Research & Analysis

Banking Through Networks of Retail Agents

Only about one-quarter of households in developing countries have any form of financial savings with formal banking institutions: 10 percent in Kenya, 20 percent in Macedonia, 25 percent in Mexico, 32 percent in Bangladesh. Yet access to financial services—whether in the form of savings, payments, credit, or insurance—is a fundamental tool for managing a family’s well-being and productive capacity: to smooth expenditure when inflows are erratic (occasional work, seasonality of crops), to be able to build up purchasing power when expenditures are large and sporadic (school fees, buying seeds), or to protect against emergencies (natural disasters, death in the family).

But in the same way that access to clean water is more than being able to buy a bottle of water, access to finance is more than being able to get the occasional loan. Access to finance really involves being connected to a national payments system, much like the national electricity network. Once I have a transactional account in a “payment grid,” I can receive and repay loans, save up and withdraw from a savings account, and use the proceeds to pay for what I need. This transactional account is my gateway to a range of financial services, it gives me a financial history, and it is the basis from which I can manage my financial life. Note a key difference between savings/payment/transfer and credit services: although many people, especially the very poor, cannot absorb debt and benefit from a loan, a great majority can benefit from client-responsive savings, payment, and transfer services.

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.