Overview
Why do so few people have accounts with formal, authorized institutions? One key constraint is the sheer cost to banks of building and maintaining branch networks to reach dispersed or low-income populations. To achieve universal access, banks will need to adapt their systems to a low-value, high-volume transactional environment and to build more flexible, scalable retail networks of points at which people can conveniently pay into or cash out from their transactional accounts. Technology can enable banks and their customers to interact remotely in a trusted way through existing local retail outlets.
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, inquire about an account balance, or receive government benefits or a direct deposit from their employer. The clerk at the retail or postal outlet collects and disburses cash, and in some cases – depending on local regulation - can open bank accounts for new clients and fills in credit applications.
Profitability for a small agent
Acting as an agent can be quite lucrative for some. Among 425 agents CGAP studied in Brazil and Kenya, there are multiple tales of some agents making big money. There is one example of a former lawyer who lost his job during Kenya’s post-election crisis in 2008 and opened a small kiosk selling beauty supplies and M-PESA services. With a prime location across from an office block, he was able to handle an average of 256 M-PESA transactions daily and earn USD 27 per day in profit, about 10 times the daily wage of an ordinary laborer and better than his salary as a lawyer.
But most agents make considerably less money, usually enough to make it profitable to be an agent but not terribly lucrative. This is particularly true for smaller merchants who make up the bulk of the 14,000 M-PESA agents in Kenya and 47,000 in Brazil authorized to handle deposits and withdrawals. The average M-PESA agent sees a profit of USD 5.01 per day. In Brazil, non-Banco Postal agents earn roughly the same in nominal terms – USD 4.34.
Though these look equivalent, there is a wide gap between them. For M-PESA agents, USD 5.01 per day is attractive in comparison to airtime, often one of the top sellers for small merchants. M-PESA commissions are, on average, 3.2 times greater than those earned from selling airtime (USD 1.6). For Brazilians, USD 4.34 is rather meager. If adjusted for purchasing power, this is 32 percent less than the typical M-PESA agent’s take home pay. However, Brazilian agents report that foot traffic from being an agent is substantial: nearly three-quarters report having more customers in their store due to the presence of a branchless banking agent, with the average increase of 37 percent.
Costs of being a small agent
In any branchless banking scheme, the primary function of agents is to provide retail customers with reliable on-demand conversion of cash to electronic float, and vice versa. Doing so requires agents to protect the cash they keep on hand and regularly re-balance their cash with the electronic value in their account.
This process of “liquidity management” is costly, in monetary terms, time and risk. Rural agents in Kenya find liquidity management consumes 31 percent of their M-PESA commissions. One-third of Brazilian agents say they are considering quitting, primarily due to the inconvenience and robbery risk of moving cash to and from the bank.
There are 3 cost-bearing elements of liquidity management: (i) cash security, (ii) transport to bank, and (iii) working capital constraints that stem from the time an agent must wait for cash/e-float exchanges to be settled and commissions disbursed to the agent. The costs to the agent will vary between countries, and possibly even between providers in the same country. However, liquidity management will be one of the top concerns for most agents in all countries.
Few M-PESA agents in Kenya complained about robbery risk, but this vexes Brazilian agents: 41 percent of agents interviewed in Brazil have been robbed in the past 3 years. More than 90 percent believe they are at increased risk of robbery due to the large volumes of cash handled as an agent.
Aside from the risk of robbery, the trip to the bank itself has costs. Among the agents CGAP studied in Kenya in rural areas and urban slums, it is common for agents to spend 10 percent of their commission to arrive at a location where they can exchange cash and e-float. Most Brazilian agents operate near to a bank branch, but they find themselves visiting the bank 9 times per week on average, due to the volumes of transactions they handle combined with low limits for allowable cash on hand set by the bank, to protect them from overly large losses from robbery.
Finally, being an agent is rather capital intensive compared to other products small merchants typically sell. For example, the average M-PESA agent holds USD 129 in airtime scratch-off cards at one time, which could be termed as his or her working capital for that business. By contrast, the minimum e-float balance which Safaricom requires agents to have before they can operate is USD 1600, 12 times higher, and roughly equal to the GDP per capita for Kenya. In practice, agents must have more in order to ride out the several days which usually pass before they can afford to travel to a location to exchange cash for e-float.
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