By: Cristián Melo
For years, financial institutions have been working on achieving greater capillarity in the supply of their services. Reaching points where they have no presence has been a great goal to achieve. However, this objective has been difficult to achieve due to the high cost of installing physical branches in different locations within a country. Non-Banking Correspondents have emerged as an alternative to meet this objective, with quite reasonable costs, apart from promoting an old desire such as increasing bank usage.
What is Non-Banking Correspondent in simple words? It is to use businesses, stores, kiosks or, in short, businesses located preferably in places where there is no banking presence, to which an electronic device such as a POS or a cell phone or other is provided, and that they can provide banking services such as such as deposits and money transfers, balance inquiries, payment of services (electricity, water, gas, telephony, internet, etc.), among others.
The next question immediately comes: what does a business gain by offering these banking services? There are several answers, not mutually exclusive. In general, the business is paid a fee for each of the transactions it makes, or a percentage of the utility bill it receives, or a combination of both. In other cases, tables are defined that encourage receiving deposits or transfers, where there are fixed costs to pay for a certain number of transactions. In short, there can be many combinations. Just as an anecdote to illustrate a case from years ago in Sao Paulo (Brazil), in a suburban neighborhood we found a small photocopies and stationery store that had eight POS from different banking entities. The tenant, every time he received a bill, decided which team to use depending on the one that paid him the most for that type of transaction.
There are important issues to consider when a financial institution wants to undertake a project of these characteristics. Some of them are:
1. Define the operational model to be used.
The Correspondent will receive and deliver money from customers. Therefore, an operational account must be defined that allows this type of transaction to be carried out, either by paying or subtracting money depending on the type of transaction.
Another important issue is to define the periodicity of payment of commissions to the Correspondent, to maintain their interest in using the service.
2. Define the transactions to be accepted
In general, there are money entry and exit transactions. However, in general, the amount of money input transactions (payments, deposits) are much higher in quantity than the output ones (transfers). This means that the Correspondent’s operational account must have enough money to be able to receive money entry transactions.
Given that the availability of cash from these Correspondents is, in general, limited because they are small businesses, what is done is to see the possibility of giving them a loan at a preferential rate, revolving type, after a credit evaluation. In the case of money transfer transactions, the model must contemplate the online payment in the Correspondent’s account, each time money is delivered. Additionally, there are transactions through the use of Debit and Credit cards that are also implemented in these models, but that are generally less used given the location of the points where these Correspondents are located (peripheral neighborhoods, rural towns with low bank penetration).
3. Carry out an exhaustive Business Case of the business
This point is key to ensure that the business is profitable for both the client and the Correspondent. Service companies are generally reluctant to pay for bill collection. However, offering the possibility of collecting in places where there is an unbanked public and, therefore, that does not use electronic payment channels, is attractive to reduce delinquency.
On the other hand, one of the most expensive issues is the equipment, its delivery, training and maintenance/replacement of the POS. There may be interesting alternatives of commercial agreements with existing networks to mitigate such costs. It is not insignificant to consider that a higher collection for deposits or account payments will imply an increase in the sight balances of the financial institution. Similarly, delivering a revolving loan is another income to consider when making the evaluation. Indirectly, it has also been detected that the increase in transactions in this type of channel decreases the use of branches for these same transactions, which in some cases can lead to a decrease in the use of physical ATMs or temporary peak ATMs.
4. Authorization of the operation..
Models of this type, where a third party performs the work of a Bank, in places where supervision cannot be carried out, such as that carried out in a branch of a financial institution, leads to the approval by the authority being delayed. That is why it is always recommended to make an exhaustive analysis of the documentation and steps that are required, in advance, to reduce such times.
What is recommended is to start working on these regulatory requirements as the project develops and, if possible, request provisional approvals.
The following is a graphic example of a deposit transaction in a client’s account, carried out in a non-bank correspondent, which serves to understand how the operational model of this service works.
To finish, it is very important to consider that there is a security issue involved in providing this type of service, both in sending transactions and in handling money. It is recommended to include the Operational Risk teams to carry out preventive monitoring of the service in case suspicious situations are detected, such as people who claim for unpaid accounts and that appear as executed, for example.
1. Real experience of design, implementation, start-up and operation of Non-Banking Correspondent in a Bank. (Cristián Melo Guerrero – Principal Partner Synergos Chile)
2. Images https://pixabay.com/es/illustrations/negocio-ocurrencia-crecimiento-3189797/