N OV EM B ER 2010
s o c i a l
s e c t o r
p r a c t i c e
A new idea in banking for the poor
By teaming up with retail outlets in low-income, often hardto-reach areas, financial institutions can create value both for themselves and their new customers.
Alberto Chaia, Robert Schiff, and Esteban Silva
Correspondent banking has become one of the most promisingstrategies for offering financial services in emerging markets. In this model, financial institutions work with networks of existing nonbank retail outlets—such as convenience stores, gas stations, and post offices—to deliver financial services. This approach can be especially powerful when serving the unbanked poor because of its ability to reduce banks’ cost-to-serve and reach low-income workers wherethey live. In Brazil, where the strategy has enjoyed its greatest successes, about 1,600 municipalities (approximately one-third of the total) are served solely by correspondent-banking outlets. Correspondent (or agent) banking benefits a range of stakeholders. The poor gain convenient access to financial services in their own communities. Financial institutions reach a vast new customer segment.Agents increase their sales volumes and have an opportunity to develop deeper relationships with customers. But implementing correspondent strategies can be tough. It may be hard to build networks of partners that can fulfill the correspondent role. The economics are still uncertain for players that don’t offer a range of services. And because the strategy is relatively new for financial-servicesproviders, it is difficult to know exactly what will work in each particular community. Through our research and experience working with pioneering providers, we have identified four guiding principles to help organizations implement correspondent strategies successfully: (1) move quickly to capture early-entrant advantages, (2) build partner networks rigorously, (3) create diversified productofferings, and (4) conduct pilots that can be rapidly implemented and constantly refined. These principles have enabled organizations to establish sustainable operations that dramatically increased the use of financial services by the poor. Four years after Brazil, for instance, passed legislation enabling the expansion of correspondent banking, providers had extended formal financial services to everymunicipality (about a third of which previously did not have any outlets offering formal banking services). In Mexico, a program of electronic transfers through the country’s Diconsa stores, which sell food and other basic goods in the poorest and most rural communities, reached 200,000 households within two years of being launched and could reach two million to three million more. Kenya’sM-Pesa, a highly successful mobile-payment provider, has developed a network of over 16,000 agent points since 2007. They operate like correspondent outlets, putting most citizens within reach of a physical location providing cash-in, cash-out services.1
Frederik Eijkman, Jane Kendall, and Ignacio Mas, Bridges to cash: The retail end of M-Pesa: The challenge of maintaining liquidity for M-Pesaagent networks, Bill and Melinda Gates Foundation, PEP Intermedius, 2010.
Reaching out through correspondents A majority of the emerging markets’ 2.2 billion low-income workers2 who do not use financial services live in areas that are difficult and expensive to serve. Most of these communities lack bank branches but do have other retail outlets, such as convenience and grocery stores, gasstations, lottery kiosks, pharmacies, or post offices. Correspondent banking enables financial-services providers to reach these communities through existing retail outlets that potential customers use for other purposes. People know the businesses, since they already frequent them for other purposes—for instance, purchasing groceries or fuel or picking up mail. They may even have developed a...
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