DRIVERS OF AGENT ACTIVITY: REACTIVATING AGENTS IN RURAL KENYA

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1 DRIVERS OF AGENT ACTIVITY: REACTIVATING AGENTS IN RURAL KENYA Working with savings banks to double the number of savings accounts in the hands of the poor April 2016 RETAIL REGIONAL RESPONSIBLE Learning Paper

2 LEARNING PAPER 3 Learning paper With case study incorporated DRIVERS OF AGENT ACTIVITY: REACTIVATING AGENTS IN RURAL KENYA Working with savings banks to double the number of savings accounts in the hands of the poor April 2016 CONTENT This study was commissioned by the World Savings and Retail Banking Institute (WSBI) within the framework of the WSBI program Working with savings banks in order to double the number of savings accounts in the hands of the poor. This specific study aims to share lessons learned during the program run. Both qualitative and quantitative research was conducted in partnership with Kenya Post Office Savings Bank (KPOSB), also referred to in this paper as Postbank. The geographic areas covered throughout 2015 were Nairobi, Rift Valley, Central, Western and Coast Regions. With agent dormancy and inactivity being an industry-wide problem, we wanted to understand how many of the reported agents remain active, semi-active or dormant as well as what might be reasons for inactivity. The first section of this publication describes what matters from a strategic, management and operational point of view when working with agents within a bank-led partnership model. The paper adds a case study on KPOSB s journey in grasping why agents go dormant and what needs to be done to reactivate them. The authors would like to extend their thanks to the KPOSB management, agent banking and branch staff as well as all agents who participated in the study. Their tireless support helped make the study possible through logistical arrangements, time, sharing their views openly, and participating in the development of agent reactivation strategies. Author: Co-author: Mbinya Mutiso Weselina Angelow

3 4 DRIVERS OF AGENT ACTIVITY: REACTIVATING AGENTS IN RURAL KENYA THE STATUS OF AGENT BANKING IN KENYA Banks and MNOs have long posited that closing the proximity gap provides a clear means to narrowing the financial access gap. In 2013, WSBI conducted a proximity study to understand the relational factors of proximity and access. The study 1 used geospatial information system data to look at how much populations cluster together in the sort of numbers that might make an agent outlet sustainable, and how many customers need to be captured by the different types of outlets to become financially sustainable at reasonably affordable pricing. The findings indicated that for a single teller kiosk mainly found in urban and rural settings, the optimal number for sustainability is 2,000 customers per month. For a full service agent, found in a mostly urban setting, the optimal number for sustainability is 700 customers per month. The Micro Save Kenya ANA 2014 survey 2 findings indicated that mobile money agents posted a median 46 daily transactions against a bank agent s 30 daily transactions. This means that a bank agent averaged 900 transactions a month, or at least one transaction a day, representing 45% of the optimal number of 2,000 for a sustainable agent. What the strong results do not tell us is about the elephant in the room so to speak. How many of the reported agents are active, semi-active or dormant? And why? Agent dormancy and inactivity is an industry wide problem, though it s magnitude is not well documented. The MicroSave ANA 2014 survey, comprising more than 8,000 MNOs and bank agents, indicates that while agency banking and mobile money had been implemented fully by 2010, 61% of the agents had been in business for a year or less, compared to 59% in What does this tell us? While the network is now a year older, agents do not report more years in business. In 2014, only 58% of agents in Kenya expected to be in the agency business in 2015, an alarming latent churn rate. Uganda and Tanzania reported 22% and 30% latent churn rate respectively. High agent churn rate means a higher number of operationally inexperienced agents, resulting in higher downtime and transaction errors, more customers sent away, and higher customer dissatisfaction with the channel. In 2015, Kenya reported in excess of 35,000 mobile money agents and 13,500 bank agents spread across the region. The agents transacted 50.4% of all cash transactions, exceeding all transactions carried out at a bank branch or by ATM. The FinAccess 3 report of 2014 reported a 33% jump in financial inclusion between with 218 service points for every 100,000 people, up from 162 outlets in This paints a very rosy picture for agency banking as the next financial inclusion channel. 1 WSBI Working Paper: Mapping proximity - Bringing products and services close enough to the poor to be meaningfully usable and still keep them sustainable for WSBI partner banks, May Agent Network Accelerator Survey: Kenya Country Report 2014 ( 3 Fin Access Report 2015 (

