Bank branches: not a cost-effective gateway to financial inclusion
Posted: August 22nd, 2011 | viewed: (1,923) | Comments: ( 0 ) | Topic: Blog Post, Regulation | Region: Global
Getting cash into and out of banks is expensive. Last year, Clara Veniard at the Bill & Melinda Gates Foundation wrote up the results of a costing exercise conducted with seven service providers in Asia, Africa, and Latin America to compare the cost of servicing a transactional savings account the traditional way—that is, by facilitating transactions at bank branches—with the cost of doing so using third-party agents outside of branches that are empowered to perform cash-in and cash-out transactions.
The magnitude of the difference is striking. The monthly cost of servicing a savings account using a cashier in a bank branch, even assuming full utilisation, was roughly four times greater than doing so using agents outside of the branch. The big driver, as you might expect, is the allocation of fixed costs associated with branch construction and setup: according to the Foundation’s analysis, “a branch cashier incurs more than 78 cents in fixed costs per transaction, compared to just… 4 cents or less for a mobile-enabled agent or mobile wallet.”
The high cost of facilitating deposits and withdrawals in bank branches is a major stumbling block for financial inclusion. You don’t have to be a banker to think that it will be hard to make money offering poor people accounts when it costs you 78 cents to facilitate every deposit and withdrawal, particularly since poor people’s account balances are typically small, meaning you can’t earn much by loaning those deposits out. Banks can solve this puzzle by charging customers fees; but fees drive price-sensitive poor customers away.
Using low-cost agents to facilitate cash-in and cash-out transactions is therefore an obvious way to make financial services more affordable to low-income customers. Some banks, mostly in Latin America, are establishing these networks of cash-in/cash-out points themselves. Others are leveraging networks built by other players; a number of banks in Kenya allow their customers to make deposits and withdrawals via M-PESA, for example.
Reducing the cost of deposits and withdrawals by setting up networks of independent retail agents is one of the most important roles that non-banks can play in financial inclusion—and it’s one of the reasons that banks and non-banks alike need to be able to set up networks of independent agents. If they can’t, bank branches will remain the sole gateways to financial access—at the expense of those who lack it.
For more on the regulation of cash merchants, see “Regulating New Banking Models that Can Bring Financial Services to All” by Claire Alexandre, Ignacio Mas, and Daniel Radcliffe in our Regulation Section. For a more thorough discussion of the cost advantages of agents compared to bank branches, see “The Economics of Branchless Banking” by Ignacio Mas
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