barriers for some personal reputation, and leadership of the retail businesses that otherwise might be interested store owner within the community; level of the in becoming banking agents. population's awareness about the store; nature of the business of the store; safety of area where Hence, banks often support agents in two additional store is located. ways. First, they usually provide a pooled insurance to · Convenient for clients--size, location, and all their agents against theft of cash or personal harm. cleanliness of the store; number and friendliness of staff; range of client needs the store can fulfill. Second, banks usually provide their agents with an · Trusted by the bank--credit history; track record interest-free overdraft that can be used only to fund of store's commercial operations; store owners' banking agent transactions. In this case, the store's police record; quality of existing cash handling and POS authorizes transactions as long as the store's control mechanisms. account balance at the bank does not go below the · Ease of installation for the bank--store already amount of the overdraft. The store manager can has bank account; level of staff's comfort with increase the volume of agent business it can handle technology; availability or possibility of telephone by depositing its own funds into the same account. line or other communication link; availability of The overdraft is a form of credit extension strictly suitable space within the store; openness to the between the bank and the retail outlet. It is the bank's co-branding preferences. bank's business to ensure it is repaid; the customer · Existence of potential synergies between the will not know whether its banking transactions are store's existing business and the new agent being cleared with the support of an overdraft or business--potential for generating additional foot not. Thus, in the event of default by the store on traffic and triggering additional sales (this helps an overdraft, there should be no claim back to the ensure commitment and might help the business customers whose banking transactions were enabled case as well). Many stores in Brazil reported up to through the use of the overdraft. 30 percent increase in sales because of their newly offered banking agent service. The maximum amount of overdraft a bank will be willing to give a store will be determined in the As stated earlier, the main instrument that governs first instance by a normal credit review process and the bank­agent relationship is the contract between secondarily by projected agent business volumes. them and the technology platform through which all The overdraft limit might be set at a lower level if transactions occur. The contract typically would cover the retail outlet is operating in a physically unsafe the following: environment, thus forcing the agent to go to the branch more often. Although the safety of the store's · The types of transactions the agent can undertake cash is the store's responsibility, banks sometimes feel on behalf of the bank and a list of prohibited responsible for the physical well-being of store staff activities and their customers and do not want to materially · The process to be followed for each type of increase that risk through their actions. transaction · The physical and service infrastructure the agent Scaling up the agent channel needs to make available and maintain · The technical platform the bank needs to provide Efficient financial systems are characterized by scale and maintain and specialization. They are the yin and the yang of · The processes to be applied by both banks and markets: scale calls for concentration of activity into agents to control risks and maintain confidentiality fewer players, specialization calls for fragmentation of customer data of roles across multiple players; scale is about doing · The supervisory rights of the bank things cheaply, specialization is about doing them · The structure of agent commissions well. Together they ensure that existing players are very good at what they do, and sustainably so. Two aspects that are clearly the agent's responsibility are (i) the physical safety of its staff and the cash The introduction of bank agents opens the door to in its till and (ii) the maintenance of sufficient funds outsourcing some branch operations to frontline in a bank account with which to offset customer retail outlets. The disaggregation of channels can and 12 generally does go further, creating several possible "plug and play" package, including agent selection players who bring further degrees of specialization and and contracting (whether directly or on behalf of the scale--and hence potential efficiencies--into banks' bank), agent installations and training, marketing retail channels. Consider the following examples. support for the outlets, and handling legal disputes in case something goes wrong. Retail chains or franchises. Rather than selecting individual outlets one by one, a bank would do well In Brazil, network managers also assume part of the to seek out established chains or franchises through risk stemming from agents' actions and are paid a which it can contract a collection of outlets. These commission per transaction, plus a bonus for growing chains will have widespread name recognition (which transaction volume at their agents. Lemon Bank, which helps in advertising where the agents can be found), does not own any branch infrastructure, uses about a loyal clientele (which helps deliver immediate foot 16 network managers for its 5,580 point network. traffic to the agent), and a host of prime locations in the areas they serve. Retail distributors. Banks may also consider partnering with others to fulfill much narrower roles Partnering with retail chains or franchises can also in support of agent networks. Distribution companies deliver significant operational