Reaching poor clients with financial services in rural areas is often prohibitively expensive for financial institutions since low transaction numbers and volumes typically would not cover the cost of a branch. To overcome that challenge, financial institutions in developing markets are increasingly turning to banking agents, using retail outlets to process financial transactions that would usually be handled by a branch teller.  Lower set-up and running costs of banking agents should enable providers to viably offer a full range of financial services to low-income clients in rural and remote areas.

What are banking agents?
Banking agents are retail, lottery, and postal outlets that work on behalf of a financial institution and let clients deposit, withdraw, and transfer funds, pay their bills or an insurance plan, inquire about an account balance, or receive government benefits or a direct deposit from their employer. The agents process transactions with point-of-sale (POS) card readers, a mobile phone, barcode scanners, and sometimes personal computers that connect with the bank’s server using a dial-up or other data connection. The clerk at the retail or postal outlet, not a bank teller, collects and disburses cash, and in some cases – depending on local regulation - can open bank accounts for new clients and fills in credit applications.

Why do financial institutions develop banking agent networks?
Some financial institutions in urban areas use banking agents primarily to divert existing customers from crowded branches. In areas with little branch infrastructure, the agent is used to open and service accounts for people who would not use a bank branch and previously had no access to banking services.  The low set-up and operational costs of banking agents counterbalance the low transaction values and volume in these locations. In addition to reducing delivery costs, increasing client convenience, and enlarging market share, banking agents can be an attractive service channel because they may not be subject to the same stringent and costly regulations that apply to branch operations.

What are the regulatory prerequisites for the use of agents?
To legally use non-bank agents to conduct transactions on behalf of financial institutions, a certain regulatory framework is necessary. Many Latin American regulators have recently enabled the use of banking agents to increase financial system coverage and access to finance in their markets. However, regulation on Know Your Customer requirements, product offerings at agents, transaction handling, technology devices, and many other issues will also impact the use of agents in a country.

What is the role of technology in running a banking agent network?
Establishing and operating a banking agent network is technology-intensive, requiring a range of different technologies to communicate transactions, identify customers, monitor transaction values and volumes, and authorize, verify, and settle transactions.  Financial institutions equip their banking agents with a combination of point-of-sale (POS) card readers, mobile phones, barcode scanners to scan bills for bill payment transactions, personal identification number (PIN) pads, and, in some cases, personal computers (PCs) that connect with the bank’s server using a dial-up or other data connection.  Clients that transact at the agent use a magstripe bank card or their mobile phone to access their bank account or e-wallet.

How do clients benefit from banking agent networks?
Banking agents often provide first-time access to payment and banking services low-income clients living far away from the next branch, as well as convenience for urban clients in conducting their daily transactions. The impact of financial services on people’s livelihoods has been thoroughly documented and is applicable also for access provided through banking agents. In addition, banking agents offer proximity (they’re typically located close to a customer’s home, saving a long bike ride or bus ticket), as well as more flexible opening hours and shorter lines than branches. Agents are often more accessible than branches, which many poor clients feel intimidated about using.

How do banking agents process transactions?
The transaction process for banking services using a bank card is simple. An existing bank client presents his or her card at the agent, requests a transaction, and specifies the amount to be withdrawn, deposited, or transferred. Selecting the type of transaction on the POS device, the agent enters the amount, swipes the client’s card through the reader, and lets the client enter a PIN number. Once the transaction has been authorized by the financial institution, the device prints the client’s receipt. For bill payments, clients hand over their bill, and the agent swipes it through the bar code scanner. In most cases, the client will hand over cash to pay a bill and receive a receipt.

Before a banking agent can start operating, the store has to deposit a certain amount of cash in an account at the bank it will be working for. These funds serve as the agent’s “working capital.” Many banks will extend agents a credit line instead of asking them for a cash deposit. When a client withdraws or deposits money, the agent account is adjusted in the same amount. If deposits and payments (cash in) at an agent’s location exceed withdrawals (cash out) beyond a specified limit, the agent’s transaction device blocks and can only be unblocked if the funds are deposited at a branch.

