Banking is going digital at an incredible pace, with new technology-backed business models changing the rules of the game. But despite the emergence, and increasing acceptance of digital channels, physical bank branches remain important as customers still appreciate in-person engagement. Physical branches are also important in emerging economies where low internet penetration may hinder digital access to banking services. But what happens when a region is too far flung, or presents too small a business opportunity for banks to invest in physical branches? Well, that’s where agency banking comes in.
What is Agency Banking?
Agency banking is a system where banks collaborate with local third-party agents to deliver essential financial services on their behalf. These agents serve as intermediaries, facilitating transactions like cash deposits, withdrawals, and fund transfers, particularly in remote or underbanked regions. By leveraging existing retail networks, agency banking expands financial access, making banking services more convenient and accessible for individuals who previously had limited options. In areas where traditional banking facilities are limited, banks even work with small local businesses like retail stores or supermarkets to offer financial services. Financial institutions also partner with other banks for syndicated loans, risk-sharing, and co-branded financial products. Additionally, collaborations with entertainment services, such as streaming platforms, gaming companies, and event organizers, allow banks to offer exclusive financial products. Agency banking allows banks to expand their reach and accessibility to new customer segments, while helping the agents, or local partners explore a new income or revenue stream. And customers get access to secure banking services.
What’s in it for Banks?
- Reduced Infrastructure Costs: Setting up physical bank branches requires significant investment in infrastructure, staffing, and security. With agency banking, financial institutions can extend their services into new regions without incurring significant operational costs. For instance, a large South African Bank did just this when it utilized another organization’s Point of Sale devices to facilitate banking transactions. It minimized its capital expenditure on branch expansion while offering customers convenient access to banking services at retail outlets. Customers were able to deposit, withdraw funds, and facilitate pre-paid (electricity, airtime) facilities at familiar, easily accessible locations. This model enhanced financial inclusion, particularly in rural and semi-urban areas where traditional bank branches may not be feasible.
- Minimizing Bank Cash Handling Costs: As agency banking enables banks to use existing merchant networks for cash transactions; it significantly reduces cash handling costs, or the expenses associated with transport and storage of cash. Another African bank used regional agents to provide banking services. This reduces expenses related to rent, security, staffing, and cash storage at physical bank locations. This model allowed the bank to offer financial services while cutting down cash handling expenses and operational costs. This in turn increased banking penetration in rural areas with minimal operational costs.
- Increase Scale and Reach: With agency banking banks can extend the reach of their services to new areas, and new customer segments without high infrastructure costs. They can focus on specific tasks such as onboarding, loan sourcing and verification, product awareness, and facilitating transactions. For instance, an Indian bank works with direct selling agents who handle sourcing and verifying loan applications, reducing the bank’s acquisition costs while improving turnaround times. The bank could strategically expand its market presence in targeted regions and cities by providing lucrative commissions to agents. The agents played a vital role in sourcing loan applications, performing initial verifications, and reducing processing time. This strategy not only helped the bank expand its customer base but also improved loan recovery rates due to better applicant screening.
- Financial Inclusion: Most developing countries have a large population that remains outside the formal banking economy. Agency banking helps bridge the gap by having local agents educate these populations about the banking service like cash deposits, withdrawals, bill payments, and follow it up with easy access to these services. Many banks in Africa work with a mobile money service provider to extend financial services across remote areas via their agents. This has transformed banking accessibility for millions, by allowing users to deposit, withdraw, transfer money, and even access credit through their mobile phones. Banks benefit by integrating mobile money services with traditional banking, expanding their customer base and improving financial literacy among previously unbanked populations.
What’s in it for the Agency?
The agency stands to benefit from new income streams as most agency banking models work on revenue sharing models. Some common commission structures used in these partnerships include:
- Transaction-Based Commission: Banks pay agents a fixed commission per transaction, such as for deposits, withdrawals, or bill payments. This model incentivizes agents to process higher volumes of transactions.
- Percentage-Based Commission: Agents receive a percentage of the transaction amount. For example, an agent may earn 1% on cash withdrawals or deposits made through their outlet.