advantages for a have fleets of trucks traveling frequently to the kinds bank. These include negotiating a single contract, of stores that are likely to be bank agents. These potentially granting a single consolidated credit line distributors can offer knowledge of the stores and to fund store-level banking transactions, leveraging can serve as cash delivery mechanisms, solving the staff education and training programs, streamlined vexing problem of how to transport excess cash from screening of outlets for eligibility, and support in isolated agents to the nearest branch. technology deployment at stores. Ultimately, scale and ubiquity are best achieved by In Brazil, the more powerful chains include the joint tapping into shared or interoperable networks of venture between Banco Bradesco and the postal agents that serve mul tiple banks, much like a POS- network (newly established Banco Postal has 5,569 enabled store today can accept cards from Visa or outlets), and Caixa Economica's deal with the 8,867 MasterCard issued by any bank in their respective lottery outlets. On the other hand, banks in Peru associations. Mas (2008) describes a system whereby report that it is harder to gain sufficient marketing the agent has a contract with at least one bank, but and branding presence in stores of larger chains, who may service customers of other banks with which are more concerned about controlling the "look and it does not have a direct contract as long as the feel" at their stores. agent transactions for these other (issuing) banks are governed by (i) the contract between the agent and Agent network managers. Daily management and its own (acquiring) bank and (ii) a separate agreement development of the agent network includes selecting, (either bilateral or through a common payments setting up, and training individual agents; monitoring network) between the issuing and acquiring banks.. the technical platform and each store's POS devices and providing technical support when a POS terminal Nevertheless, it is important to stress that the drive breaks down; checking cash levels at each point; and for scale and ubiquity needs to be made consistent running after agents that have reached their cash limit with the overall commercial strategy of the bank. but have not deposited funds at the branch. As discussed in the previous section, agents in their pure form perform only a transactional function, and Rather than developing such expertise in-house--not without appropriate marketing, sales, and credit a core activity for a financial institution--most banks collection support they are not likely to generate choose to outsource agent management to network significant additional banking business for the bank. acquirers. These are service companies who provide Pure numbers of agents will not make up for lack of everything from just the technology platform, to a full coherence in the bank's distribution strategy. 13 Box 2. The evolution of transaction and cash volume at an agent outlet Setting up an agent network--selecting the right clients around the agent. Especially at the beginning agent, marketing its services, acquiring new business of each month, the large amounts of cash collected in its location--is not easy. We have talked to several by agents require the store manager to travel several banks in the process of launching their first agents, and times per day to the nearest branch to deposit excess their experiences are often the same: too much cash funds. In the stylized examples below, we illustrate flowing into the agent's till. Initial transaction volume how a bank can estimate transaction and cash volume is generally composed of bill payments, because in a location and how transaction and cash volume can clients still have to develop trust to conduct banking evolve over time. transactions, and the bank will have to acquire more Table 2A. Estimating transaction and cash volume at agent network--a stylized example Population size 20,000 Number of households 5,000 4 per household Estimated bill payments during first month Number of transactions 1,250 1 bill per month per household, 25% of those paid at agent, average US$10 per Volume US$12,500 bill Payment days within month 70% day 1­5, 30% day 6­10 Instant withdrawals Formal salaries: 60% of those older than 18 yrs old are economically active, 5% formally Number of transactions 30 employed with direct deposit, 5% using Volume 3,600 agent to withdraw 60% of average US$200 monthly salary Payment days within month 50% day 6­10, 50% day 16­20 Other withdrawals: Number of transactions 250 5% of households withdraw once per month; average US$25 Volume US$6,250 Payment days within month 20% day 6­10, 50% day 21­26, 30% day 26­30 Note: For a simple simulator predicting a banking agent networks transaction volume and cash flow go to www.cgap.org/technology The bank estimates that one agent can process The bank generates US$500 from "users" (i.e., approximately 120 transactions per day (assuming people who pay their bills in cash) (transaction fee one POS device, four minutes per transaction, 10 of US$0.4 per paid bill), as well as US$84 from its hours open per day). Based on this, the bank needs clients for withdrawing funds from their bank accounts at least two banking agents to absorb the 200 daily (transaction fee of US$0.3). This is before paying agent transactions during the first five days. Under this commissions. scenario, the agent network Measuring transaction and cash volume · processes 1,530 transactions per month at an agent outlet · shows a positive net cash position of US$2,650 (most cash is flowing in during days 1­5) The bank recently launched a banking agent. Figure · receives US$278 in commissions (US$0.2 for bill 2-A shows the cash flow at the outlet during the payments, US$0.1 for withdrawals)a initial 90 days. The agent's overdraft is US$2,000. The · deposits (at least during days 1­10) and withdraws nearest branch is 15 minutes away by bus (US$2.5 per (after day 10) funds from the bank branch return ticket), and it takes 45 minutes for the agent to stand in line to deposit or withdraw funds. 