How does the cash end up at the branch?
Even though banking transactions are processed in real time, the settlement of cash between the agent and its financial institution often happens hours later. In case the volume of cash-in and cash-out is balanced, i.e., the agent does not run out of cash to be able to service client withdrawals, but also does not reach a maximum cash limit, the agent can continue operating. However, especially at the end of the month when many clients pay their bills or when salaried workers withdraw their salaries at a specific day, the agent risks having a liquidity problem. In that case, a contracted cash transport company has to pick up surplus funds, or provide additional cash. In some countries, like Brazil, the agent himself can make a deposit, up to a certain amount, at the nearest branch.

Why would a retail outlet want to become a banking agent?
For handling banking and payment transactions on behalf of a financial institution, the retail or postal outlets receive a small commission. However, the main benefit for banking agents is not from these small commissions, but from the newly generated foot traffic into their store. Stores are able to attract new clients who will not only use the newly offered banking agent services, but will also purchase other products. In addition, working for a financial institution bolsters the outlet’s reputation and helps to distinguish it from others. Depending on the specific contract, financial institutions will also pay for specific marketing activity in the agent’s community, or incentives based on performance. Some retail outlets, however, are also concerned about potential risks of working as banking agent since they will have cash at hand which could attract theft and fraud.

What are key characteristics of a good banking agent?
Since the banking agent will often be the only connection between the financial institution and its customers, the selection of the banking agent is extremely important to minimize fraud, guarantee customer service quality, achieve good transaction performance, and effectively cross-sell financial services to existing clients. Features of the community in which an agent is located will also impact an outlet’s success. Financial institutions should apply specific criteria to identify their banking agent including a security check (including credit history, criminal record, etc.), the store’s reputation within the community, its experience with POS devices, for example.

How do financial institutions manage a banking agent network?
Agent management involves selecting the location, choosing an agent, training and setting up the agent, cash management, and providing 24/7 technical and emergency support. Financial institutions must also conduct marketing and promotion activities to support agents in their locations. Rather than developing expertise in-house in how to best identify, select, train, monitor, control, and pay agents, some banks have chosen to outsource agent management to network management companies.

What are the costs and revenues in establishing and running a banking agent network?
Many financial institutions see banking agents as a way to reduce their costs. Even though financial institutions will not have to cover the high up-front cost of building branches, they still have to invest in new technology, internal organizational changes, and product development to establish their agent network. To run the network successfully, costs include monitoring, technical and product support, as well as cash transport in case of liquidity problems at the service points. Financial institutions generate revenues from fees and interest rates charged to clients and strategic partners, as well as from investment income from clients’ deposits. The costs and revenues of a banking agent network will fluctuate depending on the network structure, types of agents chosen, financial products offered, and local regulation.

What financial products and services can be offered by a banking agent?
Theoretically, banking agents can offer all varieties of transaction and banking services. However, in some countries, account opening, credit appraisal, and check cashing still have to be done at a branch. To ensure that the banking agent is complying with customer service requirements, and to provide security against fraud, many financial institutions also initially limit the range of financial services offered at an outlet that recently joined the network.

How do you ensure that each agent has just enough (but not too much) cash at hand?
Managing liquidity, or ensuring that the agent has enough, but not too much cash at hand to continue transactions, is the main challenge in running a banking agent network. Cash transport is costly, and agents expose themselves to risk when they deposit surplus funds at the branch themselves. Today, liquidity challenges prevent banking agents from reaching many remote areas, since they still depend on the possibility to withdraw needed funds or deposit surplus cash at the nearest branch. Making agents independent of the branch network will depend on how they can effectively balance cash in and cash out, or become cash intermediaries in their communities. 

How do you acquire clients remotely?
Potential clients of an agent network in developing countries either have never had access to financial services or have only used branches to access their accounts. Thus, providers have to allay clients’ concerns that their transactions at the agent might be less secure than at the branch, as well as educate clients around financial product use, terms and prices.

In locations that already have a large customer base but are far from a branch, clients often rapidly start transacting at the agent since it saves them time and money needed to travel to the branch. Promotional events, marketing materials, and word-of-mouth also help clients locate the new point of sale. Having a new financial services provider in closer proximity might also convince non-clients to open an account.

In locations in which the majority of the population is unbanked, more intense client acquisition activities, such as client sign-up vans, financial education sessions, and marketing, might be required. Client sign-up operations close to the newly-established agent will help people directly locate their new point of service.