Independent Research and Policy Advocacy

Extending the third-party aggregator model from ATMs to Business Correspondents

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When you have two systems running in parallel, the hardest part is always managing the interface between the two. Customers don’t usually all migrate to the new system entirely and at the same time, so there is a need for the new system to offer backward compatibility with the older, more established system. Without that, the stakes to migrating to the new system may be too large, and adoption will lag.

So it is with money. The new electronic form of money must integrate as seamlessly as possible with legacy paper money if new-to-banking people are going to be at all comfortable in experimenting with and using it. That’s why the retail agent or Business Correspondent (BC) bit is the cornerstone of any branchless or mobile banking proposition.

But that is where the economics and operations of branchless banking ventures get really tricky. The technical bit is easy: as long as it’s about managing electrons and bits, scalable, low-cost systems can be put in place. But a cash in/out channel is an entirely different story: it needs to be carefully constructed bit by bit as a patchwork of stores. Each store needs to be vetted, supervised and supported. Each store needs to be fed with enough revenue day in and day out to justify setting liquidity aside and running to the bank to rebalance when liquidity runs out.

You don’t see many large-scale, branded retail chains in India in any sector (think groceries, pharmacies, agricultural inputs, whatever), and that’s for a reason: managing retail channels is really hard business in a country with such a disperse geography and where there are already so many local shops running on razor thin margins.

If that’s the case, why should banks, who have no experience operating beyond their own branches, be expected to succeed in creating their own networks of BCs? Some are trying hard, but how many can claim to have a sufficiently dense network of stores doing brisk cash in/out business every day?

You should let specialists manage retail networks, and let banks ride over them. Specialist store aggregators, operating under specific rules and guidelines issued by the RBI, could then offer BC service for any and all banks.

Think how such specialized shared BC networks could transform the problem. Entrepreneurs with experience in managing indirect channels would develop business where banks themselves are not willing to go. Banks would simply sign up whichever shared BC networks they feel are in relevant locations and offer good service to their clients. Individual stores would be able to offer service to all their clients, whichever bank they happen to bank with, in the same way as they sell a range of toothpastes to suit their clients’ various toothpaste preferences. Banks wouldn’t each need to deploy essentially the same systems to reach pretty much the same stores – a costly duplication that makes the already precarious economics of cash in/cash out altogether unachievable.

If this seems far-fetched, that is essentially what is happening today under the RBI’s new policy allowing third-party ATM networks. Why should banks themselves have to run with the operational hassles of installing and managing hardware and replenishing cash boxes? That can easily be delegated, as long as certain ground-rules are met, especially on aspects of technology platform and consumer protection. These are properly identified and clearly laid out in the RBI’s guidance on the topic.

A BC is functionally equivalent to an ATM. An ATM is essentially a point-of-sale (POS) terminal (the card reader, the screen, the keyboard) with a cash box attached. In a BC setting, the only difference is that the cash box is physically separated from the POS terminal (which might be as simple as a mobile phone), and the cash gets dispensed or accepted manually by the shopkeeper rather than automatically. But the transaction is governed electronically through a banking technology platform, because the POS informs the customer how much cash to hand over to or to take from the shopkeeper. What is important is that transactions always occur on a technology platform controlled by a bank (not the third party network manager) and hence under the clear supervision of the RBI, and that the network manager be bound by clear, specific consumer protection rules.

Under a shared BC model, each store might operate from a single bank account using the technology platform provided by one bank (we could term this the “acquiring” bank). Any transactions it performs on behalf of customers from other banks could be settled through the NPCI’s real-time mobile switch.

Creating third-party networks of shared BCs is the logical next step in the process of enabling scalable branchless banking services. Free up banks from the burden of managing the operational aspects of cash-in/out networks. Aggregate the cash in/out transactional volumes across all banks to make the business case easier for individual stores. Flash forward to the inevitable step of infrastructure sharing, like telcos have come to accept with tower sharing and banks with ATMs. And let banks concentrate on their core mission: developing, selling and managing a variety of electronic financial services that solve people’s broad financial needs.

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4 Responses

  1. This is a great idea and practical for rural and low density footprints in banking. Just yesterday I was reading a paper by CUTS on the “essential facilities” rule – the focus being more on conventional infrastructure and wondering why the same couldn’t apply to deposit/withdrawal banking in rural areas! (and of course, you guys were already thinking on these lines…..grrrrrr!!!:-)) The viability improves. Such a facility needn’t be exclusive – if a bank feels it wants to establish its own show, let it. But as a solo provider of access, let it become a “shared career” for reasonable access fees. This converts all existing ops into the new infra with just a legal the bank incurring the loss or marginal viability now at least shares costs! Agreements could be reached say district wise on such “access points” – so banks don’t have the headache of negotiating each individual location or the RBI administering it (electronic banking will enable it to monitor individual anyway).

