Banks Have Some Good News…Are They Listening?

CGAP, in partnership with the Inter-American Development Bank and Akya, a banking consultancy, recently completed some analysis on the business case for banks in branchless banking. Our findings, which we share with you in a series of posts, starting with today’s, are based on interviews with over 20 banks that play some role in a branchless banking deployment. We also looked closely at the financials of a few banks that have been involved in branchless banking for five or more years, running agent channels for payment products or as a way to reach unbanked customers.

Our findings should bring some good news to the banking industry that is quite beleaguered and battered by crisis, competition and alleged illegalities. These are not the best of times for banks globally. In one part of the world, banks are barely recovering from a crisis. While elsewhere, especially in markets across Africa, new actors, such as mobile operators or technology companies are making forays into the banking business. From Brazil to India, banks are struggling to innovate to develop services for the unbanked or reach new segments and keep up with demographic changes.

As we have done with other pieces of research, we detail our findings in this presentation. We make the following five main points:

(1) Agents are the most economical channel available at low transaction volumes. Banks that have all three channels – networks of agents, branches and remotely-managed ATMs (the closest equivalent to agents) — see the lowest transaction costs at their agent channel. Transaction costs at agents range roughly from 0.27 to 0.58 USD per transaction and are 50% the transaction costs at branches and ATMs (see slide 10). However, at higher transaction volumes, fixed cost infrastructure like ATMs, is of course more economical for banks for basic transactions (slide 13).

(2) Banks provide three main reasons for doing branchless banking. In our analysis, we identified at least seven different roles for banks in branchless banking, from holding float to running their own independent payment business (slides 15-18). But based on surveys and interviews, banks are involved in branchless banking for three main reasons where there are major business case implications: (1) as an additional, efficient channel; (2) to grow faster or reach unbanked segments; (3) for payments-led banking proposition. There is evidence that banks benefit in all three cases.

(3) Agent networks provide convenience and improve the costs associated with serving existing customers. In the presentation, we provide evidence of bottomline gains both from decongesting branches and bringing added convenience to customers (slides 20-21). In one case, after a review of all transactions through the branch network of a major Mexican bank, we estimate transferring 20% of the transaction volume over to the bank’s agent network. The result is estimated at 30 basis points on ROE (slides 23-24).

(4) Banks develop branchless banking channels to grow faster, enter new geographies or reach unbanked customers. Agent-led growth into new geographies will be cheaper even when discounting for costs to identify and train agents and costs associated with managing agent churn. In terms of reaching unbanked customers, in a number of markets, banks are looking to offer basic deposit and basic transaction accounts. The business case for low income deposits via agents depends on: cost of funds; scale; stability of those funds; and transaction volume. While commission-based agents offer favorable unit economics, customer transaction behavior can erode the business case — too many deposit and withdrawal transactions leading to a small deposit base will make the cost advantage of agents work against the business (slides 35-38).

(5) Payments can be substantial. Agents play an important part in a payments-led banking proposition wherever banks have launched such services. The agent network is a significant part of the upfront investment and ongoing operating costs of the payment business (slides 45-46). While agents’ pre-funded accounts can be a source of funds, banks getting into this business don’t expect income from float. In one case, income derived from float represents less than 3% of total platform income. In a developing country context, banks can expect payments platforms to be profitable on their own, without any additional financial services, but may need to adjust their outlook. In one case, for a service seeing over 2 million transactions a month, the expected before tax profit of the new payment business is expected to be about 7.9% of a bank’s profit.

Read the full details of this analysis in the presentation available here.