India’s financial services industry is poised for a digital revolution. From payment banks to India Stack to the recent expansion of mobile financial services, policy makers and financial service providers are energetically pursuing digitization of financial services. But the country still has a tremendous way to go. Roughly half the population has low digital literacy, and adoption of digital financial services (DFS) is skewed towards higher income population segments. For example, only 9 percent of those with lower education levels are online, as compared to 38 percent for those with higher education levels.
As CFI Fellows, we explored how frontline banking agents can advance the adoption of DFS by helping first-time DFS users become comfortable transacting in new ways. We evaluated the factors currently shaping the adoption of DFS by emerging consumers in India and assessed how well agents are playing their crucial role in helping customers successfully transition to digital platforms.
In the blog post we wrote at the outset of our project, we pointed out that there are benefits and drawbacks to deploying human touch in digital financial services, and that an optimal mix of human and technology-enabled customer touchpoints needs to be achieved. Over-reliance on banking agents could cause overdependence on the part of customers, possibly eliminating potential cost savings unlocked by technology. But banking agents may also present great benefits, including in assisting with product adoption, facilitating transactions, resolving problems, building trust, and supporting customers’ transitions to more advanced services.
However, not all agent banking services are created equal, and in India we observe a wide range of models in action. In our research we studied three types of agents, each with a different profile and relationship to their parent organization. We wanted to answer these questions:
- Do agents have sufficient technical, financial and administrative resources?
- Do agents have awareness and knowledge about the range of products and services offered in the digital financial space?
- Are agents motivated (via monetary compensation or otherwise) to spend the time needed to promote awareness of DFS among customers and assist them in their DFS transition?
Commercial Banks and Business Correspondents: Since 2006, commercial banks have been allowed to use third-party, non-bank individuals, known as business correspondents (BCs), to extend financial services. BCs perform a variety of functions on behalf of banks, such as opening accounts, facilitating withdrawals and deposits, introducing the customer to financial products, and providing other payment services. BCs enable banks to provide services in remote locations at a low cost.
Payment Banks and Payment Bank Agents: The Reserve Bank of India (RBI) issued the first “payment bank” licenses in February 2015. Payment banks function like any other bank, except that they do not advance loans, and therefore they operate free of credit risk. They can, however, accept deposits of up to US$1,500 per customer, offer remittance services, issue debit cards and mobile banking services, and facilitate transfers and purchases. Payment banks provide their services through third-party individuals, referred to as payment bank agents (PBAs). PBAs are not direct employees of payment banks and receive commissions based on the number of bank accounts opened and transactions made.
Microfinance Institutions and Credit Officers: The Indian microfinance industry has evolved dramatically since its inception, with microfinance institutions (MFIs) maturing and broadening their range of services. Despite this evolution, most MFIs across India still transact with customers in cash and are only gradually integrating digital platforms. MFIs typically employ credit officers (COs) on a full-time basis to connect them with their clients, paying them a fixed salary. COs perform a variety of tasks, ranging from on-boarding and orienting customers, to performing services such as opening bank accounts, fielding customer queries, and collecting repayments. These staff members were included in our research because of their potential role in assisting customers with the transition to DFS.
We studied one payment bank, one business correspondent company and two MFIs. Across these parameters and banking agent models, here’s what our investigation uncovered.
The technical resources are available, but support from the parent company varies
We found that business correspondents and payment bank agents have adequate access to the means to conduct their transactions, but encounter technical issues during facilitation of digital transactions. BCs receive moderate support from their aggregators and financial institutions but complain of a lack of attention during busy times, such as the beginning of the month when withdrawals are typically high. The PBAs we spoke with received little to no support from their parent institution, thereby heavily affecting agents’ awareness of products, which consequently hinders customer demand. Similarly, in terms of financial resources, BCs and PBAs report struggling with financial liquidity. (Credit officers associated with MFIs do not use digital platforms at this time, but reported being well-supported by their employer.)
They know but they don’t necessarily share
We found that PBAs had high levels of awareness about the DFS market in India, followed by BCs and COs. However, PBAs are weak in passing on information to their customers. BCs and COs are in a position to share their knowledge about DFS with their customers but lack incentives to do so. In terms of levels of digital literacy, we saw that PBAs have good knowledge and skills and are adept at using smartphones and other technical devices. They could help compensate for customers’ poor digital literacy skills. BCs are less knowledgeable on this front, while COs ranked the lowest. BCs and COs seemed to enjoy high levels of trust among their customers, while PBAs did not.
Compensation matters for motivation
We saw that the least motivated agents were also the most poorly compensated. BCs were more adequately incentivized compared to COs and PBAs. For CO and PBA agents, orienting new customers to use DFS was hardly worth the effort.
What Can FSPs Do Better?
The more we talked with agents during our research, the more we became convinced that agents are an enormous and necessary resource for bringing about India’s transition to digitally-based financial inclusion. Agents are the bridge between FSPs and last mile customers, not only in a practical sense as transaction facilitators, but through their human touch. Our discussions with agents, branch managers, and senior executives of financial organizations revealed important insights into the opportunities and challenges that exist for each type of financial service provider in building effective agent networks.
In summary, we found that commercial banks working with business correspondents could increase their support to agents by maintaining regular contact with them, helping them troubleshoot technical problems and strengthening the financial incentives for better outcomes for both banks and last mile consumers. For payment banks, given the novelty of their product, it is important for them to find their unique selling proposition and carve out a niche for themselves where they can sustainably provide value-added services in the era of cut-throat competition from several new age fintech providers. To increase their outreach, we found that payment banks have to substantially increase their product marketing to increase awareness and demand among their customers. Lastly, microfinance institutions can gradually start shifting their customers onto digital platforms by taking small steps at a time, such as digitizing the process of loan disbursement and repayment. In this context, credit officers can act as key nodes of influencers among the institutions’ customers.
For more, read the new report, Agents of Change: How the Human Touch Is Bringing Digital Financial Services to New Customers in India.
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