14 Figure 2-A. First 90 days: Cash volume at agent outletb 18,000 14,000 10,000 $ US 6,000 2,000 ­2,000 1 4 7 10 1 3 1 6 1 9 2 2 25 28 31 34 37 4 0 4 3 4 6 49 52 55 58 61 64 6 7 7 0 7 3 76 79 82 85 88 DAYS Cumulative net cash Cash limit Net cash per day Cumulative net cash w/deposits Even though daily net cash positions are not extremely To improve the agent's net cash position and provide high, the cumulative cash position rises quickly, and an incentive to the agent, the bank takes a few without any cash deposit at the branch, the agent measures, including a marketing campaign at the would hit its cash limit on day 5. nearest branch informing existing clients about the agent outlet closer to their home. The bank also holds Key information for the bank to note during the 90 a small promotion event in the store to acquire new days of operation include the following: clients. · Total number of transactions: 1,407 (21 per working The bank negotiates with the municipality to day, 469 per month). distribute the biweekly social payments to 100 · Volume of transactions processed at agent: recipients (each payment is US$20) in the town. US$25,149 (US$370 per day) of which 89 percent In response to the agent's complaint that it is too represent cash inflows. Net cash position after 90 expensive for the agent to travel to the branch, the days is US$19,875. bank changes the agent's commission structure. · Transaction pattern: Larger number of transactions Now, for each cash-in transaction, the agent receives at the beginning of each month, and generally more US$0.3 and for each cash-out transaction the agent transactions observed on Mondays. receives US$0.1. (See the next section for a more · Store manager deposits US$300 each weekday at detailed discussion on agent commission structures.) the branch, transporting a total of US$19,200 to the In addition, the bank installs a fast-track line or a "VIP branch. pass" at the branch at which the agent can deposit · Agent generates US$281 in commissions and and withdraw funds without waiting more than five spends US$160 on bus tickets and 80 hours (i.e., minutes. This reduces its travel time to the branch eight working days) on the bus and in line at from 75 minutes to 35 minutes. The bank is satisfied the branch. overall with the agent's performance and considers increasing the overdraft to US$4,000. 15 Figure 2-B. Second 90 days: Cash volume at agent outlet 18,000 14,000 10,000 $ US 6,000 2,000 19 39 59 79 99 ­2,000 101 301 501 701 901 111 311 511 711 911 121 321 521 721 921 131 331 531 731 931 141 341 541 741 941 151 351 551 751 951 161 361 561 761 961 171 371 571 771 971 DAYS Cumulative net cash Cash limit Net cash per day Cumulative net cash w/deposits Key information for the bank to note during these spikes in cash-in and cash-out movements. Luckily second 90 days of operations include the following: the cash disbursements in this example were not too large, but the biweekly withdrawals could have put the · Total number of transactions: 2,148 (31 per working agent in a difficult position if the agent did not have day, 716 per month) (i.e., increase of 741 of which sufficient funds at hand. Hence, the bank should not 600 are from social payments). only help the agent balance cash in and cash out over · Volume of transaction processed at agent: a certain period, but it should also spread cash in and US$40,599 (US$597 per day) 64 percent of which cash out transactions as much as possible. This could are deposits. Net cash position after 90 days is be done by negotiating with local service companies US$8,927. that bill payments would not be paid only once a · The agent still goes to the branch 27 times (with month, but every other week, and maybe timed with the initial overdraft, the agent would have to travel disbursements of social payments or withdrawal of 37 times), but this time not only to deposit, but formal salaries. also to withdraw funds especially for the social payments. The agent transports a net of US$8,400 This example illustrates how cash transactions affect to the branch. The social payments accumulate to an agent outlet and how banks can predict some disbursements of US$12,000 during the 90 days. problems, but not all of them. One of the biggest · The agent generates US$489 in commissions, challenges banks currently tackle in their agent spends US$37.50 on bus tickets, and now only 16 networks is cash management. Cash transport from hours (i.e., two working days) on the bus and in the the agent to the branch can be reduced through some fast-track line at the branch. of the measures described. However, cash transport always will be an element of the agent business. The Because of the consistent cash outflows, the net cash agent will net a community's cash flow and, rather position at the outlet improves significantly. However, than having 200 people pay their bills at the branch, for the agent, it is not the net cash position at the end only the one store manager or an employee will need of the month that is important, but rather the daily to do so. a This is a large amount if you consider, for example, the minimum salary in Colombia is US$250 per month. b In Figure 2-A, the "cumulative net cash" shows the volume of cash collected or disbursed during the three months: (cash in ­ cash out) Day 1 + (cash in ­ cash out) Day 2 + (cash in ­ cash out) Day 3 + .... The "cumulative net cash w/deposits" shows the fluctuations in cash held at the agent considering the shop owner's frequent cash deposits: (cash in ­ cash out ­ cash deposited at branch + cash withdrawn at branch) Day 1 + (cash in-cash out ­ cash deposited at branch + cash