Branchless Banking

Branchless banking is the delivery of financial services outside traditional bank branches, using retail agents such as shops and pharmacies, mobile phones, and other low-cost channels. Customers can open accounts, deposit and withdraw cash, send money and pay bills without visiting a bank. The model is used mostly in developing economies to reach people who live far from a branch or whose small balances would not justify the cost of serving them in one.

The term was popularised in the 2000s by development organisations working on financial inclusion, and it covers two broad models: agent networks run by banks, and mobile money services run by telecom companies or other non-banks. It is closely linked to agent banking, described under banking agents, and it differs from purely online banking, because a physical point for handling cash remains essential.

Imagine your nearest bank is a two-hour bus ride away, but the corner shop is a two-minute walk. Branchless banking lets that shop act as a small window of the bank. You hand the shopkeeper cash, the shopkeeper taps a few buttons on a phone, and the money appears in your account. Later you can send it to a relative or pay a bill straight from your own phone.

The shopkeeper does not keep your money; the bank or mobile money provider does. The shop simply turns cash into digital money and back again, earning a small fee each time.

• Bank-led agent banking. A licensed bank appoints agents to carry out basic transactions on its behalf, under a contract described under banking correspondent agreement. Brazil's correspondentes bancários and India's business correspondents are leading examples.
• Non-bank-led mobile money. A mobile network operator or e-money issuer offers a mobile wallet, with customer balances backed by funds held at partner banks. Kenya's M-Pesa, launched by Safaricom in 2007, is the best-known case.
• Hybrid and partnership models. Banks and telecoms share roles, for example a bank holding accounts while a telecom provides the phone channel and agent network.

The core activity is cash-in and cash-out at agents. When a customer deposits cash, the agent's own electronic balance is debited and the customer's account credited; withdrawals work in reverse. Agents must therefore hold both cash and electronic value, and managing this agent float is one of the main operational challenges. Transactions are authorised in real time over mobile networks, often through simple menu-based phone services that work on basic handsets, and agents are usually supervised by larger "master agents" or aggregators who help them rebalance cash. Account opening may use simplified, tiered checks, with lower transaction limits for customers who provide less identification, an approach in line with simplified due diligence.

The economics depend on volume. Agents earn commissions per transaction, so an agent needs enough daily customers to make the work worthwhile, while the provider needs enough agents for customers to find one nearby. Networks that grow too slowly can stall because neither side sees enough activity. Successful schemes have usually started with a simple, widely needed service, such as sending money home to family, and added savings, bill payments, wages and government transfers once the agent network was dense enough.

Regulators have had to decide who may appoint agents, what they may do and who is liable. India's central bank allowed banks to use business correspondents in 2006, the State Bank of Pakistan issued branchless banking regulations in 2008, and the Central Bank of Kenya issued agent banking guidelines in 2010, alongside its earlier decision to let M-Pesa operate. Common rules require the principal bank or provider to remain responsible for its agents, set limits on transaction size, protect customer funds held by non-bank issuers, and apply know-your-customer and anti-money laundering obligations in proportion to risk. Agents are usually barred from lending money on their own account or charging unauthorised fees.

Branchless banking has brought accounts to many people who were previously unbanked, especially in East Africa and South Asia, and studies of mobile money in Kenya have linked it to improved household resilience. It also costs providers far less per customer than branches, which is why banks in richer countries have studied it while pursuing branch rationalisation. The risks include agent fraud and errors, cash shortages at agents in rural areas, customer confusion about who is responsible when things go wrong, and dependence on a small number of dominant providers. Consumer protection and data privacy have become a growing focus as digital financial services expand into credit and savings.

• CGAP (Consultative Group to Assist the Poor)