The agent economics around branchless banking can be a complicated subject. As we highlighted in the M-PESA research we did last year, liquidity management can be difficult and costly. But in general, M-PESA agents were making enough profit to compensate for these inconveniences. Two colleagues and I were in Brazil in December to understand how the agent network (termed “banking correspondents” in Brazil) worked there. We partnered with the Center for Microfinance Studies at FGV (Fundação Getulio Vargas) and PlaNet Finance. In previous posts, Claudia McKay discussed the impact of branchless banking in Brazil at the community and customer levels. Now I’m going to discuss the impact on the merchants/agents themselves.
Let’s first take the case of Nestor* (names have been changed in this piece) who owns an Internet café 25 kilometers from the city center of Sao Paulo. He started the agent business in 2006 and carries out his transactions with a simple POS machine from Banco Popular do Brasil. The integrator company that he works with provided him with and installed the POS device in his store. The company also provides maintenance and support in case of any technical problems. His commissions are paid directly from the integrator company, not from Banco Popular.
Nestor’s main motivation for being an agent is to bring more people into his store. He said that traffic has increased by around 35% since being a banking agent. In fact, many people come to use his computers to print their bills from the Internet and then pay for the bills right there in his store. In November 2009, Nestor carried out around 1,397 transactions for the month. Of these transactions, 25 were withdrawals, 475 were bill payments, 878 were utility payments, 7 were account openings, and 12 were non-financial transactions (such as balance inquiry and others). At approximately 0.15 Brazilian Reais BRL (0.08 USD) per transaction, this provided him with a monthly commission of 209 BRL (114 USD). The costs associated with being an agent are minimal and for Nestor this only includes 30 BRL (16 USD) for insurance. He carries out all the transactions himself, so he didn’t hire additional staff for the agent business. Therefore, he received a profit in November of around 179 BRL (98 USD) from the agent business.
There are a few intangible costs associated with being an agent. For example, Nestor’s cash limit is 5,000 BRL (2,732 USD) so once he has accumulated this much cash on hand, his POS will be blocked from carrying out more transactions. He then has to go to the bank to deposit the cash, at which time his POS will be unblocked. As a result, he goes to the bank 2-3 times per day, which is more than the one trip per day he used to do before being an agent. But since the bank is only 5 minutes away by car, the cost is only a matter of time away from his business.
Comparing the agent business to his main business of the Internet café is instructive. Nestor estimated that his revenue from the Internet café is 8,000 BRL (4,372 USD) per month. Let’s assume on the very conservative basis that 85% of his revenue is taken up in the costs of running the business. This would be a total cost of 6,800 BRL (3,716 USD) per month, providing him with a profit of 1,200 BRL (656 USD) per month.
So let’s compare: 1,200 BRL (656 USD) per month in profit from the Internet café compared to 179 BRL (98 USD) from the agent business. Nestor is the first to say that he’s clearly not doing this for the money. But since the financial costs of being an agents are covered by the bank and the integrator company (in terms of equipment and maintenance), and because the bank is nearby and he doesn’t have to put up any of his own initial capital (as M-PESA agents do), then he has very little to lose and much to gain, namely a 35% increase in foot traffic.
Now let’s look at the case of Roberto, who owns a hardware store in the town of Ocidental, 45 km from the capital of Brasilia. Roberto is new to the agent business having started in May 2009 for Banco Popular do Brasil. His main motivation was to provide a service to the population around him since the town needed a banking agent. With his one POS machine, he carried out 1,102 transactions in the month of November 2009. Of these, 275 were bill payments and 827 were utility payments. Once again at around 0.15 BRL (0.08 USD) per transaction, this gives him a total commission of around 160 BRL (87 USD) per month.
In contrast to Nestor, Roberto has made a bigger investment into the agent business. He hired another employee to help with the transaction volume and also added a section to his hardware store to make space for this. Part of the additional staff person’s time (since this employee probably doesn’t do agent business full-time) is around 353 BRL (193 USD). His rent slightly increased with the new space, estimated at about 250 BRL (137 USD) per month, and 5% of his electricity bill going towards the agent business adds another 8 BRL (4 USD). Finally he pays 40 BRL (22 USD) for insurance. The total expenses from being an agent total around 650 BRL (355 USD) per month.
The math is pretty clear: expenses of 650 BRL (355 USD) vs. commission of 160 BRL (87 USD). Roberto knows that he is losing money on the agent business, and he says that his hardware company is covering these loses for the time being. In addition, his cash limit is 7,500 BRL (4,098 USD), so he travels the 15 minutes by car to the bank 2-3 times per day to deposit his excess cash. While foot traffic has increased in his store overall, he admits that the agent business is a lot of work and he wonders if he can keep it up. He hopes to get a PC from the integrator company to replace the POS so that he can do more transactions and faster. He wants to persevere with the business because he feels that the community needs this banking service in the neighborhood.
These cases are just two examples from the 50 interviews we did with agents, and among the 300 agents for whom we gathered transactional data. So they should not be taken as completely representative. But as one of the integrator company staff told me, if a merchant in Brazil enters the agent business with the hope of making a good profit, s/he will quickly drop out. But so will those that are making a loss.