Remittances have emerged as the most common anchor product offered by alternate banking channels, (banking channels used by the unbanked such as money transfer agents), particularly in large Indian cities like Delhi and Mumbai. Huge unmet demand for sending money home efficiently and quickly, combined with willingness to pay for the service, has made over the counter (OTC) remittances an attractive proposition for many digital financial service providers. Competition in this space has increased tremendously and every provider is keen to hold on to, and increase, their share of the pie.

The delivery channel for remittance services comprises a range of stakeholders from the bank to the front-line agent, and all the managers and facilitators in between. Such is the importance of the channel offering remittances that the provider chosen to make the remittance is often not decided by the customer, but rather by the front-line agent, who makes the decision based on the commission he/she will receive. Customers sending money using OTC are often oblivious of the provider used to send their money. Their primary concern is confirmation that money has reached the intended beneficiary.

Recently the OTC remittance business in Mumbai has caught the eye of First Rand Bank (FRB) a multinational bank, which has entered into this arena with an innovative and disruptive business model that focuses on keeping the channel happy. The business model, which is still in its nascent phase, has been (according transaction agents and distributors) efficient enough to wrest nearly 20% of the business from well-established Business Correspondent Network Managers (BCNMs) within six months of the bank entering the OTC market. 

Practices adopted by the new entrant (what we observed)

·   Competitive channel compensation: One of the reasons for M-PESA’s remarkable take-off in Kenya was the generous commissions Safaricom paid to their channel in the start-up years in order to gain traction. For example, in 2010 the average agent received $420 commission per month. Since M-PESA has become so well entrenched, and with the growth of the agent network, this had fallen to $129 by 2013. In Mumbai FRB gained much needed traction and, in turn, made in-roads into the well-established remittance market by offering better compensation to channel partners. Master agents or “distributors” and front-line agents were offered lucrative commissions to attract the early adopters among them. Below is a brief comparison based on the feedback we received from the field.

·  Direct involvement of bank in channel recruitment: In this model, the bank has done away with BCNMs and is directly recruiting distributors and agents in the field. The bank carries out extensive due diligence prior to finalising the distributors. They target distributors who have worked with other providers since they already have an agent network working for them. This experience of distributors is then leveraged for agent selection. A team from the bank is deployed on field to monitor the agent selection process, conduct background checks, and assist the distributor in finalising agent recruitment. 

·  Advance credit limit to agents: Shortage of e-float at agent counters is a perennial issue that every provider grapples with – this has been repeatedly highlighted in The Helix’s agent network assessments (ANA) surveys across the globe. This problem becomes even more acute when the agent is unwilling to increase his/her liquidity with increasing business volumes. To ensure that shortage of liquidity is no more a roadblock to scale-up operations, the bank has given a credit limit of Rs.5,000,000 (US$8,333) to its agents. This is given to the agents without any physical collateral or security deposit. And as the conservative eyebrows rise, it is worth mentioning here that there are a few (but only few!!) mechanisms to prevent fraud.

·  Hourly reports: Distributors and the agents get hourly reports of all transactions. These reports keep the distributor informed of the cash position of the agent. The distributor’s field staff collects any excess cash from the agent. Instead of the traditional method of liquidity rebalancing, where the field staff member visits the agent counter only once a day, the frequency of visits to agent counter is not fixed and varies depending on the volume of business. This helps the distributor to collect cash and not leave the agent overloaded with cash. While in principle this collection exercise should be religiously followed on an hourly basis, non-adherence to this leaves the bank exposed to risk of flight by the agent with large amounts of cash exchanged for e-float that has been taken on credit.

·  Distributor’s personal guarantee: Since this model is inherently exposed to cash risk, the bank has adopted some control measures. The bank has communicated that any fraud committed by the agents will be the distributor’s responsibility and reinforces this through constant in-the-field monitoring. This ensures that distributors are cautious during agent recruitment and also in cash management. Thus they recruit only those agents with whom they have an existing business relationship and can trust. The bank, through these measures, leverages the existing relations of the distributor and the agents to its benefit.

The bank, through its real-time monitoring framework keeps a bird’s eye view on the entire business landscape. Whenever the cash balance increases beyond an acceptable level with any distributor, the bank intervenes to ensure that the cash is deposited in a timely manner.

MicroSave’s presentation to RBI in January 2014 highlighted that agent commissions and liquidity management are among the most important aspects that contribute to a sustainable agent network. With minor tweaks in the business model, FRB has made major in-roads into the well-established remittance market of Mumbai. This was made possible also because a portion of the channel commission is sourced through higher customer charges. MicroSave’s prior research suggests that customers are willing to pay for the service this sector offers.

Potential implications

The market share that the bank was able to capture in such short span of time guarantees that the tactics adopted have been observed by the competition. We are yet to see how the competition will react to the erosion of their market share. In the meanwhile, what we can assess are the potential implications for the sector. The figure below examines these in two eventualities – 1. Where the model succeeds and 2. Where it fails.

The table below examines these potential implications in greater detail.

                                                            Potential Implications

                   The Model Succeeds

                        The Model Fails

   Implication

              Explanation

   Implication

             Explanation

Reduced instances of transaction denials

Liquidity practices in this model will ensure that the channel has float available at all times, leading to reduction in customer transaction denials. This can solve liquidity management concerns that DFS delivery channels have grappled with for long.

Agent fraud and the ripple effect

The risk associated with the advance credit limit cannot be ignored. It can potentially lead to high levels of fraud by agents and/or distributors. This eventuality could lead to significant bank loses which may also have ripple effect on the customers.

Channel satisfaction

FRB’s practices address key concerns of agents. Adoption of these practices will improve satisfaction and reemphasise the importance of the channel in urban remittance markets.

Agents official commissions normalise

Failure of this model could lead to agent commissions in the sector going on a downward spiral until it equates with the nominal commissions which are traditionally paid.

Market wide replication

We do expect aggressive private banks or new entrants to quickly innovate and try to grab as much market share as they can. Eroding market shares are likely to push veteran players also in the same direction eventually.

Increased risk aversion in the sector

Any instance of significant agent fraud and/or failure of the model could result in apprehensions among service providers and regulators. Innovations may then be difficult to implement and this can lead to a brief period of sectorial stagnation.

Likelihood of a ‘commission war’

The competition could potentially react by rolling out lucrative commission structures for channel partners making way for a ‘commission war’ which can result in the weeding out of smaller players and lead to more market consolidation.

More intensive and direct involvement from banks

Banks could, taking a cue from these practices, be more directly involved in managing the channel, and reduce the dependence on BCNMs. This will in future leave the banks with a larger share of the risk for the business. This can also lead to more standardised systems including (including stringent agent selection practices).

 

Initial success of First Rand Bank’s approach seems to indicate that ensuring the channel’s happiness is the key to success in this model. It is too early to comment on the efficacy of the model itself. By exposing itself to some credit risk, FRB has addressed some of the most difficult challenges facing agent network managers. If the bank is able to monitor the operations effectively and manage the risks, such innovations are a clear indication of interesting times ahead in the sector and might evolve as a “to be replicated” key to success in future. Fingers crossed!!While all this is speculative at the moment, we still have to wait and see what turn the market in Mumbai takes.

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