- Fixed Monthly Retainer: Some banks provide agents with a fixed monthly payment, ensuring they have a steady income even if transaction volumes fluctuate.
- Tiered Incentive Structures: To encourage higher performance, banks may offer tiered commissions based on the agent’s transaction volume. Higher transaction counts result in higher commission rates.
How a Robust Revenue Management System Can Enable Agency Banking Strategies
Managing an agency banking model calls for a strong revenue management solution as legacy banking cores lack the agility and flexibility required for the task. Banks need a robust, cloud-native, microservices-based middleware platform that can sit over their legacy cores to manage agency partnerships effectively. Here are the specific features that banks must consider when choosing a revenue management platform:
- Product Catalog Centralization: All the products, services, and the rates associated with the agency must be centralized by creating a unified catalog that integrates all bank offerings, including physical products, digital services, benefits, and subscription-based offerings. This enables seamless updates to product pricing and features across multiple sales channels and ensures that all products and services are consistently priced and described across different sales channels, departments, and systems. It also provides a single source that supports various teams, from relationship managers to operating users, ensuring alignment in pricing and service delivery. By centralizing pricing and product management in a single system, businesses can streamline operations, reduce errors, and ensure a seamless customer experience.
- Agent Negotiations: Maintaining a strong relationship with the agent network is critical for business growth. But the negotiation process with agents is complex as banks must consider their existing relationship with them. A robust revenue management solution can simplify these negotiations by offering transparent and customizable pricing structures that align with partnership agreement. It can provide detailed analytics and insights on partner performance based on historic data, helping businesses make informed decisions. It can enable flexible discounts and incentive models to create strong and mutually beneficial partnerships. It can also offer customizable dashboards to project the partner’s revenue growth by inputting rates, duration, and other key factors. And it can ensure accurate revenue forecasting based on contractual commitments and obligations.
- Pricing Models: Banks need flexible and innovative commission strategies to foster loyalty and sustain long-term agent partnerships. The platform must support tiered, usage-based, and flat-rate models to cater to different agents or partner customer segments. It must provide negotiated prices based on demand, agent behavior, and market conditions. And it must help banks offer discounts, seasonal offers, and loyalty programs to enhance agent engagement and productivity.
- Revenue Sharing: Managing revenue-sharing agreements can be challenging with multiple partners involved. A powerful revenue management system can simplify this process by providing scheduled commission pay-outs based on predefined rules, ensuring accurate and timely pay-outs to agents and partners. It can also provide transparent invoices and extracts that clearly state the commission and revenue details and maintain accurate ledgers using the appropriate account heads. It must also ensure compliance with financial regulations and accounting standards.
- Governance and Compliance in Agent Banking: A modern revenue management platform can help banks strengthen their risk management and governance efforts by ensuring that agent commissions are systematically tracked and approved before the payment is made. This is done to avoid financial discrepancies. The configurations, transactions and approvals must go through multiple layers of verification to prevent errors and fraud. It must also maintain thresholds or limits for the commission amount payout to avoid potential risks.
- Commitment Tracking: The partners of the bank may commit to certain volumes or value of transactions during a specified period and the bank offers benefits to the partners based on these commitments. The organization’s revenue projections are based on these as well. The bank must periodically track the engagement with the partners to evaluate if they are aligned with the commitments made earlier. The revenue management platform must be able to carry out commitment reviews or in-depth tracking and analysis of the actual business done by the agent. This is then compared to what was committed at the time of deal commencement. Banks can use the platform to carry out profitability analysis to arrive at actual profits to be made off a particular business partnership. It ensures timely renewals and compliance by tracking the commitments automatically and monitors contract expirations, commitment deviations and penalties, and alerts the bank when required.
Agency banking is a powerful tool for expanding financial services, improving financial inclusion, and driving economic growth. By forming strategic partnerships with agents, banks can extend their services efficiently while keeping operational costs low. A well-structured commission strategy ensures that both banks and agents benefit, creating a sustainable partner ecosystem. As technology continues to evolve, digital integration with agency banking will further enhance accessibility and financial inclusion across the globe.
