The m-pesa account between Vodacom and one of the major banks in South Africa, is one good example of correspondent banking... Early entrants into these kinds of innovations, even in different business models and sectors, usually pay off, as late-comers usually find it difficult to justify the required cost and effort of collaboration...
A new idea in banking for the poor
By teaming up with retail outlets in low-income, often hard-to-reach areas, financial institutions can create value both for themselves and their new customers.
NOVEMBER 2010 • Alberto Chaia, Robert Schiff, and Esteban Silva
Correspondent banking has become one of the most promising strategies for offering financial services in emerging markets. In this model, financial institutions work with networks of existing nonbank retail outlets—such as convenience stores, gas stations, and post offices—to deliver financial services. This approach can be especially powerful when serving the unbanked poor because of its ability to reduce banks’ cost-to-serve and reach low-income workers where they live. In Brazil, where the strategy has enjoyed its greatest successes, about 1,600 municipalities (approximately one-third of the total) are served solely by correspondent-banking outlets.
Correspondent (or agent) banking benefits a range of stakeholders. The poor gain convenient access to financial services in their own communities. Financial institutions reach a vast new customer segment. Agents increase their sales volumes and have an opportunity to develop deeper relationships with customers.
But implementing correspondent strategies can be tough. It may be hard to build networks of partners that can fulfill the correspondent role. The economics are still uncertain for players that don’t offer a range of services. And because the strategy is relatively new for financial-services providers, it is difficult to know exactly what will work in each particular community.
We came to similar conclusions in our own research. In Mexico, the all-in cost of offering savings accounts (including marketing, opening an account, and per-transaction costs) through correspondent outlets is about 25 percent lower than offering them through traditional branches (exhibit). Correspondent models thus help organizations serve low-income consumers at a lower cost, which is particularly important because people in the segment typically transact in small sums.
The use of correspondent agents is leading to a significant expansion of low-income workers’ physical access to financial services:
- Brazil: In 2000, nearly 30 percent of Brazil’s municipalities had no access to formal financial services. But between 1999 and 2003, the government revised its regulations to allow correspondent banking and facilitated its expansion by improving the country’s interbank transfer system. By 2004, every municipality in Brazil had access to formal financial services, and about 1,600 (one in four) were served only by the correspondent network.
- Mexico: More than 5,000 correspondent outlets, supported by 11 banks, have sprung up since the government authorized correspondent banking in late 2009. The government is using it to build a basic financial-services offering through more than half of the 23,000 state-owned Diconsa stores. Since 2009, a pilot program using point-of-sale devices and fingerprint-based identity cards has delivered government payments to nearly 200,000 households. Mexico’s government could use the network to reach two million or more beneficiaries4 and to add savings and insurance to the range of services it provides.5
- Kenya: M-Pesa, a successful mobile-money transfer service in Kenya, depends on physical locations that operate like correspondent outlets to give users quick and convenient opportunities to withdraw or deposit cash. Its approach involves exchanging cash for float (in an electronic form issued by the mobile operator) at one of the organization’s 16,000 retail outlets, also known as agent points. This capability is a critical component of all mobile-financial-services offerings, since consumers must be able to convert digital funds to cash, and it is much more cost effective for providers to fulfill this need by tapping into existing physical networks than to build their own from scratch.6
Perhaps above all else, correspondent banking is still relatively new in the context of financial inclusion. The rules of the game vary by geography, and the game itself changes as the strategy develops: competition is increasing, the regulatory landscape is shifting, and customer attitudes are evolving. While uncertainty opens opportunities for innovative institutions, it also presents risks, particularly for companies that can’t refine their approaches by incorporating what they learn during implementation.
Guidelines for success
The success of organizations in countries such as Brazil, Kenya, and Mexico suggests a path for the next generation of correspondent-banking models. Drawing on these experiences, as well as on our research, we have identified four guidelines that can help organizations implement successful correspondent strategies.
Move quickly to capture early-entrant advantages
In Brazil, the bank Bradesco gained a significant advantage in 2001 by quickly securing exclusive access to distribute financial services through the agencies of the country’s post office, Empresa Brasileira de Correios e Telégrafos. That gave the company a network of 5,532 post offices, including more than 1,700 in municipalities that lacked banks.7 Through Banco Postal, a wholly owned subsidiary, Bradesco extended correspondent services to the entire network in just five years.8
Build the partner network rigorously
Providers can use a cost curve analysis to understand the relative expense and potential reach of different channels in different communities of varying population densities. Such an analysis of the Mexican market suggests that correspondent banking would be a good way to expand capacity in large cities and the only viable option in small villages. But it would be more difficult in midsize towns where large retail networks are scarce. This kind of evidence can help financial institutions understand how to configure a correspondent network so they can find retail partners that provide the appropriate reach into the communities they want to serve.
Organizations can build trust over time by providing a consistently high-quality experience. Those that already operate correspondent networks and have a good reputation with the customer base may gain trust more easily when they open new correspondent locations. Likewise, financial institutions that are starting up networks may benefit from identifying and prioritizing partners that have good relationships with target consumers to increase the likelihood of their using correspondent services once they are available.
Create diversified product offerings
Providers must develop product offerings that not only attract consumers but also generate sufficient value to sustain banking operations. Correspondent partnerships that offer more than bill-payment services and savings accounts are likelier to thrive than those that do not.
Direct-deposit services also offer value for both consumers and providers of correspondent services. Much like government transfers, the electronic payment of salaries or pensions is convenient for consumers. Such products could also serve as the foundation for credit offerings based on expected cash flows from employers. In Brazil, the volume of payroll-linked loans grew by more than 110 percent annually—four times the pace of credit cards—in the first four years after regulators authorized the products, in 2003.
Conduct pilots that can be rapidly implemented and continually refined
The learning curve for correspondent banking in the context of financial inclusion is steep. Organizations should expect to make mistakes when they develop their models. The most successful operations design processes that enable them to learn from their mistakes and to develop solutions as they proceed.
Safaricom, a telecom provider, took a similar approach to piloting when it developed its M-Pesa mobile-payment service. Originally conceived as a platform for receiving and making payments on small loans, M-Pesa partnered with the local microfinance company Faulu to gain access to clients. Piloting suggested that the service would undercut Faulu’s offering but that the population would value general payment and remittance services. M-Pesa redefined its value proposition as a result, and today it is one of the world’s most successful mobile-money transfer services.12
Pioneering organizations around the world are demonstrating the value of correspondent banking. As the strategy evolves, it will become increasingly important as a way to develop scale in financial inclusion. It is not only an effective alternative to building new branches but also an important adjunct to mobile financial services, providing cost-effective outlets for cash-in, cash-out services. Experience suggests that early entrants gain the most. Organizations that start now could promote social and economic benefits for poor people by dramatically expanding financial inclusion and thus helping a growing number of low-income workers gain access to financial tools that they can use to improve their lives.
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