Finance is one field where we have witnessed significant innovations in recent decades, and this has transformed our society in many ways. One of the most promising innovations in the field of financial inclusion is the Business Correspondent model in which BCs serve as retail agents of banks for providing banking services at locations other than a bank branch/ATM. The financial ecosystem is evolving rapidly with the advent of these tech-enabled agents. The Business Correspondent (BC) model typically involves an agent (providing in-person support) as an extended arm of the bank ~ an important piece in the financial ecosystem and a key touch point that enables banks to expand their outreach in remote or hard-to-reach areas at a substantially lower cost.

These agents serve as conduits for what is popularly called as cash-in and cash-out (CICO) service. This service allows customers to convert cash into digital money (or e-money) and digital money into cash. CICO networks mark the first move in the transition to the digital economy. The mere access to this service is revolutionary for most isolated regions because it is a gateway to digital financial services (DFS), thus promoting financial inclusion.

The Business Correspondent or Agent model involves use of technology, such as payment cards or mobile phones, to identify customers and record transactions electronically and, in some cases, to allow customers to initiate transactions remotely. The entire framework hinges on technology-enabled remote banking logged into the system in a brick-and-mortar bank.

The model has led to the creation of a mass market for affordable, accessible, convenient and sustainable financial services for low-income people and small scale entrepreneurs in remote areas which lack bank branches, but do have other retail outlets that already have the reach needed to access target customers.

The model was introduced in 2006 by the Reserve Bank of India (RBI) to allow banks to employ local people as thirdparty, non-bank agents to travel door-to-door to provide banking services to local communities. The model proposes that in areas inaccessible to banks, entities such as grocery stores, telcos, snack parlours, petrol pumps, lottery outlets, public utilities and companies with a retail network – which potential customers use for their daily needs ~ are authorised to perform financial operations on behalf of the bank. By capitalizing on existing infrastructure and client relationships, operators can expand financial access in a more cost-efficient manner.

One transformative development in the BC space was the RBI’s decision in 2014 to allow microfinance institutions to act as business correspondents. This has led to the diversification of products and services and the improved availability of credit. Further, the government is transferring large amounts of government benefits through BCs via direct benefit transfers, so the viability of the model should improve.

This channel can be seamlessly integrated with other banking channels, ensuring that banking services are available to customers where and when the customer needs them2. It is far more convenient and efficient than going to a bank branch. It reduces banks’ cost-to-serve and lowers physical distance barrier by reaching low-income communities where they live. Bank agents can be mobile, making daily or weekly rounds, and also serve clients at their doorstep.

The grassroots level agents have a comparative advantage in serving rural households because they possess better knowledge and a keener understanding of local-level political and economic dynamics and market actors which fundamentally mediate developmental outcomes. On account of this, they are effectively placed to reduce several participation barriers. For women, who usually face barriers in the form of less mobility and more time constraints, BCs alleviate not only the cost of the transactions but also the emotional and physical stress of travelling to a branch.

Agents are typically required to invest significant upfront capital in the business and are encouraged to leverage their personal connections and credibility within the local community to stoke demand. This model provides substantial cost benefits to the provider, as the agent incurs the majority of start-up costs, and most ongoing costs are variable and commission-based. The agent model also features some important non-financial benefits. As the retail face of the business, agents can provide customer assistance in a way that most ATMs cannot. This is especially valuable in communities with low rates of overall and technological literacy.

For banks, some of the advantages of using business correspondents are:

• Greater reach: By using BCs, banks can reach out to areas that lack formal financial services at a much faster rate and lower cost than they can by building brickand- mortar branches.

• Doorstep banking: The use of BCs enables banks to provide banking services, including loan disbursement and recovery, at convenient locations or even door-to-door. •

Better loan performance: Since local stakeholders know the customers on a personal level, their involvement in credit processes have better outcomes. It strengthens borrowers’ accountability, results in better monitoring and follow up, and in turn improves loan utilisation and repayment rates.

Financial services firms need to weave local contexts in their business models in order to serve the communities successfully. Closer integration with the community, through models like BC banking, also helps in bringing about a greater appreciation of the challenges faced by them. In a country as vast and diverse as India, deeper understanding of the market can only come if firms have a widespread distribution and recruit locally. In order to serve their customers better, financial services firms need to be present in local markets and have employees who are familiar with the cultural and economic nuances of the community in which they work.

The country needs a larger force of agents ~ educated, motivated and savvy enough ~ to effectively reach remote and challenging communities. But considering the work required for onboarding these customers and orienting them to actively use digital services, BCs’ compensation appears to be hardly worth the effort. Much of the revenue is soaked by BC while their agents are literally exploited. On account of this, agents tend to favour densely populated, well-monetised and oversaturated markets. The original business correspondent model of doorstep banking has already given way to kioskbased banking due to the increased workload required of BCs.

The BC business is a low margin, high frequency small ticket business model. For such models to be viable it is critical that the BC networks focus on how to build scale and how to ensure sustainability. BC networks can flourish in areas that support healthy numbers of transactions. In those locales, the transaction fees earned by agents more than compensate for the financial costs and operational burdens of the business.

The model has chronically suffered from low profitability and high churn. There is a high level of agent attrition on account of unattractive remuneration. Agents take on significant financial risk in starting their business. For an individual starting a mobile money business, upfront costs include the initial cash and float required, as well as shop setup expenses such as furnishings, technology devices, licensing, and security. That’s a substantial sum that can sometimes equal more than one year of average rural income.

There are two factors which underpin the viability of the BC business model. They are: agent exclusivity (i.e., agents who only work for one service provider) and dedication (i.e., agents whose only income source is through digital financial services). It is far from clear that banks have cracked the dynamics underlying the BC model4. Most BCs have not moved beyond remittances and deposits. There are two ways to make the agent model more sustainable – by adopting varied agent models, ranging from fulltime “wealth advisors” to parttime “lite” agents.

First, players can diversify and expand the portfolio of products sold by agents to include higher margin products such as loans or investment products. Some BCs also serve as agents for mutual funds and insurance companies or sell small savings instruments, since they offer a fair amount of commission. Second, players can pick agents who are involved in businesses other than financial services, so they are not ‘dedicated’, that is, not solely dependent on the financial services business for their income. They can focus on simple transactions, and not remain solely dependent on the BC business for revenue.

Meaningful financial inclusion will be possible in India only if BCs provide quality services with transparency and dignity to the country’s underserved populations. But BCs need financial stability for themselves before they can be expected to extend financial inclusion to the unbanked and serve a new generation of account holders. The BC model has enabled banks to separate themselves from their legacy business models and move into unproven territory. It has led to creation of flexible and adaptive operating models. But the objective of the BC model remains to be unfulfilled. It was expected that through this financial services delivery chain, lowincome populations in rural areas, especially women, would experience improved financial resilience as a result of increased access to and uptake of a wide range of financial services.

There are a lot of good ideas and a robust demand for agent services, but not the desired motivation at the ground level and a strong will at the policy level to make the model gain pace. There is a need for collaborative synergy and all constraints ~ demand side, supply side and policy side ~ have to be simultaneously addressed.