4 LEARNING PAPER 5 OVERCOMING AGENT DORMANCY Chart1: Operational issues STRATEGY AGENT BANKING BANK MANAGEMENT STRUCTURES POLICIES AND PROCEDURES MONITORING AND SUPERVISION COMPENSATION STRUCTURES LIQUIDITY MANAGEMENT PRODUCT & SERVICE PRICING MARKETING RELATIONSHIP BUIDLING & COMMUNICATION (INTERNAL & EXTERNAL) By 2015, the KPOSB had established 992 agents with a 46% dormancy rate as defined in the Dormancy Policy 4. Considering the level of resources expended towards establishment and management of the agency banking business, the need to look into overcoming dormancy and creating sustainable agents became very clear. The focus of this paper will be on the stated reasons for agent inactivity and dormancy and approaches to overcoming agent dormancy, with specific focus on tackling operational issues which are institutional in nature. Aligning agency banking strategy with bank strategy A mismatch between the global bank strategy and the agent Banking strategy could well be the most important cause of agent dormancy. When the agent banking strategy is not seen as contributing substantively to the bank s performance, resources will not be allocated in time, or in sufficient amounts if at all. This includes funds, personnel, risk management, policies, systems, monitoring and evaluation. Initial buy-in of the agent banking strategy must be sought at all levels of the institution. If key decision makers and staff do not understand the value add that the agency provides, it may be perceived as a threat. The business rationale of decongesting branches and reducing the cost of setting up brick and mortar may not resonate with staff who have performance targets to achieve. A viable business model must be developed and performance monitored continuously to allow for review. Evaluation of the legal and technological environment is imperative to keep in step with dynamic shifts that will impact on the business model. 4 AGENT STATUS DESCRIPTION AGENT STATUS DESCRIPTION Active Agents With activity within 12 months Semi Active No activity months Inactive No activity months Dormant No activity 72 months < above

5 6 DRIVERS OF AGENT ACTIVITY: REACTIVATING AGENTS IN RURAL KENYA As a strategic business unit, agency banking would have specific core functions that are recognized and have adequate resource allocation. These would include the following; Business Development scoping and recruiting agents, marketing, and branding Distribution Deployment, Agent Network Managers, and support staff Operations customer support, liquidity management, business tools, Training and onboarding agents / refresher training, new products and services Customer experience feedback, issues resolution, communication Quality assurance and reporting supervision, performance management, planning It is important to ensure that personnel incentives are aligned across the bank, roles, responsibilities and reporting lines clearly outlined, and performance targets unambiguous and activity based. Deployment model: To build own network, partner, or outsource? Banks have different deployment models at their disposal when embarking into the agency business. Between building own network, partnering, or outsourcing, the bank must balance between the need for speed to market, reach, cost and control. Many banks opt for building own network, which provides the opportunity to keep a close check on the quality of agents recruited, but is costly, time to market longer, and reach, less. Agent monitoring also becomes a challenge especially where the bank does not have enough human resource capacity or technology to monitor agents. A critical factor in dormancy is inadequate footprint of the product. If the bank does not have sufficient customer numbers, the agent will likewise suffer from inadequate traffic, which results in low commissions, agent apathy, and dormancy. Relationship management & communication Building relationships with agents is key for a successful agent network. Fostering open, easy, affordable communication is key to a sustainable working relation - ship. Agents cite the following impediments to business; lack of bank-wide support inadequate communication on products and services, inadequate / untimely communication on changes in policy and procedures inadequate support staff inadequate, delayed, or lack of issue resolution lack of feedback on issues raised high costs of communicating with the bank reactive practice to business issues disconnect between agency banking staff and branch staff resulting in support lapses To address the challenge of relationship building, communi cation and support, many banks engage agent network managers, who provide onsite support. Collection of feedback in a timely open fashion is key to keeping a finger on the pulse of the agent network. Some banks also provide 24/7 toll free lines and contact centers for resolution of issues as and when they arise. Staff at the contact center need to be knowledgeable about agent banking procedures and policy, as well as other bank products and services. Management structures a) Policies and procedures Inadequate or lack of appropriate policies and procedures is a recipe for inconsistent business. Policies that provide guidelines on agent and bank roles and responsibilities will go a long way in standardizing business practice. Policies that govern float manage - ment, inactivity, errors, hours of operation, branding, supervision, and communication are imperative in maintaining a healthy network. Policies should also stipulate timely sanctions for undesired behavior, and the Banks risk management team enforce compliance to policy. It is important to establish a communication channel that is cost, time, and reach effective.

