To promote effective regulation of branchless banking, especially mobile banking, CGAP, DFID, and the Alliance for Financial Inclusion (AFI) have organized the third Global Leadership Seminar for high-level policymakers and regulators who set policy for branchless banking, including mobile banking. CGAP’s Technology Program and AFI are supported by the Bill & Melinda Gates Foundation. This week we’re blogging from the seminar, where the conversation has focused on technology, but also business models and especially distribution networks. A session on banking agents was chaired by Ignacio Mas of the Bill & Melinda Gates Foundation. The broad consensus was that agents (so far) have not created significant risks for consumers or the soundness of any banking system among the countries where agents are doing cash-in cash out transactions.

It is easy to slip into a shorthand vocabulary when dealing with a technical issue like mobile banking. Is that a challenge when we talk about agents?
For me, the key word is distribution. That’s the main problem we are trying to solve. It means two things. First, getting services closer to the customers – proximity. The second is being able to conduct smaller transactions affordably. Those two together are a basic enabler to serve poor people. Solving the problem of distribution is solving a business case and getting closer to the customers with the ability to do small transactions. In general, the broad solution to us seems to be to take banking transactions outside of traditional bank infrastructure, which is why I prefer to say that we are seeking “banking beyond branches” rather than “branchless banking.” Branchless banking cannot work without branches. The small store doing cash-in/cash-out transactions still has to go somewhere to get rid of the excess cash – and that’s usually a bank branch. So it actually isn’t branchless at all. The objective is to create outlets for people to transact in every town and village.

There’s been a lot written about distribution networks and banking the unbanked. How did you try to advance the conversation?
Now that we have some history of transacting through every-day retail outlets, it was a good opportunity to ask about the actual history of risks that has transpired from that experience. The panelists agreed that fraud cases have been very few, and that consumer protection issues reported have also been few, perhaps the salient one being the availability of cash at agents. That creates an issue of the convenience of the service, but not a fundamental risk to the system. Another hotly debated topic was whether regulations should allow agents to be exclusive (where there’s a proprietary network), nonexclusive (where agents can work for several services) or whether they should be silent (let the market decide) on this point. I personally don’t see much reason why they couldn’t transact from their bank accounts with multiple banks to service more customers in their communities. The exact legal relationship between the outlet and the banks would depend on how risks are addressed.
What are the common ingredients for successful regulation of agent banking? Is there a prescription?
The exact legal relationship between an agent (the outlet) and the bank depends on how risks are addressed. By eliminating all credit risk you don’t need to have a contractual framework between the bank and the retail outlet to address financial risks. The real goal here is to ensure that a customer can conduct a cash-in/cash-out transaction at a store without having to actually trust that store. Two things must happen for this to be possible. The first is that the customer’s transaction is settled against the bank account of the store itself. The second is that there is real-time authorization to ensure that all transactions are properly funded from either the customer’s account or the store’s account, depending on whether the they are doing a deposit or a withdrawal.

What about consumer protection?
It’s important to separate the financial risks from consumer protection risks. There may be implied agency if the bank puts its logo in a store, but that goes to consumer protection issues and not financial risks. Consumer issues should be handled by a contract between banks and outlets, that deal with aspects such as disclosure, communication of redress mechanism, etc. That contract should be linked to the use of a bank logo / branding in retail environments – it’s the act of putting the bank brand that raises consumer protection issues because customers may reasonably expect that transacting at the store is like transacting at the branch.

You asked policymakers in your session what their backup plan might be should agent banking not actually push the envelope of financial inclusion. What is yours?
If this approach doesn’t work, then we will have to continue developing community-based microfinance which, though much less scalable, has been quite effective in meeting customer needs where such organizations have been established. However, banking beyond branches still looks to be the most promising option. If there is toothpaste in any corner shop in the world, why would we not succeed in putting transactional services (which don’t even require physical delivery of goods) in those same shops?

-Ignacio Mas, as told to Jim Rosenberg