[From IFMR blog, 18 October 2013, with Abhishek Sinha]
When you have two systems running in parallel, the hardest part is always managing the interface between the two. Customers don’t usually all migrate to the new system entirely and at the same time, so there is a need for the new system to offer backward compatibility with the older, more established system. Without that, the stakes to migrating to the new system may be too large, and adoption will lag.
So it is with money. The new electronic form of money must integrate as seamlessly as possible with legacy paper money if new-to-banking people are going to be at all comfortable in experimenting with and using it. That’s why the retail agent or Business Correspondent (BC) bit is the cornerstone of any branchless or mobile banking proposition.
But that is where the economics and operations of branchless banking ventures get really tricky. The technical bit is easy: as long as it’s about managing electrons and bits, scalable, low-cost systems can be put in place. But a cash in/out channel is an entirely different story: it needs to be carefully constructed bit by bit as a patchwork of stores. Each store needs to be vetted, supervised and supported. Each store needs to be fed with enough revenue day in and day out to justify setting liquidity aside and running to the bank to rebalance when liquidity runs out.
You don’t see many large-scale, branded retail chains in India in any sector (think groceries, pharmacies, agricultural inputs, whatever), and that’s for a reason: managing retail channels is really hard business in a country with such a disperse geography and where there are already so many local shops running on razor thin margins.
If that’s the case, why should banks, who have no experience operating beyond their own branches, be expected to succeed in creating their own networks of BCs? Some are trying hard, but how many can claim to have a sufficiently dense network of stores doing brisk cash in/out business every day?
You should let specialists manage retail networks, and let banks ride over them. Specialist store aggregators, operating under specific rules and guidelines issued by the RBI, could then offer BC service for any and all banks.
Think how such specialized shared BC networks could transform the problem. Entrepreneurs with experience in managing indirect channels would develop business where banks themselves are not willing to go. Banks would simply sign up whichever shared BC networks they feel are in relevant locations and offer good service to their clients. Individual stores would be able to offer service to all their clients, whichever bank they happen to bank with, in the same way as they sell a range of toothpastes to suit their clients’ various toothpaste preferences. Banks wouldn’t each need to deploy essentially the same systems to reach pretty much the same stores – a costly duplication that makes the already precarious economics of cash in/cash out altogether unachievable.
If this seems far-fetched, that is essentially what is happening today under the RBI’s new policy allowing third-party ATM networks. Why should banks themselves have to run with the operational hassles of installing and managing hardware and replenishing cash boxes? That can easily be delegated, as long as certain ground-rules are met, especially on aspects of technology platform and consumer protection. These are properly identified and clearly laid out in the RBI’s guidance on the topic.
A BC is functionally equivalent to an ATM. An ATM is essentially a point-of-sale (POS) terminal (the card reader, the screen, the keyboard) with a cash box attached. In a BC setting, the only difference is that the cash box is physically separated from the POS terminal (which might be as simple as a mobile phone), and the cash gets dispensed or accepted manually by the shopkeeper rather than automatically. But the transaction is governed electronically through a banking technology platform, because the POS informs the customer how much cash to hand over to or to take from the shopkeeper. What is important is that transactions always occur on a technology platform controlled by a bank (not the third party network manager) and hence under the clear supervision of the RBI, and that the network manager be bound by clear, specific consumer protection rules.
Under a shared BC model, each store might operate from a single bank account using the technology platform provided by one bank (we could term this the “acquiring” bank). Any transactions it performs on behalf of customers from other banks could be settled through the NPCI’s real-time mobile switch.
Creating third-party networks of shared BCs is the logical next step in the process of enabling scalable branchless banking services. Free up banks from the burden of managing the operational aspects of cash-in/out networks. Aggregate the cash in/out transactional volumes across all banks to make the business case easier for individual stores. Flash forward to the inevitable step of infrastructure sharing, like telcos have come to accept with tower sharing and banks with ATMs. And let banks concentrate on their core mission: developing, selling and managing a variety of electronic financial services that solve people’s broad financial needs.