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Business News/ Opinion / Online-views/  How to win the financial inclusion war
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How to win the financial inclusion war

Bank agents for last-mile connectivity armed with better financial technology can be a winning combination

Success as a payments bank will require cracking the bank agent model. Photo: BloombergPremium
Success as a payments bank will require cracking the bank agent model. Photo: Bloomberg

In the last article, we explored the importance of customer centricity, tailored products and customer experience to the success of payments banks. In this piece, we focus on how these products and experiences will reach customers. While technology is changing the way financial services are provided to the underserved and will be critical to success, we believe that the reliance on agents for last-mile banking coverage is likely to continue in the medium term. High-tech will thus need to be combined with high-touch, that is, cost-effective and at-scale agent networks.

But India’s past experience with the business correspondent (BC) model offers a cautionary tale for payments banks looking to build agent networks. The model has chronically suffered from low profitability and high churn. A recent study by Helix Institute and MicroSave found that more than half the agents earn profits below the $2-a-day UN-defined poverty line. Agent attrition is estimated at 25-34%.

Given this track record, it is an opportune moment to look at what would make for a viable agent network. We believe there are two ways to make the agent model more sustainable. First, players can expand the portfolio of products sold by agents to include higher margin products such as loans or investment products. Second, players can pick agents who are involved in businesses other than financial services so they are not ‘dedicated’, that is, not solely dependent on the financial services business for their income (according to the Helix-MicroSave study, two-thirds of BCs in India are ‘dedicated’ agents, far higher than in other countries such as Kenya, Pakistan or Bangladesh).

But selecting agents who aren’t reliant solely on financial transactions has its own complications. Our recent experience conducting research with agents suggests that distinct approaches are needed for simpler lower-margin high-volume services (such as cash-in, cash-out and remittances) and for more complex higher-margin low-volume ones (such as account opening, insurance, credit and investments). Here are three important considerations.

First, agents that are in “push businesses" (that is, those that require active selling, for example, clothing, electronics) are likely to be more successful in selling higher-margin low-volume products, while lower-margin high-volume products can be sold by “pull businesses" (that is, those that are more reactive to customer demands, for example, kirana stores, and mobile top-up agents). Higher-margin, more complex financial products (for example, credit, insurance, investments, etc.) are likely to be “push products", meaning they are likely to require the agent to get involved in the various steps of the sales process—identifying customers, generating interest, explaining the product’s value proposition, handling queries, closing the deal and then managing documentation and customer on-boarding as well as post-sales support. In contrast, simpler financial transactions such as remittance transfers and mobile top-ups are “pull products" for which there is an existing active demand for the product from the customer.

Second, merchants that have a high footfall in their core businesses (for example, kirana stores), and thus limited time to serve, are more suited to selling lower-margin high-volume products, while merchants who have low footfall (for example, speciality clothing, electronics) can manage higher-margin low-volume products as well. The opportunity cost of selling complex and time-consuming products is not high for low-footfall stores. There is an inherent trade-off between stores that have a high footfall and those that have time to serve.

Third, for complex high-margin products, it is important to pick agents with a strong standing in the community, while technological proficiency is key for selling low-margin, high-volume products.

What does all this mean for payments banks? Given these contrasting choices, we believe these findings point to a tiered agent model, where different types of agents provide different types of services.

First, there could be a cadre of dedicated “full service agents" who conduct the most complex and time-consuming transactions and essentially serve as mini bank branches. They need to be educated and technologically savvy. They need to see financial services as their primary business and be comfortable offering a full suite of products. They will need intensive training and support from payments banks, akin to an in-house sales force.

Second, there could be “medium service agents" who do some of the more time-consuming transactions such as opening bank accounts, selling loan products, etc.

It is important that these agents be comfortable with active selling and be well established in the communities they serve so that customers trust them with these financial transactions—think “push" businesses with low-footfall such as clothing, gift shops or stationery shops. They will require some up-front training, but also significant ongoing support.

Finally, there will need to be a large number of “lite service agents"—small merchants in “pull businesses" who have little time to devote to complex services and only do simple financial transactions (for example, cash in and out, remittances). These would be businesses that have a high footfall, with younger, more tech-savvy agents, who are likely to require little training and support.

Success as a payments bank will require cracking the agent model.

We believe that such a tiered approach to agent banking will be critical to balancing scale with complexity.

Varad Pande is a partner at Dalberg, a global strategy and policy advisory firm focused on social impact, where he leads the financial inclusion practice. Manisha Pandita is a senior project manager at Dalberg.

This is the third in a four-part series on what it would take for India’s payments banks to succeed.To read the earlier parts in the series, click here and here.

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Updated: 15 Jun 2016, 02:25 PM IST
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