withdrawn at branch) Day 2 + (cash in ­ cash out ­ cash deposited at branch + cash withdrawn at branch) Day 3 + .... c Commission also could be structured with a fixed component per transaction, plus a tiered amount based on the amount of the transaction. For a detailed explanation of the recommended agent commission structure, see "Making the Business Model Work." 16 Making the business cost if the store manager hires a person who runs model work only the POS terminal.) · Maintaining sufficient liquidity in the till, the cost of In any distribution channel strategy, the business which will be a combination of interest foregone, model needs to work for all parties involved. additional security risk, and staff time and transport Otherwise the model is not sustainable and either cost incurred in depositing/withdrawing cash at the the contract will need to be renegotiated or one bank. These costs are driven by the net volume of of the parties will not have adequate incentive to transactions processed (i.e., cash in less cash out). continue developing the channel. Indeed, in the early In practice, most agents take cash in on net, so days of agent networks in Brazil, the system suffered most often there will be an incremental cost on from very high agent turnover attributable, at least in deposits only. part, to the unrealistic expectations many agents had · Holding sufficient account balances in the bank to about the profit the agent business would generate. offset customer transactions. The cost associated Let us consider first what would be the appropriate with this will be zero if, as is often the case, the remuneration structure for the agent; the general bank balance is provided as an interest-free principles are discussed next, and the case study in overdraft. Otherwise, it will be the average bank Box 2 provides an example. balance times the difference in risk-adjusted return between the store's normal commercial business The agent's perspective and the bank deposit rate. Where there is little or no effective competition Beyond cost recovery, the incentives the bank would among agents, agent commission should be paid by like to create for the agent are as follows: the bank (though perhaps chargeable to the customer directly against the customer's account) rather than · Drive transactional volume--link remuneration to by the customer in cash directly to the agent. This transactions processed. creates transparency and eliminates opportunities for · Service both small and large transactions--the abuse by agents by misstating fees. Where there is commission should reflect the more onerous competition, agents may be allowed to compete for burden that larger cash transactions have on the local business by being able to determine their own store in terms of security, use of limited liquidity, commissions payable by customers. Customers can and more frequent trips to the bank. If all cash then assess the fees charged at an agent against the transactions incur the same fee independent of general level of service provided (including reliability value, agents may be disinclined to accept high- on the availability of cash). denomination transactions. · Drive customers to bring money into the system--a The structure and level of fees should be a function of deposit is better business than a withdrawal because two things: costs the agent incurs and incentives the the bank earns float and by definition will bring in a bank wants to create for the agent and customers. second transaction fee (associated with a withdrawal, In almost all the banking agent networks we know, a transfer, or a payment) later on that can be split banks pay a commission per transaction to the agent, between the bank and the agent. But if cash-in is which is often different for specific products. predominantly for bill payments and loan repayments rather than deposits, providing an incentive for The costs of the banking agent business for the store cash-in may not have the intended result. owner are mostly variable. They can be itemized as · Use the agent's own funds to top up the agent's follows: bank account, rather than relying on the bank's overdraft facility. · Use of store space, which is notionally a fixed-cost per month. We recommend a remuneration structure to the · Staff time in processing transactions through the agent based on a commission composed of a fixed POS terminal, which is proportional to the absolute part per (electronic) transaction processed and a number of transactions processed. (With increasing variable part (expressed either as a percentage or as banking agent activity, this could become a fixed stepped increases in fixed amounts) on the value of 17 cash transactions processed. The agent's commission The bank's perspective could be higher for deposits than for withdrawals because this reflects the agent's higher cost for such The costs to the bank for using an agent channel are transactions and gives the agent an incentive to typically the following:7 go after new business. The commission could also depend on the amount of overdraft granted by the · Amortization of initial fixed cost of setting up the bank (higher overdraft would mean lower commission agent (including installing POS terminal, conditioning level) and on the frequency the bank expects the the space, training staff, and launching marketing agent to clear the overdraft by depositing excess cash activities), as well as initial system integration. at the branch (more frequent depositing would mean · One-time cost of card issuance, per client. a higher commission level), thereby reflecting the level · Transactional commissions paid to the agent. of credit risk incurred by the bank. · Communication cost for the POS. This will be per transaction (if a connection to the bank needs to The commission structure should be very simple, be established each time) for online