In 2018, the mere thought of visiting a bank branch was a nightmare for many Nigerian bank customers. The queues were unending and did not respect any time of day. The bank branches were few and the ATMs were never enough. Where they were available, most ATMs did not function efficiently due to poor network. It was a daily nightmare for the Central Bank of Nigeria (CBN).
Today, there are some Nigerians who have not stepped foot in a bank branch for more than a year, yet they do not miss a thing thanks to banking agents. Even though it has yet to solve Nigeria’s financial exclusion problem or discourage cash transactions, agency banking has grown in usefulness to the point that many Nigerians can’t imagine banking without it.
Paystack, a Nigerian fintech company now owned by Stripe, highlighted one reason why banking agents are so powerful in a recent post analysing agency banking. According to the company, the agents’ advantage lies in their existing relationships with people in the communities they operate. In these spaces, they have built a level of trust that is crucial for dealing with money.
“That kind of connection hits home in a way a formal, roaming sales rep can’t match,” Tochukwu Ironsi, a market intelligence specialist at Paystack, said.
It is the kind of connection that allows a unique business model the market is known for. Usually, commercial banks make money by charging interest on deposits. This means customers pay from zero to minimal fees to deposit money. They earn more when customers withdraw the same money.
Banking agents, however, charge fees on every transaction. This means customers are charged to deposit and withdraw money. Paystack says this model is a function of both market forces and regulation. The two factors affect not just how much providers can earn from agency banking but also how commissions are shared among agents.
The fees agency banking providers charge for bank transfers and POS transactions are usually regulated and capped by the CBN. The agents, however, charge the users according to the prevailing market conditions. Recently, the agents stirred controversy when the Lagos branch of the Association of Mobile Money and Banking Agents Association of Nigeria (AMMBAN) announced that its members would be increasing transaction fees due to harsh economic conditions.
Although the fees agents charge may seem small compared to the actual transaction amount, they usually amount to at least 5 percent of the amount. Agents take 80 percent of the total commission per transaction, leaving their operators with the remaining 20 percent. Agency operators with large scale in the market end up making multiples of the commission from every transaction.
“The reasoning behind these fees? Agents save you both the time and the travel costs you’d spend getting to and waiting at an ATM or bank branch. Put another way, the fees that agents charge roughly correlate to the average distance to the nearest ATM or bank branch, as well as the average time spent there,” Ironsi said.
There is a sense in agents getting a larger share of the commissions per transaction. Agents grapple with other costs to generate the transaction that yields the commission. There are the one-time costs of purchasing or leasing POS terminals and the setting up of physical locations. Agents also take on the recurring expenses for trips to banks and ATMs, data for POS devices, utility bills, and other critical operational expenses. These costs can be as much as $100 in monthly expenses, according to a 2018 study by BCG.
Paystack says consideration for costs of operation is largely why agents are found in large numbers in densely populated urban centres with high foot traffic and lots of commercial activity. On the other hand, agents who choose to operate in rural or remote areas tend to charge higher fees to make up for the lower number of daily transactions. The result is that the underbanked people continue to have limited access to financial inclusion whereas those who are banked continue to enjoy services that were primarily meant to reach the underbanked.
The report also shows that agents have to manage their liquidity. To do this, the agents have to maintain a timely supply of physical cash for customer withdrawals and an electronic balance for transfers and deposits. Where banks fail to provide faster access to cash, agency banking providers are readily available to rescue them. Providers use their money to provide real-time transfer rails to instantly settle that digital money from the customer to the agent (sometimes for a fee), according to Paystack. This enables same-day settlement of POS transactions which is usually not the practice in the banking system. By doing so, providers empower agents never to run out and to have a constant flow of cash, which is important to the business.
“This combination of strong customer demand, sizeable gross margins for agents, and creative liquidity management has made agency banking a very attractive business model for all parties involved,” Ironsi said.
The report also acknowledges the shifting tides in the power dynamics in the agency system. It aligns with BusinessDay’s findings that ‘umbrella’ agents or “pure-play” agents, as Paystack calls agents who focus solely on agency banking, face existential threats. The influx of merchants or small businesses that offer agency banking products alongside other services is pushing customers away from the pure-play agents, thereby threatening their business.
Paystack also argues that agency banking growth also poses threats to the CBN’s drive for a cashless economy and increases the cost of producing cash. The cost of distributing cash has increased partly because of the commission agents earn on withdrawals and deposits. According to the Nigerian InterBank Settlement System, producing cash can cost as high as 5.5 percent of monetary value, without agents in the mix. However, agents add to this by charging an additional 2.4 percent of the transaction amount for cash withdrawals.
“So while cash might seem free at the point of commerce, the actual cost of getting the cash to the user to spend in the first place can be as high as about 7-10 percent of the transaction value. This ‘cash tax’ is quite steep compared to electronic channels where the overall transaction costs range from 0.1 percent to 1.6 percent of the transaction value,” Ironsi said.
The report sees the regulator restricting the activities of banking agents as a long-term solution to bridging the gap between the unbanked and the banked population and reducing the cost and use of cash.
“A future with low-cost, widespread digital retail payments offers convenience and cost savings for both governments and consumers. However, this threatens agency banking models which rely heavily on commission revenue from cash-based transactions,” Ironsi added.