What can the Bangladesh finance sector learn from DBBL's agent banking initiative?

On 18 July 2018, we met with banks in Dhaka to share learning from the Dutch-Bangla Bank Limited agent banking model initiative co-funded by the Business Finance for the Poor in Bangladesh Challenge Fund. Together, we discussed practices that other finance sector actors can use in efforts to extend financial services to ‘unbanked’ citizens.

Affordable financial services often do not reach millions of small businesses due to geographical dispersion, high transaction cost, and limited offering of products and services. There are roughly 6 bank branches for every 100,000 rural adult citizens in Bangladesh.

The agent banking model is an alternative to the brick-and-mortar approach that requires customers to visit bank branches. Financial services are instead offered by engaged agents, who carry out banking transactions from their outlets under a legal agreement with banks. This is an adaptation of distribution models already in use by multinational organisations, fast-moving consumer goods producers,, and telecommunication organisations.

Roughly 86,000 rural areas in Bangladesh have been targeted with the DBBL agent banking model. These ‘unbanked’ rural villages previously did not have access to financial products in any form. However, with new opportunities provided by agent banking services, all services except foreign exchange and remittance are now available. Among the primary benefits:

Greater convenience, and cheaper transaction costs
Travel shorter distances to use banking services
Services available after regular business hours, as agent banks are open 9am to 7pm

The DBBL agent banking initiative is not free from its challenges. According to DBBL Chief Technology Officer Md. Abul Kashem Khan, “People still do not trust agent banking, as they do not have a clear concept of this alternative banking channel.”

Impact of DBBL agent banking services

This co-investment by BFP-B and DBBL has provided banking services to more than 800,000 customers, including 206,000 small business, and has created roughly 3,000 jobs
Previously, a customer had to travel 7 kilometres to avail banking services. Now, customers can find DBBL agent banking outlets within 2 kilometres of home. Cost per transaction was previously BDT 51, and it is now BDT 17 (mainly transportation). Savings per transaction cost was approximately 66.7%
As of March 2018, the total deposit amount in agent banking clients’ accounts is approximately £40 million. Cumulative daily credit transaction of these agents is around GBP 4 million
Number of operational DBBL agent outlets and provide banking services increased from 134 to 1,350
Total number of MSEs receiving banking services rose significantly, from 938 to 206,259. However, only 1% are females
Each agent outlet collected savings of an average of GBP 31,633 by end line

Key learning points from DBBL agent banking

Public money to de-risk private sector investment

Even though 20 banks have been given license for agent baking operation from 2013 till date, only two have been able to capture significant market share. Both banks have partnered with development organisations to expand the business. Public-private partnership can help de-risk private sector investment to test out innovative alternative solutions.

Value proposition

It is evident from DBBL’s experience that micro and small enterprises prefer to keep their money in a safe place if it is easily accessible. In a market which is experiencing liquidity shortages this provides an alternative approach to generate significant liquidity and helps to spread risk of the lending portfolio of the balance sheet.

Investment decision: market share vs payback period

There are two models emerging for agent baking. One is patient capital approach with a longer payback period but deeper reach geographically serving groups who are underserved or unserved. The other has a quicker payback but shorter horizon. There is space for both. However, in any market, any players who has been able to move faster and acquire customers quickly is able to acquire significant market share faster. Hence, it is evident that gaining market share requires a decision to take a patient capital approach.

Collaborate where you can, compete where you must

We also need to think about what the common infrastructures are where industry players can collaborate so that there is no need for making independent investments and, how they can compete on areas such as brand and services so that the industry grows.

Disruption

It is very likely that technology will be disruptive and our banking models have to adapt to that. In future one potential disruption the agent baking will have to manage is the advancement of mobile phones for mobile financial services. As customer become more familiar with technology, the value proposition of agent banking has to be very different than the value proposition those are offered through low cost channels such as MFS.

Questions raised during the event

Though 20 licenses were issued by Central Bank for agent banking, why have only a few banks moved forward with it?
Why is this the best time for agent banking?
What is the time frame for agents to breakeven?

Remarks on the questions

Due to security reasons, most banks are unsure of the return on investment as a result of which they were not ready for agent banking at that time.
This is a good time for agent banking because, from observations, agent banking is free from the risk associated with unpredictable crisis such as that of liquidity that other banks may face
Usually a breakeven period of two years is mentioned by the banks but, some agent breakeven earlier than he stipulated two years while the others may take a longer time

Other learning points to consider

Bank can consider collaborations with the development sector, which has also found ways to reach unbanked populations
DFID is funding programmes such as BFP-B because it is keen to see development
Rapidly evolving technology has the potential to disrupt the current business models used to bring about financial inclusion. Banks must be prepared with contingency plans to deal with these kinds of disruption. Technology can be disruptive and has potential to have major impact on the banking sector and Bangladesh