Use of Agents in Branchless Banking for the Poor: Rewards, Risks, and Regulation (Focus Note No. 38)

Publication Date: Oct 2006
Published by: Consultative Group to Assist the Poor (CGAP)
Document Type: Paper

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This note identifies issues involved in regulating branchless banking particularly on the use of retail agents.

This focus note examines the experience of five pioneering countries - Brazil, India, South Africa, the Philippines, and Kenya – which practice agent-assisted branchless banking targeting poor customers.

The focus note:

• Introduces the two models of branchless banking through retail agents:
  • The bank-led model,
  • The nonbank-led model;
• Details that both use information and communication technologies, such as cell phones, debit and prepaid cards, and card readers to transmit transaction details from the retail agent or customer to the bank;
• Introduces the main issues involved in regulating branchless banking, particularly regarding the use of retail agents;
• Examines the new or enhanced risks these branchless banking models raise:
  • Agent-related risks: credit risk, operational risk, legal risk, liquidity risk. reputation risk;
  • E-money risks of the nonblank-led model: risk of theft or imprudent use of funds from public in exchange of e-money by unlicensed, unsupervised nonblank.

The note concludes with some considerations for regulators:

• The banks should be made liable for the actions of their agents;
• Any system-level risks from the bank-led model can be mitigated similarly as in case of branch-based banking;
• Regulators should confirm the applicability of domestic AML/CFT rules to retail agents under both models;
• Light oversight and transaction limits may be well suited to the early days of the nonblank model.