Banking Agents in Colombia: Rural Expansion and Its Frontier

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Banking Agents in Colombia: Rural Expansion and Its FrontierMarch 2016

Main findings

• Standard reporting duplicates by 98% the number of banking agents in Colombia.

• Aggregators operate 72% of access points and are better positioned to expand rural coverage through increased operational efficiency.

• The existing agent business models still have room for growth in 38% of the 691 rural municipalities.

• 22% of rural municipalities struggle with structural limitations and would benefit from specific policies aimed at improving the quality of financial access.

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1. State of the agent channelUnduplicating access points in Colombia and the role of transactional aggregators

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The channel can still grow leveraging its existing modelRural areas still have deficient coverage

• The state of the banking agent channel is characterized by:

• Duplication of access points through existing reporting mechanisms

• A central role of transactional aggregators in operating the bulk of access points across urban and rural areas

• The channel has not yet reached maturity in rural areas, where there is still room for growth

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Reporting procedure duplicates total number of access pointsIt also obscures the role of transactional aggregators

Report F398 Actual0

20,000

40,000

60,000

80,000

87,887

12,386

32,108

Agents/Banking correspondents as of Nov. 2014

Aggregators Banks

-49% = 44,494

Each bank reports shared agents as their own

96% coverage of the 1,122 municipalities*

72% operatedby aggregators

3 main banks comprise ~8.500 agents

* Including Corregimientos - CDs. See methodological notes.

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What is the role of aggregators in expanding accessAggregators increase revenue and thus viability for agents

Trx Pool

Agent

Aggr.

Prov.

1. Providers of goods and services require performing financial transactions to operate.

2. Aggregators contract with various providers to perform those financial transactions on their behalf through their own platform. This platform connects agents, which are then shared de facto by providers.

3. Through a technological platform provided by the aggregator, Agents perform financial transactions in physical retail locations.

4. Aggregation enables the agent to capture a larger portion of the total Transactional Pool.

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Agent’s transactional pool in Colombia The present study focuses exlcusively on the banking and bill payment portion (red)

Banking and bill payments

Airtime

Lottery Remittances

Other pools: mass transit,

G2P, etc.

Maximum Aggregation

This research

All data from Nov. 2014

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Cities Intermediate Rural Dispersed rural0

5,000

10,000

15,000

20,000

25,000

30,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

26% 33%39% 37%

74%67%

61%63%

9,168

1,556 1,085 577

26,337

3,1001,688 983

Agents by operator, quantity and share

Operated by banksOperated by aggregators

Aggregators bolster access across the urban-rural spectrumTheir de facto sharing model enables increased coverage and density

35.505 4.656 2.773 1.560

Definitions of rurality levels according to DNP. See methodological notes.

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Access point density is significantly lower in rural areasDo the characteristics of the transactional pool tell us it could be higher?

Cities Intermediate Rural Dispersed rural0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-10

10

30

50

70

90

110

8% 11% 24% 58%80% 10% 6% 4%64% 17% 11% 8%

116

5851

4346

123

Distribution and density of agents

AreaAgentsPopulationAgents p/ 100,000 inhabAgents p/ 1000km2

453

117 municipalities 314 municipalities 373 municipalities 318 municipalities

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Busier agents reveal potential for growth in rural areasMore Trx per agent but a leaner transactional pool: less Trx per inhabitant

Cities Intermediate Rural Dispersed rural National total0.0

2,000,000.0

4,000,000.0

6,000,000.0

8,000,000.0

10,000,000.0

12,000,000.0

0

50

100

150

200

250

300

350

400

7,388,609.0

1,653,165.0970,140.0 465,374.0

10,477,288.0

208

355 350

298

235

Monthly transactions and agent average

Total TrxTrx per agent (right axis)

Transactions p/inhabitant 2.4 2.1 1.8 1.3

Rurality coefficient 1.00 0.86 0.74 0.54

10+ million monthly Trx operate US$ 1.224 million

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2. The challenges of rural coverageWhich are the specific challenges of increasing rural access points in Colombia

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Operations need to match the rural challengeIn addition to distance, other factors compound to require greater efficiency

• The rural coverage challenge is characterized by:

• Increased demand for cash-out

• Less payments, leaner transactional pool

• Higher average transaction value

• Informal economic environment

• Preeminence of account-based delivery of financial services

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The rural transactional pool is about cash-outWhile in urban areas it is about cash-in through bill payments

Percentages might not add to 100% as neutral transactions are excluded, see methodological notes.

Cities Intermediate Rural Dispersed rural National total0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

89%

67%

54%50%

81%

11%

31%

44% 49%

19%6,578,523.00 8,438,094.00

Quantity of monthly transactions, cash-in/out

Share Cash-in Trx Share Cash-out Trx Trx Cash-in Trx Cash-out

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Cities Intermediate Rural Dispersed rural National total0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

82%

57%

50% 48%

71%

15%

40%46% 47%

26%

611,045,638.20 866,839,386.61

Monthly value cash-in/out, USD

Share amount Cash-in Share amount Cash-outAmount Cash-in USD Amount Cash-out USD

Higher participation of cash-out increases liquidity costsOperational stress is compounded in addition to distance

Percentages might not add to 100% as neutral transactions are excluded, see methodological notes.