    Rather than worry about legal glitches and “competition” issues that may constrain its roll out – one would rather seek ways to push it out. A review can be undertaken blockwise every 2 or 3 years (to be determined) to ensure that the business correspondent does not become a “theka” that can be an abuser of dominant position in a good market. But such a glitch is a happy problem for govt given where banking access it at right now!

    One area to dwell on it the ownership and structure of this access point. As a de facto monopoly, the normal incentive to push and grow isn’t there. Its necessary that the growth and operations in this segment is linked to growing access. Some suggestions:
    i) Let all banks contribute to share capital in its ownership – minimum holding can be stipulated and treated as a part of its priority sector lending.
    ii) The bank management is incentivized on results in terms of number of account holders and deposits – not lending. Lending is something they’ll push anyway and is covered. The focus is on bringing in “new account holders” and making them active depositors – even if they save nothing or don’t borrow.
    iii) Such Business Correspondents could be authorized to operate in cities too for the unbanked – with their choice of which bank to use. This brings in “informal sector” accounts with a segment who’s performance incentive is linked to spreading banking. Even in cities, banks hardly chase these informal earners and smaller accounts – bank executive quite simply find their career progress better served through normal commercial accounting and large ticket items.

  2. Thank you Ignacio and Abhishek for this post. Do you have any thoughts on how to approach spatial differences in networks? How are we going to achieve a footprint in villages of Chattisgarh and Bihar in addition to metros and Tier 2/3/4 locations? What would incentivise the while label BC network companies to go to these places?

  3. Hi Bindu. Under a shared BC model, there would be three drivers to help deeper penetration of BCs into rural areas. First, aggregation, which is esential in low-density areas: each store would be able to serve all their banked customers, not a prescribed fraction who happen to be with the one bank. Second, rural stores could organize themselves into a network, without waiting for people from the big cities, much less banks, to seek them out as agents. Third, a non-discrimination requirement might be
    imposed on BC network managers, whereby they must charge the same prices
    everywhere, regardless of location. This would entail a degree of cross-subsidisation,
    from higher-density urban areas to rural areas.

    Hi Pras, thanks for your kind feedback. The BC business is one of economies of density (local granularity) rather than scale per se, so I don’t see a force pushing necessarily towards winner-take-all, producing a monopolistic supplier. A few networks may be of
    national scope, some may be regional, many will be quite local, including by local communities taking money into their own hands and organizing their own BCs. There is likely to be some competition, even as you say from banks who might want to go it alone. To the extent that consumers need to be protected from potential abuses by a dominant BC network, I’d handle it by imposing specific consumer protection norms rather than by tinkering with their ownership or pricing models.

  4. The basic premise of the blog to me it seems is having a common network of stores working through a single bank(account) and at common costs to customers. In Indian conditions bringing stores on line will be a major tasks even if other conditions are met. Government of India set up 100,000 customer service centres under its e Governance plan for G2P services, many of which are still working under supervision of a Govt company. Many of these, initially through SBI, adopted a common kiosk banking solution and are working as BC agents..Many banks are following this model with a common national BC( CSC e Governance P Ltd.) and a common software, with different local agents. B2P services performed by these kiosks make them earn additional income apart from banking operations.( Furthermore, government can subsidise these at locations where there are viability issues.) My guess is soon this kiosk banking workforce may touch over 25000 locations in rural areas.

    My take is that we can further simplify things in above model, if we can work through a single FI virtual bank, with other banks acting as its agents.

    Let us hypothetically consider if we can convert Unique identity Authority of India issuing Aadhaar into this virtual FI Bank. It has demographic data and biometric data, which is accepted proof of identity and residence by RBI, which is what a banker needs to open a bank account. At the time of enrolment for Aadhaar, it can issue an FI account whose number shall be same as Aadhaar. This account should be operable at any bank branch/ ATM/POS of any bank subject to conditions.

    Thus till we make stores model operative effectively, let us make best of what is already working on the ground- off course with many loose ends to tie up.

    If the country is to achieve FI, it will need many solutions working simultaneously. In my views UIDAI is a bank only needing a CBS server to be placed at CIDR.

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