The Business Correspondent model has shown promise by bringing a network of tech-enabled banking agents into poor and underserved rural communities
Finance is one field where we have witnessed significant innovations in recent decades and this has transformed our society in many ways. One of the most promising innovations in the field of financial inclusion is the Business Correspondent model in which they serve as retail agents for banks for providing services at locations other than a bank branch or ATM. India has traditionally been an under-banked country, with a financial system that doesn’t work for the poor and hard-to-serve populations. One key reason for this is that most transactions are conducted in cash. Brick-and-mortar outlets make cash-based services difficult and expensive. Even State-owned banks have balked at reaching rural and poorer parts of India.
Even though, there has been a huge uptake of digital banking in recent years, cash remains a crucial part of most people’s lives. The very small deposits and loans of lower-income customers make them unprofitable for banks which use traditional conventional models. Moreover, the cost of opening branches or setting up ATMs in remote locations tends to be high. Many rural dwellers still live too far from bank branches to make accounts viable for them. Also, rural customers usually deposit and borrow small amounts, making the business they bring to banks less lucrative. The main problem is Indian banks and other financial service providers haven’t found a way to serve poor customers located in far-flung areas and still make a profit. For years, India’s banking system struggled to reach these individuals with products that can significantly improve their financial lives and integrate them into the mainstream financial system. Now, alternative distribution approaches are emerging. The global revolution in digital payments has created new opportunities to connect poor and rural households with affordable, convenient and reliable financial tools.
One such approach — the Business Correspondent or agent model — has shown promise by bringing a network of tech-enabled banking agents into underserved communities. Agent networks, a distribution channel that relies on individual entrepreneurs under a franchise-like model, is an effective way to provide banking services. Also known as agent banking or correspondent banking, it has enabled banks to reach remote customers. It involves use of technology, such as payment cards or mobile phones, to identify customers and record transactions electronically and, in some cases, to allow customers to initiate transactions remotely. The entire framework hinges on technology-enabled remote banking logged into the system in a brick-and-mortar bank.
The agent model typically involves a person providing support as an extended arm of the bank. This is an important piece in the financial ecosystem and a key touch point that enables banks to expand their outreach dramatically at a substantially lower cost. The network leverages technology for maximum outreach in the assisted mode of banking through point of service handheld devices, mobile phones, biometric scanners and even micro ATMs which can be accessed either through AePS (Aadhaar-enabled Payment Services) or a debit card. Easy-to-reach micro ATMs for stripped-down banking services such as cash deposits, loan repayments, transfers and withdrawals are a revolutionary tool for a low- cost banking infrastructure.
Business Correspondents are typically grassroots entrepreneurs who serve as contractual representatives of the sponsor bank and are authorised to conduct specified business on its behalf. They are compensated through fees and commission paid by the sponsor, which also takes care of their training needs.
These agents, who help banks acquire and serve customers, have worked under what is essentially a franchise model. Bank agents are typically required to invest significant upfront capital in the business and are encouraged to leverage their personal connections and credibility within the local community to stoke demand.
This model provides substantial cost benefits to the provider, as the agent incurs the majority of start-up costs and most ongoing costs are variable and commission-based. The agent model also features some important non-financial benefits. As the retail face of the business, agents can provide customer assistance in a way that most ATMs cannot. This is especially valuable in communities with low rates of overall and technological literacy.
The model was introduced in 2006 by the Reserve Bank of India (RBI) to allow banks to employ local people as third-party, non-bank agents to travel door-to-door to provide banking services to local communities. The agent model proposes that in areas inaccessible to banks, entities such as grocery stores, telcos, snack parlours, petrol pumps, lottery outlets, public utilities and companies with a retail network which potential customers use for their daily needs, can be authorised to perform financial operations.
Financial services firms need to weave local contexts in their business models in order to serve the communities successfully. Closer integration with the community, through models like Business Correspondent banking, also helps in bringing about a greater appreciation of the challenges faced by them. In a country as vast and diverse as India, deeper understanding of the market can only come if firms have a widespread distribution network and recruit locally. In order to serve their customers better, financial services firms need to be present in local markets and have employees who are familiar with the cultural and economic nuances of the community in which they work.
The agent networks served as the last line of resistance during the ongoing pandemic. Following the nationwide lockdowns, the Centre announced two relief packages under the ‘Pradhan Mantri Garib Kalyan Yojana’ amounting to $260 billion, an estimated 10 per cent of the Gross Domestic Product (GDP), for the vulnerable. Agents played a significant role in its implementation, as Government subsidies were credited directly to the accounts of beneficiaries
The channel has led to the creation of a mass market for affordable, accessible, convenient and sustainable financial services for low-income people and small-scale entrepreneurs in remote areas which lack bank branches, but do have other retail outlets and post offices that already have the reach needed to access target customers. These outlets provide locations for a network of agents that can be used as low-cost delivery channels for providing financial services to people visiting them, especially in rural areas. Customers may have already developed a level of trust and confidence required for more habitual use of financial services.
The model has chronically suffered from low profitability and high churn. There is a high level of agent attrition on account of unattractive remuneration. Agents take on significant financial risk in starting their business. For an individual starting a mobile money business, upfront costs — which include the initial cash required as well expenses such as furnishings, technology devices, licencing and security fee — are substantial.
In places that have significant population density that can drive decent volumes, agent networks will grow organically. However, whether an agent is located in an urban or frontier region, of course, is not the sole determinant of success. In all markets, additional factors can limit the development of networks. These include the lack of banking infrastructure required for rebalancing, regulatory requirements that make it challenging and time intensive to recruit agents, unreliable telecommunications networks and power grids, poor roads and other physical infrastructure.
The country needs a larger force of agents who are educated, motivated and savvy enough to effectively reach remote and challenging communities. But considering the work required for on-boarding these customers and orienting them to actively use digital services, the agents’ compensation appears to be hardly worth the effort. On account of this, they tend to favour densely populated, well-monetised and oversaturated markets. The original model of doorstep banking has already given way to kiosk-based banking due to the increased work required of agents. Meaningful financial inclusion will be possible in India only if banking agents provide quality services with transparency and dignity to the country’s underserved populations. But agents need financial stability for themselves before they can be expected to extend financial inclusion to the unbanked and serve a new generation of account holders.
(The writer is a well-known development professional of international repute. The views expressed are personal.)