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PARTNERS AT THE LAST MILE: RETAILERS, BANKING AGENTS, AND INSURANCE COMPANIES Summary of the Last Lecture • The Last Mile • Banking Correspondents • Models of Bank-Retailer Relationships In-Store Banking • In this case, the financial institution typically occupies a small area inside the retail store, equipped with a communications device to link to the mother bank and staffed by a bank employee. There is little relationship between the bank and the retailer, as each party carries out business as usual. In-Store Banking • In Bolivia, for example, BCP, a large Peruvian bank, has set up small kiosks on the premises of various large retailers, usually supermarkets, to offer basic account services. In-Store Banking • A financial institution may or may not pay retailers to occupy the space. In Uruguay, banks do not pay, claiming that the retailers benefit from the bank’s presence in the form of greater customer traffic, but in other countries— In-Store Banking • Especially countries like Bolivia, where only exclusive (one bank, one retailer) arrangements are permitted—the retailer has more negotiating power, and the bank does, in fact, pay a commission. In-Store Banking • Such partnerships are relatively straightforward. They bring down the physical infrastructure cost of reducing “white space” on the map. In-Store Banking • However, there are no cost advantages in terms of IT or staffing, since the bank’s own staff still processes transactions. In-Store Banking • The attractiveness of this model depends on the relative cost of opening traditional branches, which is partly determined by the regulatory framework. Banking Agents • In the banking correspondents or agent model, the financial institution works through the retailer, leveraging the retailer’s employees. Banking Agents • Customers carry out banking transactions directly with the retailers’ employees at the cash register, and a shared informationtechnology system processes the transactions. Banking Agents • Risk to the banking system is minimized because the transactions take place on the agent’s bank account until a general settlement at the end of the day. The agent becomes, in effect, a transaction aggregator for its area. Banking Agents • This arrangement requires considerable integration between the two parties. The institutions need to share both information and funds platforms; thus, interfacing technology and data synchronization become important. Banking Agents • Liquidity and cash management (such as the transport of cash) can become a challenge, especially if the amount of cash required for banking is much larger than the retailers’ ordinary needs. Banking Agents • A local convenience store that becomes a bank agent might need to multiply the amount of cash on hand several times. This increases the risk of fraud, robbery, disputes, and delayed or missing transactions. Banking Agents • The need for control is one of several reasons that banks may find it best to work with major, well-established retailers that do a highvolume business and can invest in technology. Banking Agents • Moreover, because the financial institution is effectively “outsourcing” customer interaction to the retailer, the human resources challenges are greater. Banking Agents • Customer service is in the hands of retail agents, who may or may not adequately represent the bank’s interests. Agent employees could be rude or simply uninformed. Banking Agents • They need training on products, processes, and customer service. There are also risks that retailers will not have the right image or will give low priority to supporting financial services as a line of business. Banking Agents • In some countries, notably Brazil, regulation prohibits the financial institution from prominently displaying its brand when using agents, which may reduce the incentive of banks to work with agents. Banking Agents • One of the big questions about banking agents is whether banks will use them to reach new BOP customers or merely to cut costs for existing customers. Banking Agents • It is of course much easier to shift the transaction location for existing customers, as has HSBC in Brazil. Reaching new market segments requires marketing and product adjustments in addition to the work required to create the new channel. Banking Agents • For BOP clients, financial education on anything from how to manage a savings account to protecting PIN numbers may need to accompany marketing and sales. Banking Agents • Banco Bradesco, one of Brazil’s largest banks, has made important strides in reaching new markets. It won a government tender in 2002 to offer services through the Brazilian postal system. Banking Agents • Within a few years its Banco Postal division had a presence in more than 5,900 post offices and amassed 5.5 million new clients, representing a third of Bradesco’s client base. Banking Agents • Nearly 75 percent of these new customers earn less than $200 per month, putting them in the BOP category. The model has been especially important for geographic penetration. Banking Agents • Before the regulations authorizing banking agents, 1,659 municipalities in Brazil had no banking services. Today that number is zero. Banking Agents • A second big question is whether customers will use agents for a full range of banking services. In Brazil, the vast majority of transactions are for paying bills or receiving government benefits. For BOP customers new to banking, behavior change may be slow but steady. Banking Agents • Finally, the question remains whether Brazil’s dramatic success with this model will spread. After Brazil’s nearly 100,000 agents, South Africa, with only 5,000 agents, has the next largest banking agent network, followed by Kenya, with fewer than 3,000. Retailers Become Bankers • The third bank-retail model involves large chain retailers who obtain a banking license and offer financial services through their own outlets, as many major retailers have long done, from Sears to Wal-Mart to Tesco. Retailers Become Bankers • These models may begin with the offer of store credit, often with a bank partner in the background. After all, American department stores developed the forerunners of credit cards as far back as the 1920s—stamped metal squares, known as charge plates, that Retailers Become Bankers • bore customer identification. But when retailers decide to move into products such as personal loans, microenterprise credit, bill payments, insurance, and savings, they need to launch their own financial institutions. Retailers Become Bankers • Mexico, in particular, has seen retailers founding banks, including Coppel, Grupo Famsa, Grupo Chedraui, and most recently Wal-Mart Mexico. This rapid entry follows the unprecedented success of Banco Azteca, created by appliance retailer Elektra in 2002. Retailers Become Bankers • Banco Azteca offers deposits and loans through over 1,500 agents in Elektra stores. Banco Azteca boasts 8.1 million savings accounts, 8.3 million loans, and 11 million insurance policies. Retailers Become Bankers • The beauty of the Azteca model is that it internalizes the complex relationships described above—information technology, human resources, branding, control—inside a single enterprise, which then reaps profits wherever they occur in the chain. Retailers Become Bankers • This route is only open to major retail chains, however, and it requires the development of many new corporate capabilities in the banking arena. Variations • Companies find many successful variations on these basic models. For example, the models can be combined in the same store. Variations • Mexico’s Chedraui Group of hypermarkets services Compartamos Banco’s microloan clients by accepting loan repayments in its checkout lines, right next to kiosks where Chedraui’s own Banco Facil offers banking services. Variations • In other cases the retailer in question is not in a fixed location. FinComún, a microlending company in Mexico, partnered with BIMBO, a major bread distributor, to offer financial services to some of the 450,000 small store operators who sell BIMBO products. Variations • BIMBO equipped its truck drivers with pointofsale (POS) devices to record loan disbursement and repayment transactions on their regular bread deliveries. Variations • Because BIMBO has a stake in the success of the small grocers, it is willing to do more than just process transactions. BIMBO actively markets the loan product and preselects clients before a FinComún loan officer approves the loan. Summary • Instore Banking, banking Agents, Retailers become bankers, variations