transactions, at least initially, so that agents can grasp the but might be a fixed cost per month if using fixed business opportunity. Banks might initially adopt a Internet connectivity. simple per-transaction fee, perhaps with a minimum · Back-office cost of processing transactions, which is guaranteed fee for the first few months. Over time proportional to the number of transactions. banks can then adjust the commission structure to offer the right incentives to make the business Developing an appropriate structure of bank charges model more sustainable. to clients using the agent channel is essential to drive adoption. We offer the following principles: Besides the level of commissions, the other fundamental determinant of the business case for the · No account opening or maintenance fees, which agent will be the number and volume of transactions customers see as barriers to entry. Fixed costs it can expect to process. This will be determined (installation, cards) should be amortized on usage primarily by the bank's marketing framework: range variables. and nature of services offered, branding and local · Banking agents, in principle, should be the lowest sales presence, and agreements with utility companies cost channel for cash transactions, and the charges for bill payments and with local employers for salary for using them should reflect that. Customers should payments. The agent has more limited tools to attract be rewarded for using this channel rather than more new business, though as stated earlier we have seen expensive and more easily congested branches or specific instances of a wide variation in transactional ATMs. volumes going through different agents operating · Transaction charges should be lower on deposit than in similar environments for the same bank. Based on on withdrawal, reflecting the additional revenue international experience, it seems that agents might deposits bring (again, float plus a subsequent drum up business for their banking agent activity, reverse transaction). This may seem at odds with but most will not consider it their job to actively the higher commission the bank might pay the promote it any more than they promote the rice on agent for a deposit, but this reflects that the bank their shelves. stands to gain far more from a deposit than from a withdrawal. So the bank should aim to recover A final component of the agent's business case is the more of its costs when the money is on its way in, benefit the agent brings to the agent's core business, not out. either in terms of more people patronizing the store or people picking up more things when they go to the store to cash in or out. This is hard to quantify, as is another benefit that has been reported to us: some store owners see a credibility benefit from having their store associated with a bank logo. 7 This discussion assumes that the bank is managing its network in-house. If it engages a network manager, the cost structure to the bank may be different, reflecting the nature of the tasks outsourced and the contractual arrangement it has with the network manager. Also, some costs listed here might be shifted to the agent, particularly the communication cost. 18 Table 2: Banking agent regulation in five different countries Brazil Bolivia Colombia India Peru Date of regulation 1999 (CMN 2007 (Circular 2006 (Decreto 2233) RBI Circulars 2005 (Circular 2640/99), 2000 535/2007) DBOD.No.BL.BC. 2147-2005) (CMN 2707/2000), 58/22.01.001/2005­2006, abrogated. 2002 (CMN DBOD.No.BL.BC. 2953/02), 2003 72/22.01.009/2005-2006, 2008 (Resolución (CMN 3110/03 and DBOD.No.BP.40/21.04.158/ 775-08) CMN 3156/03) 2006-2007a What third parties can Any enterprise Any legal Any legal entity or NGOs/MFIs set up as a Any legal entity or work as agents? entity or person that serves nonprofit trust or society, person serving the person, solvent the general public cooperative societies, Section general public and and without 25 nonprofit companies, without negative negative credit post offices credit history history What kind of approval is Approval of Notify only Approval of bank's None specified in regulation. Approval only for needed from the Central agents providing agent contract, none In practice banks notify first agent contract Bank before contracting "banking services" thereafter Central Bank. signed, then notify an agent outlet/retail (i.e., account only for each new chain? opening, deposits, agent withdrawals, and not just bill payments) Does the bank have to With each agent With each With each agent With each agent or with With each agent sign a contract with each or with network individual or with network network manager owning or or with network agent or each network manager owning agent. manager owning subcontracting a group of manager owning manager? or subcontracting a Regulation or subcontracting a agents or subcontracting a group of agents does not group of agents group of agents mention cases of network managers. Is the agent required to No Yes Nob No No work exclusively for one bank? If not, can the agent sign Not mentioned in No No No Not mentioned in one master contract with regulation regulation an acquiring bank through which it channels other banks' transactions? Is bank responsible for all Yes Yes Yes Yes Yes transactions conducted at the agent toward its account holders? Does transaction No, within 48 hours Yes Yes No, data have to be sent Yes settlement have to at the end of day or next happen in real time? working day Can agents conduct KYC No, agent can only Yes No, agent can only No, agent can only fill out No check to open accounts? fill out account fill out account account opening forms and opening forms and opening forms. collect copies of identity and collect copies of other documents. identity and other documents. a "Financial Inclusion by Extension of Banking Services--Use of Business Facilitators and Correspondents," RBI Circular, 25 January 2006, as amended 22 March 2006. "Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks," RBI Circular, 3 November 2006. b But the agent has to have a bank account with each bank for which it processes transactions. 