partners at the last mile: retailers, banking agents, and insurance companies

PARTNERS AT THE LASTMILE: RETAILERS,

BANKING AGENTS, ANDINSURANCE COMPANIES

Summary of the Last Lecture

• Service Company Models• Financial Subsidiaries• Lessons from Downscaling

The Last Mile

• Convenience is an important word in banking, and nowhere is convenience more important than in the BOP market. There are extreme cases, like the Ugandan coffee farmers mentioned in previous lectures

The Last Mile

• who put their lives at risk on the long road between the bank and their village, or South Asian women whose customs discourage them from leaving their homes.

The Last Mile

• The challenge of providing convenience is that conventional bank branches are too expensive to put in every low-income neighborhood and village. The volume of business at such branches does not justify the up-front investment or perhaps even the running costs.

The Last Mile

• As a result, the cost of the last mile or meter has long been one of the great barriers to financial inclusion. In recent years, new models have begun to claim victory over these barriers.

The Last Mile

• Banks develop branchless banking. Retailers and telecom companies decide to become banks themselves or carry out payment transactions.

The Last Mile

• In the search for ways to meet clients where they are and when they wish, it helps to ask a simple and perhaps obvious question. Who already owns the last mile?

The Last Mile

• Among the answers are post offices, supermarkets, corner groceries, pharmacies, lottery ticket sellers, and gas stations. Such businesses either have a dense network of outlets or are places low-income people already frequent for everyday necessities.

The Last Mile

• Successful examples already exist, from the past or from other countries. For decades, post office savings banks were the only formal banking outlets in villages and hamlets across much of Africa and Asia.

The Last Mile

• And in the developed world, supermarkets have long partnered with banks as ATM locations and checkout counter cash dispensers. The challenge is to adapt such models to serve BOP clients in developing countries where institutional infrastructure is still lagging.

The Last Mile

• If banks piggyback on the investment in location and customer relationships these businesses have already made, they can reduce last-mile costs to a manageable level.

The Last Mile

• CGAP analysts argue that branchless banking models reduce costs to serve customers by at least 50 percent. If they’re right, an entire market segment, previously too costly to serve, will soon become viable customers, among them millions of people in rural areas.

Banking Correspondents in Brazil

• Modern bank-retail partnerships require supportive banking regulations. Regulators’ intense concern with the integrity of security and payment systems makes them leery of arrangements


• that extend banking relationships onto what they may see as thin ice in terms of both physical infrastructure and the involvement of nonbank third parties (whom regulators do not oversee).


• But this is changing. In country after country, regulators are opening up to new technologies and institutional arrangements that assuage some of their concerns.


• The Brazilian banking authorities were among the first to recognize the potential of moving banking transactions beyond bank branches.


• Their 2001 regulatory innovation—the banking correspondent model—has quickly and radically transformed access to financial services in Brazil and is being taken up across Latin America and even in India.


• Brazil’s banking correspondent regulation allows banks to create agreements with retailers to act as their agents.


• Any enterprise can act as an agent to one or several banks and provide basic banking services such as opening accounts, taking deposits, making withdrawals, and paying bills.


• After the banking correspondent regulations, access to basic financial services in Brazil leapt 89 percent in just six years. Ordinary Brazilians, from small jungle towns to Sa-o Paulo’s crowded favellas, are transacting through 95,000 agents, including supermarkets, lottery kiosks, pharmacies, and post offices.


• The Central Bank estimates that the majority of banking transactions are now conducted through banking agents. At least 13 million new savings accounts have been opened.


• The new channels provide a triple win: for retailer, bank, and customer. Retailers gain not only commissions for each transaction, but also increased foot traffic and sales—30 percent more in Brazil.


• They also benefit from the brand differentiation that partnership with a well-known bank can offer. Financial institutions gain access to a new customer base that brings additional revenue streams without enormous capital investment.


• According to the banking authorities of Peru, which introduced the banking correspondent model in 2005, a bank branch costs roughly $200,000 to set up, while an agent costs just $5,000.


• In Pakistan, the estimate is that an agent would cost $1,400 to establish, while a bank branch costs over $40,000. In Peru, the cost of a transaction at an agent ($0.32) is far below the cost of the same transaction at a branch ($0.85).


• And clients gain the convenience they need, plus the comfort of dealing with retailers they already know and trust.


• The banking correspondent regulations of Brazil are being copied throughout Latin America (including Colombia, Mexico, and Peru) and farther afield (Kenya, India, South Africa), with adaptation to local circumstances.


• Not all adaptations are fully successful, however. India’s banking correspondent regulations allow only nonprofit MFIs and post offices to become banking agents,


• which closes off the possibility of alliances between banks and retailers even as it discourages nonprofit MFIs from becoming regulated institutions.


• The regulations require agents to locate 10 kilometers or more away from branches, which prevents the model from being used in urban areas.

Models of Bank-Retailer Relationships

• All bank-retailer models take advantage of existing points of client contact. They reduce branching costs by avoiding the expense of building and operating these points of contact. Not all models look alike, however.


• Different structures facilitate tailoring of risk, return, and responsibility in ways that create incentives for good customer service, growth, and shared profitability.


A workable model will involve sound solutions to these four key challenges:

• Information flow (among the bank, retailer, transaction point,and customer)


• Cash management and operational risk control

• Employee and agent training and incentives• Image and branding


• The complexity of partnerships grows with the array of services offered, from relatively simple payments transactions, to savings accounts, to loans and insurance.


• We examine three main models:• In-store banking. The financial institution

places its own employees on the premises of a retailer. Example: many banks rent space on the premises of large retailers and supermarkets.


• Banking correspondents. The financial institution offers services through a retailer; customers interact with the retailer’s employee. Example: Banco Bradesco works with the Brazilian postal network.


• Retailers become bankers. The retailer leverages its physical space and employees to offer its own financial services. Example: Grupo Elektra of Mexico founded its own bank, Banco Azteca.

Summary

• The Last Mile• Banking Correspondents• Models of Bank-Retailer Relationships