This is an excerpt from a recent CGAP paper, The Early Experience with Branchless Banking. The paper synthesizes the observations and research of the CGAP Technology Program. Gautam Ivatury and Ignacio Mas wrote the paper, with substantial input from the entire program team. This blog series will cover seven observations, four uncertainties and four predictions for branchless banking – what we call mobile banking and other technology-enabled banking solutions.

Most financial service providers see partnerships with businesses that have a substantial local retail presence as a key competitive strategy. They act to build their networks as quickly as they can to expand the pool of potential customers and attain local brand presence. The pace of agent sign-up is most dramatic in Brazil, where 95,000 agents have opened for business, leaving no municipality without a retail bank outlet. This agent network has directly led to the opening of more than 13 million bank accounts in the past five years.

Depending on regulations, agents can be used to open new accounts (signing up customers and conducting customer due diligence) or to conduct customers’ cash transactions (to deposit into or withdraw from an account, or to make or receive payments). Given the finding that most branchless banking customers do not build sizable deposit balances (per observation 3, above), most customer transactions do in fact entail a cash transaction. Many banks that want to enter into branchless banking have partnered with businesses that have many local outlets so that they can jump-start their agent networks, including mobile operators, post offices, and major retail chains:

• Mobile operators. Mobile operators run some of the largest national retail distribution networks to support prepaid card sales. This puts them in a strong position to lead or participate in mobile banking projects. For instance, five banks have partnered with SMART Communications in the Philippines, and Standard Bank in South Africa partnered with mobile operator MTN in South Africa.

• Post offices. Brazil’s Banco Bradesco purchased the rights to use the national post office network as a banking agent network. Bradesco created the Banco Postal subsidiary to trade on the trust that Brazil’s population has in the postal service and to differentiate from Bradesco’s branding as one of the leading private banks in the country. By May 2007, Banco Postal had an agent network of about 5,600 agents, two-thirds of which were post offices. The rest were retail outlets branded as “Bradesco Expresso” points.

• Major retail chains. Equity Bank in Kenya signed a deal in mid-2007 to use the Nakumatt chain of retail stores as its anchor banking agents, and WIZZIT has arranged to use the Dunn’s chain of about 400 clothing stores across small town South Africa to act as account opening locations. Where banks are unable to partner with large retail chains, or in rural areas where these chains have limited or no presence, banks often outsource the building and management of chains of agents to third-party agent management companies. Banco Popular in Brazil (the banking correspondent brand of Banco do Brasil) uses companies such as Net Cash in Sao Paulo State and the Brasilia Federal District and Pag Facil in Pernambuco to sign up, equip, train, and maintain agents on its behalf. Lemon Bank has no branches at all and relies on 16 agent management companies (including three that it purchased) to manage the majority of its 5,750 agents.

A bank’s ability to sign up agents in disparate locations depends on the national payments system rules and practices. Referring back to the Brazilian success case, a second legal provision spurred geographic coverage to such a stunning extent: an agent is legally able to deposit its excess cash in to its account with its sponsoring bank through the branch of any bank, at no extra cost, and without having to open an account at that bank. The situation is quite different in Colombia, for instance, where the bank with the largest network of rural branches, state-owned Banco Agrario, charges such high cash handling fees to other banks that those banks cannot profitably set up agents in remote municipalities. While Banco Agrario’s high cash handling fees may be justified by the high cost of operating in such remote locations, the result is that other banks are not able to use agents unless they set up their own branches nearby.

Based on our observations, it appears that being an early mover in creating an agent network confers three key competitive advantages:

• Early movers are able to partner exclusively with the businesses that have the largest number of local retail outlets, thereby patching together a sizable agent network relatively quickly. Subsequent entrants are likely to find it more difficult to assemble an agent network of their own, particularly in areas with few retail establishments. The number of agents or physical locations is an easy concept to differentiate advertising, and hence it becomes a self-sustaining advantage for early movers.

• Early movers with larger agent network scan negotiate more favorable agreements with utility companies and various government agencies to distribute or collect payments on their behalf. As noted earlier, most banks realize that payments (from customers to utility companies and lenders, and from governments to welfare and pension beneficiaries) is the first product likely to move through this channel.

• A bank that is first to introduce banking services in a given geography is likely to capture greatest market share among the local population. The general manager of Banco Popular in Brazil explained that putting Banco Popular agents in unserved neighborhoods gave the bank a presence and the start of a relationship with local customers. As these communities develop and become increasingly banked, Banco Popular would be the bank whose name they would remember the best.