19 These considerations relate specifically to the use customer transactions are captured. The costs of of agents as a transactional channel. Depending the bank's distribution network can be reduced, on the bank's strategy, this channel will need to be while still effectively controlling banking risks. But supported with a range of other activities the bank installing the appropriate technology is often the easy will need to factor in its business case. The business part as long as agent outlets have electricity and case should be based on the entire outreach strategy, telecommunications coverage. not on the agent channel narrowly. It is therefore not possible to generalize on how to construct the The main challenge is strategic: understanding the business case for a bank. main purpose of this new channel and how it fits within the bank's other customer segmentation, What can regulators and banks service proposition, and branding objectives. do to unleash the power of agent Especially for banks looking to target new client networks? segments or new geographies, there are three issues that need to be addressed: The story outlined in the last sections is premised on banks being allowed to outsource certain 1. A bank will have to learn how to establish and functions along the financial service delivery chain. run a banking agent network, overcoming From a policy perspective, a certain and conducive the technological and operational challenges regulatory environment is the foundation of all legal described. banking agent activity.8 Agents should benefit from 2. A bank will have to adapt sales and marketing a different, lighter sort of regulation than bank activity, as well as product design and customer branches, because there are no issues of security service, to its new clients. of cash balances held by the agent (from the point 3. A bank might have to tackle basic financial of view of the bank and its customers). Moreover, literacy barriers and develop ways to effectively there is an obligation to maintain an end-to-end identify clients who do not possess a formal form technology platform with stringent security features of identification. to ensure the integrity of transactions happening through the agent. In fact, in some countries like Many banks focus primarily on the first issue, setting Brazil, it was the stringent regulation of branches up the infrastructure, and leave the other challenges that increased the relative attractiveness for banks for agents to resolve on their own. This might be to use banking agents (Kumar, Nair, Parsons, and one of the reasons why low-income populations use Urdapilleta 2006). Table 2 shows how regulators agents to pay bills, but there has not been a significant in five different countries are approaching the increase in the use of other formal banking services. regulation of banking agents. We believe that agents should not be expected to take over more than transaction handling. Without We have put forth the view that a banking agent adequate product development, marketing, and network is fundamentally a technology play for a sales support from the bank, the role of agents in bank. With appropriate technology, the bank can supporting and developing their communities will afford to be a little bit more relaxed about how be limited. 8 For more information on the regulatory environment for the use of agents, see Lyman, Pickens, and Porteous (2008). 20 Annex 1. A nontechnical guide to POS technology options This annex describes alternative technology requires continuous fixed or wireless signal strength. implementation options for the POS that may be used But it works with standard magnetic stripe cards and by an agent under the trust scheme described. At a with lower specification POS terminals, because minimum, a POS device must contain: the cards themselves do not need to hold any transactional information. · A card reader that can read the information stored on the magnetic stripe or chip of a card. There is an offline technology solution that requires only (As discussed below, it also may be able to write sporadic connectivity, as little as once a day, entailing information into the chip, if using the offline mode, the use of smartcards--cards with an embedded and the card may be virtual, i.e., embedded in a chip that can securely store and update information mobile phone.) on available bank balances and recent transactions. · A numeric keypad, through which users can enter The retail outlet's smartcard holds the balance of its their PIN and transaction amounts. account at the bank, and the client's smartcard holds · A screen large enough for the users to be able to the balance of the client's account at the bank. As view and validate information pertaining to the long as all transactions are done through the cards, transaction. and these are updated after each transaction by a POS · A set of encryption keys held in highly secure device, the cards ought to contain the latest balances memory, so that all communications between the on their respective accounts. The POS device is then POS terminal and the bank's server can be conveyed in a position to authorize the transaction between the securely, with no possibility of decryption by a third agent's card--holding the store's account balance-- party. The standard is keys of a minimum length of and the client's card--holding the client's balance-- 128 bits. without connecting to the bank's main server. As · A printer, to issue receipts for each (successful or long as both are within limits, the transaction will be attempted) transaction. authorized, and their respective balances on the cards will