15Percentages might not add to 100% as transfers between accounts are excluded.

Bill payments are not big business in rural areasAn indicator of a higher level of informality and a leaner transactional pool

Cities Intermediate Rural Dispersed rural National total0.0

200,000.0

400,000.0

600,000.0

800,000.0

1,000,000.0

1,200,000.0

1,400,000.0

1,600,000.0

1,800,000.0

2,000,000.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

80.1%

47.6%

32.1% 29.6%

68.3%

1.5%

7.4%

14.8% 22.1%

4.6%

9.0%

24.0%29.5%

26.4%

14.0%

9.0%19.3% 21.5% 20.2%

12.3%

Quantity of monthly transactions and share per type

Share Trx Bill Payments Share Trx Remittances cash outShare Trx Withdrawals Part % Trx DepositsTrx Bill Payments Trx Remittances cash out

5,92 7,15

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Rural agents are intensively used for withdrawals and depositsGovernment-to-person (G2P) payments augment withdrawal reporting

Percentages might not add to 100% as transfers between accounts are excluded.

Cities Intermediate Rural Dispersed rural National total0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

64.1%

23.6%16.5% 15.4%

46.7%

1.6%

4.5%7.2% 11.3%

3.6%

13.6%

35.3% 38.5% 35.9%

22.6%

18.4%

32.9% 33.4% 33.1%24.2%

474,9 570,9

Monthly value and share per type of transaction

Share Bill Payments Share Remittances cash outShare Withdrawals Share DepositsUSD Bill Payments USD Remittances cash out

~70%of totalvalue

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Deposits and withdrawals are up to 50% larger in rural areasHigher urban agent density enables smaller and more recurrent transactions

Cities Intermediate Rural Dispersed rural National total$50

$100

$150

$200

$250

8072

90 83

80

10688

85 82

90

205

246 270263

230

152

212228

218

188

Average value per transaction type, USD

Average value Bill Pay.Average value RemittancesAverage value DepositsAverage value Withdrawals

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What about delivery models: Accounts vs. countersSee Peru research for further details on this distinction

Examples

Delivery models

Financial servicesPayments, savings, credit, insurance, etc.

Account based

Mobile wallets

Typical banking

Cash based: Over-the-Counter

Money transfer

OTC bill payments

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Accounts are more relevant for rural agentsReveals rich financial life in rural areas and a need to move cash around

Cities Intermediate Rural Dispersed rural National total0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

82%

55%47% 52%

73%

18%

45%53%

48%

27%6,029,783.00 7,635,255.00

Quantity of transactions, account and nonaccount based

Share non-account based Share account-based Trx Non-account based Trx Account-based Trx

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Large rural share of account operated value Further research is needed to better understand the rural use cases of accounts

Cities Intermediate Rural Dispersed rural National total0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

66%

28%

24% 27%

50%

34%

72%

76% 73%50%

487 614609228938

Monthly value, account and nonaccount based

Share non-account based amount Share account-based amountAmount non-account based USD Amount account-based USD

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3. Strategies to increase rural access in practiceHow and where to act? Where is the frontier for the existing business models?

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Four practical strategies to increase access in rural areasConsidering the trade-off between agent increase and sustainability

1. Aggregation to tap more transactions

2. Service-level tiering to reduce costs

3. Busy rural agents for easier expansion

4. Catching sight of the coverage frontier: innovation and public policy

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1. Aggregation as an operational efficiency strategyLeveraging the ability to tap into a larger portion of the rural transactional pool

Banking and bill payments

Airtime

Lottery Remittances

Other pools: mass transit,

G2P, etc.

Maximum Aggregation

See Peru research on trade-off between aggregation and operational costs.

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2. Agent tiering or levels of service to reduce costsAdding lighter agents that need less transactions to be viable can increase coverage

Examples Tier 1 Tier 2 Tier 3 Tier 4 Tier 5

Paper receipts

ID required

Large transactions

Cash-out

Formal agents

Typical model at present in Colombia

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3. Busier rural municipalities have room for more agentsThe existing business model can deliver increased coverage in these areas

1 64 127 190 253 316 379 442 505 568 631 694 757 820 883 946 100910720

500

1,000

1,500

2,000 Ranking of municipalities: Monthly Trx per agentCitiesIntermediateRuralDispersed rural

Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 510%

15%

20%

25%

30%

Cities Intermediate Rural Dispersed rural

#1 Dispersed ruralAchí, Bolivar, Caribe22.279 inhabitants

2.736 Trx/Ag

A larger share of rural municipalities (vs. urban) make it to the busier two quintiles, 38%.

49 municipalities without coverage38 Dis.Rur, 7 Rural, 4 Intermediate

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Location of rural municipalities with busier agentsTop two quintiles of previous chart on slide 26

38% of all 691 rural agents fall in this category.