6 LEARNING PAPER 7 b) Compensation to pay or not to pay? One of the biggest pain points for agents has been the compensation structures offered by banks. Some banks offer a tiered compensation structure pegged on the value of transaction and others a flat rate for all transactions. Agents have cited low commissions as a factor in investing less money in the business. This results in customers being turned away due to lack of float, though agents will normally pass it off as a business tool failure, or lack of network. This leads to decreased traffic as the customer seeks other agents, leading to lower commissions and, eventually, dormancy. The need to keep cash-in free, and small balance cash-out priced as low as possible particularly for the poor has posed a particular challenge for banks. Increasing commissions radically also poses the danger of making a loss on the business unless there is a matching increase in transactions cost, which results in reduced transactions and of customer numbers. For the Postbank and agents to become profitable, a keen analysis of the breakeven point is necessary, revision of the business model, and strict management of the agent banking overheads maintained, while taking into consideration industry practice. c) Agent monitoring and supervision The deployment model selected by a bank will determine the levels of agent network management and roles. Agent monitoring is a crucial aspect in performance. Agents of well-performing banks speak of rigorous monitoring and supervision on float management, hours of operation, downtime of business tools, record keeping, errors and failed transactions, customer satisfaction and general outlet look and feel. Monitoring agents should be activity and issue based, in tandem with expected performance measures in any given time period. This will result in faster resolution of issues, identification of agents who are slacking off, and also provides feedback on on-site management by support officers. It is therefore crucial to establish a clear monitoring, supervision, and reporting framework that highlights achievement of performance targets. The framework also describes what action can be taken at every stage of monitoring and the authorized persons to take such action. The framework must be contained in the agent-bank contract. It is crucial for the bank to have adequate technological and human resource capacity to manage agents efficiently. d) Data analytics An IT-based agent management system that profiles each agent and tracks activity in real time is a highly useful tool. Technology is becoming indispensable to achieve real-time management of agents, quickly resolve operational issues, and maintain agent activity. Data can be used to provide insights into agent and customer behavior and business trends. e) Liquidity management Agency banking involves exchanging e-float for cash and vice versa. Inadequate liquidity is a key determinant of the agent s sustainability. Profiling of agents at recruitment must include a positive appraisal of existing business turnovers to establish adequacy of float. Agents cite time taken to rebalance float and cost as key impediments to business continuity. If the Agent does not to travel to the Branch, they must rebalance suing an MNO, which is expensive as it incurs transaction costs at the MNO and the Bank end. According to the Micro Save ANA 2014 report 77% of all agents are located within 15 minutes of a rebalancing point, and 91% of all agents rebalance at a bank branch. With the advent of technology, rebalancing must be made as seamless as possible, with as little human intervention as possible, and across electronic channels. This will reduce the cost and time taken to rebalance.

7 8 DRIVERS OF AGENT ACTIVITY: REACTIVATING AGENTS IN RURAL KENYA WHAT THEN IS THE OPPORTUNITY FOR AGENCY BANKING? Agency banking still remains a viable strategy for deepening financial access. Players must address the agent sustainability question in order to reap returns on investment and make banking a door step reality. a) Rethinking the agent deployment model A strategic deployment model that taps into the cash economy in the rural area will prove to be a winner. Partnering with VSLAs 5 and rural co-operatives that have proven to be instrumental in mobilizing savings from the poor provides a valuable opportunity for the bank to rejuvenate agent vibrancy. The VSLAs and co-operatives act as agents, closing the proximity and access gap at the same time. The FinAccess survey of 2016 indicates that among all people who use VSLAs, 56% belong to one savings group while 41% belong to two or more groups. This provides an avenue for increasing the number of active accounts. The survey also shows that only 1.5% of Kenyans use KPOSB as a savings channel while 49% of Kenyans use VSLAs. b) Cash-lite economy The Kenyan economy is largely a cash economy. The interoperability of banks slated for 2016 is set to drive transaction costs down, and spur the beginning of a cash lite economy. Access to a broader clientele provided by the planned bank interoperability will create a real-time interbank mechanism for all bank account holders in Kenya to be able to transfer money directly to one another. Beneficiaries without a bank account will be able to get a one-time code to transact from licensed agents. Strategic location and reach will be a game-changer for bank agents Conclusion In agent banking, it has become clear that the model is only as good as the quality of accounts opened, the relationship management structures in place, and quality assurance framework. The business model must meet a variety of needs for the agents to stay invested. Maintaining account and agent activity is a key component to creating sustainable agent networks. Relationship management forms an integral part of customer retention. 5 Village Savings and Loan Associations

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