be updated by the POS terminal (acting now as Optionally, a POS device might include a full keyboard card writer rather than reader). Here the bank-installed (if additional customer information is to be captured, POS at the store (rather than a central bank server) e.g., name and address for account opening), a acts as the authorizing entity. biometric (e.g., fingerprint) reader, a barcode scanner (to capture bill information), or a camera (for security). Occasionally, wireless connectivity by the POS terminal will need to be established to communicate There are several ways in which these requirements the updated balances and the full transaction history can be implemented. We consider the two main of the POS device since the last synchronization, so decision choices: whether to have an online or offline that all account balances can be recalculated on the capable system, and whether to use dedicated servers of both the acquiring and the issuing banks. terminals or mobile phones as POS devices. We Additionally, all the POS terminals in the system must then discuss the benefits and requirements for record all recent transactions undertaken so that, technical interoperability. if a customer loses his or her card, the transaction history can be reconstructed and a new card can Online versus offline transaction be issued, with no loss of value to the customer. All authorization customer transactions need to take place with the card; otherwise the card cannot by itself keep track of The simplest authorization mechanism that can be the available bank balance. established for transactions at the store is having a real-time communications link between the store Specialized POS device vs. mobile phone and the bank. The authorizing module is within a bank server, and the POS terminal acts merely as The discussion in this paper assumes that the cash an information relaying mechanism. Such online transactions at the retail outlets were recorded through transacting incurs higher communications cost and in-store POS devices, but they could also happen 21 through mobile phones. The two are fundamentally purpose of communicating the account information the same thing: the mobile phone is a POS in your to the agent. With a mobile phone, the customer pocket. Traditional POS systems physically separate cannot be expected to type in his bank details on a the card, which is kept by the customer, from the tiny keyboard each time he transacts, so his mobile card reader, which is typically deployed at the store. phone number must be linked to his bank account A mobile phone is a card (think of it as the SIM card) automatically, through a database managed either with a card reader attached (the handset itself). by the bank (if it is a proprietary mobile banking system) or a payments network provider (if it is an Which device to base a transactional solution on interoperable industry solution). This database would is simply a question of numbers. When there is no need to be maintained with due concern for privacy deployed infrastructure at all, it makes sense to set and confidentiality of customers' information. up infrastructure at the agent because there are fewer stores than customers; just let the customer Technical interoperability hold the piece that stores his personal information. With the spread of mobile phones, we now find There should be a high degree of technical ourselves in the lucky situation where the number interoperability between all the cards and POS of potential POS devices has ballooned--most terminals issued in a particular market. Even if there customers have one. Being able to leverage this are no commercial arrangements in place to enable deployed base of card readers means that customers infrastructure sharing between banks, deploying can undertake POS transactions remotely, without technically interoperable solutions has multiple necessarily having to gain access to a third-party advantages: it allows banks to retain the option of card reader. This is the true transformational power reaching commercial interworking agreements in the of mobile transactions. future without having to change the installed base of cards and POS terminals; it allows banks to purchase There are two ways in which a mobile banking standard equipment at lower unit costs because transaction will differ from a POS transaction. First, of the higher scale economies in production; and with a mobile phone transaction, two devices are it minimizes the risk of technical obsolescence of involved: one in the hands of the agent and the other equipment. Technical interoperability requires the in the hands of the customer. These are separate following: communications channels that somehow need to be linked so that the bank can deal with the information · The size and technical characteristics of each relating to this specific transaction. This is solved generic type of physical card (magnetic stripe, by having one party provide the other party with smartcard) must be standardized. For instance, their phone number (e.g., the retail outlet might ask smartcards might be based on the now widely the customer to fill in a cash deposit/withdrawal slip accepted Eurocard MasterCard Visa (EMC) stating his mobile number and the amount of the specifications. transaction). From then on each party communicates · More advanced POS terminals should be able to through its own mobile, but it is as if the parties are interact with multiple (typically older) types of cards sharing a POS. (e.g., smartcard readers that also have a magnetic stripe reader, as well as a mobile payments client). Second, in the case of a card-based system, the card · There should be a unique numbering scheme for all number identifies the issuing bank and the customer's cards, so that any card in principle can be related account number, so swiping the card serves the to a bank account held at