Positive trade-off between increased access and viability:Additional agents would not erode average transaction levels per agent below sustainability.

There is still room to divide the local transactional pool by more agents.

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Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 510%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

Distribution of municipalities: Monthly Trx per agent

Cities Intermediate Rural Dispersed rural

4. Where next: Descrying the coverage frontierHigh proportion of rural disperse municipalities in quintile 5

Median Trx p agent/month 672 386 261 166 42

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Agent network managers are minimizing Q5 municipalitiesBut this is not the case for dispersed rural municipalities

Median Trx p agent/month 672 386 261 166 42

Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 510%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

Distribution of municipalities: Monthly Trx per agent

Cities Intermediate Rural Dispersed rural

Mature urban market distribution

Frontier?*Minimization strategy

Structurallimitations

22% ruralmunicip.

* The frontier is defined as the group of municipalities in which access points are most likely not viable or sustainable within the existing business models of agent network operation.

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Location of frontier rural municipalitiesFifth quintile of previous chart

22% of rural agents fall into this category.

How is this frontier defined?Agents are viable and desirable at least when they break even. Network managers are constantly seeking to minimize the proportion of unviable agents. *

Taking the more mature urban market as a reference in the previous slide, the minimization strategy is evident beyond quintile 4, thus the frontier. The proportion of agents in quintile 5 drops significantly.

The higher proportion of rural agents beyond this sustainability frontier, reveals the struggles of operating in these locations, as described in the previous sections.

Further research is needed to be able to assess individual agents rather than municipalities.

* See Peru research on transactional break-even point and agent viability.

A Rural – With correspondent

Rural – Without correspondent

Dispersed rural – With correspondent

Dispersed rural – Without correspondent

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The road aheadAreas where action can yield benefits in the short term

• Data collection and reporting:• Improvement of gathering tools and procedures for the banking agent channel.

• Public policy action:• Design of policies to address the challenges that impede the existing the business models

to cater to the rural disperse areas.

• Data insight and innovation:• Data analytics can provide insight and boost operational efficiency, e.g., as a predictor of

cash withdrawals in each access point of the network.

• Further research:• A study encompassing agents as a unit of analysis (rather than municipalities) over a longer

period of time will provide more clear insights about how to increase operational efficiency and where the coverage frontier lies, for example, finding the transactinal break-even point for each business model and location.

• Research into understanding the role agents could have in reducing the gender gap in access to financial services, for example, female agents.

Advancing financial inclusion to improve the lives of the poor

www.cgap.org

Transactional types

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Classification of the operations in the study

Type of operation according to report F398 Definition

Segmentation cash-in/cash-out Segmentation according to delivery model

Cash-in Cash-out Neutral Account based

Not account based

Bill payments

CollectionsPayment of public and private services, social security, taxation and agreements

X       X

Payment of financial obligations

Cash payments of financial obligations of any kind of credit, including credit card payments.

X       X

Remittances cash outMoney orders (giros bancarios)

received and third-party payments

Receipt of money orders within the national territory.   X     X

Deposits DepositsCash deposits in checking accounts and savings accounts.

X     X  

Withdrawals WithdrawalsCash withdrawals from checking accounts and savings accounts.

  X   X  

Transfers TransfersTransfers of funds between accounts, either checking or savings accounts.

    X X  

Operations that have not been included as they

represent less than 0.01% of the total.

Money orders (giros bancarios) sent

Money orders sent within the national territory. X       X

Administrative transactions

Includes the opening of checking and savings accounts; the opening of CDs and loan applications for any kind of portfolio.

    X n/a n/a

Methodological notes 1Transactional types

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Methodological notes 2Rurality classification

• Classificaction of the municipalities and townships in Colombia, according to how rural they are, elaborated by the DNP – 2014. For more details, visit DNP here.

• Four categories:i. Cities and agglomerationsii. Intermediateiii. Ruraliv. Dispersed rural

• Consider the following criteria: a. Demographic characteristics of the populationb. Level of connectivity between the municipalities c. Most relevant ecnomic activities d. Vocation and land usee. Different ownership structures (indigenous reserves, collectively held lands, and others)

• Municipality. Basic unit of political and administrative division in Colombia: The municipalities have political, fiscal and administrative autonomy within the limits set by the constitution and national laws. As of November 2014, there were 1,102 municipalities.

• Corregimiento departamental (CD). A township, an alternative administrative unit used by areas of very low population density; these areas have limited autonomy. As of November 2014 there were 20 CDs.

• For additional details, visit DANE here.

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Methodological notes 3Conservative approach

• A conservative definition of municipalities with agents/correspondents was used. The following were considered without access:

• Municipalities that did not have correspondents at this date. • Municipalities with correspondents that did not carry out transactions during the month of

analysis, November 2014.

• The exercise of the agents/correspondents was also conservative, as it did not consider the possibility that some agents could operate with more than one financial entity or aggregator.