Use of Agents in Branchless Banking for the Poor: Rewards, Risks, and Regulation
This focus note examines the experience of five pioneering countries, namely, Brazil, India, South Africa, the Philippines, and Kenya, in agent-assisted branchless banking targeting poor customers. The bank-led and non-bank led models of branchless banking through retail agents use 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. The paper discusses issues involved in regulating branchless banking, and examines new or enhanced risks these models face. Agent-related risks include credit risk, operational risk, legal risk, liquidity risk, and reputation risk. E-money risks of the nonbank-led model include risk of theft or imprudent use of funds raised from public in exchange for e-money by unlicensed, unsupervised non-banks. The note presents the following considerations for regulators:
- Banks should be made liable for actions of their agents;
- Any system-level risks from the bank-led model can be mitigated in a manner similar to that in branch-based banking;
- Regulators should confirm applicability of domestic AML/CFT rules to retail agents under both models;
- Light oversight and transaction limits may be suitable in the early days of the nonbank model.