any bank. 22 Annex 2. Risk analysis of bank agents The following table lists a variety of risks that may that need to be taken. It is intended to show how, exist when a client­bank interaction occurs through for most risks that one can think of, there is generally a third party. Each risk is associated with possible a potential technical solution; regulators and banks risk mitigation options and the party that assumes will need to decide what is the appropriate balance the residual risk if the risk in fact comes to pass. This between risk minimization and cost and complexity of table is merely illustrative; it is not meant to be a the technical solution. comprehensive list of all risks, nor of all the measures Type of risk Possible risk mitigation options Who assumes residual risk Theft of cash The client is robbed in or around the · Bank chooses agent based on security of location. Client agent premises · Bank monitors incidents to establish patterns and (as with an possible connivance by agent's staff. outdoor ATM) The agent's cashbox is robbed, or · Agent can keep smaller amounts of cash and travel more Agent the agent is robbed on the way to/ often to the branch. from the bank branch · Bank can offer pooled insurance to all its agents. Identity theft Clients share or do not sufficiently · Require two-factor authentication (e.g., card plus PIN) Client protect their credentials · Financial education by the bank (as with an ATM) In a moment when the POS is · POS operators need to authenticate themselves with card Agent unsupervised, someone uses it plus PIN. fraudulently · Set defined session periods, after which operator needs to reauthenticate. · POS works only with two cards and two PINs (operator and client), so securing POS alone is not enough. Errors or fraud relating to receipts Client's transaction does not match · Receipt is produced automatically by the POS device, Client what is stated on the agent's receipt with no manual intervention. (as at a branch) · Minimum content of receipt is specified by regulation (bank name, agent name, POS device ID, time and date, amount of transaction, etc.) · Financial education: check the receipt. Transaction that appears to have · Receipt is produced in all cases, even if transaction failed, Client failed (hence, no exchange of cash) to notify client of transaction status. did in fact go through. · Financial education: always get a receipt and check it before leaving. Client is told printer is not working · POS device blocks automatically if there is no paper or Client but is assured the transaction can still printer malfunctions. (if he agrees to be made. · Printer is clearly visible to the client, so the client can see a nonreal time that a receipt is being produced. transaction) 23 Type of risk Possible risk mitigation options Who assumes residual risk Bank errors or fraud The receipt states successful · Direct communication between POS at agent and bank's Bank transaction, but does not correspond core systems. to what happened in the client's · Proper controls on bank systems. account The receipt states successful · Standard bank regulation and supervision. Bank transaction, but the value of the · Deposit insurance for the client, if the bank ceases deposit subsequently disappears operations. Fraud by third parties POS device is stolen and used · POS must be used with card and PIN of authorized Bank fraudulently operator. For improper use, would also need a client card and PIN. · POS tied to communication point of agent (phone number, IP address). · POS automatically shut off by bank outside of agent's business hours. Client goes to a fraudulent agent, · Bank could give a unique identification code to each Bank with a "fake" POS client, and POS could show it before transacting so clients can verify they are "talking" to the bank. · Clients should be able to easily check list of authorized agents from the bank or a public registry. The POS is manipulated (e.g., · Use of specific-purpose terminals, avoiding open Bank spyware is introduced) architectures. · Software can be updated only remotely with proper bank authorization. The communication between the · All communications are encrypted end-to-end. Bank POS and the bank is intercepted and · Appropriate level of security (e.g., at least 128-bit manipulated encryption keys). No. 47 May 2008 References Please share this Ivatury, Gautam, and Ignacio Mas. 2008. "The Early Focus Note with your Experience with Branchless Banking." Focus Note 46. colleagues or request Washington, D.C.: CGAP. extra copies of this paper or others in this series. Kumar, A., A. Nair, A. Parsons, and E. Urdapilleta. 2006. "Expanding Bank Outreach through Retail CGAP welcomes Partnerships: Correspondent Banking in Brazil." your comments on World Bank Working Paper No. 85. Washington, this paper. D.C.: The World Bank. All CGAP publications are available on the Lyman, Timothy, Mark Pickens, and David Porteous. CGAP Web site at 2008. "Regulating Transformational Branchless www.cgap.org. Banking: Mobile Phones and Other Technologies to Increase Access to Finance." Focus Note 43. CGAP Washington D.C.: CGAP. 1818 H Street, NW MSN P3-300 Washington, DC Mas, Ignacio. 2008. "Being Able to Make (Small) 20433 USA Deposits and Payments, Anywhere." Focus Note 45. Washington, D.C.: CGAP. Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org © CGAP, 2008 The authors of this Focus Note are Ignacio Mas, an adviser for Barrantes Arce and Kabir Kumar for their help in the analytics in the CGAP Technology Program, and Hannah Siedek, microfinance boxes 1 and 2, respectively. analyst with CGAP's Technology Team. The authors thank Luis CGAP publications are frequently cited in other works. The suggested citation for this paper is as follows: Mas, Ignacio, and Hannah Siedek. 2008. "Banking through Networks of Retail Agents." Focus Note 47. Washington, D.C.: CGAP, May.