The evolution of agency banking in Africa

A new report by Paystack traces agency banking trajectory  in Africa and where it might be headed :

From the small airtime kiosk in Kumasi, Ghana, to the corner pharmacy in Ejigbo, Nigeria, a network of agents forms the backbone of the financial system that makes payments possible in Africa. Whether it’s cash withdrawals and deposits, peer-to-peer (P2P) transfers, or bill payments, these agents are everyday people working on behalf of banks and other financial institutions to make financial services more accessible to businesses and consumers.

As these agent networks mature, a shift is happening. We’re seeing financial institutions expand and evolve their services, as they pursue new business models, and adapt to changes in their operating environment.

In this article, we’ll explore agent networks, SMEs, where they converge, and how financial service providers are evolving from mere partners to ambitious builders of entire ecosystems.

Telling this story required insights from the operators on the frontlines. Thank you to the several executives who spoke with me about one of the most interesting shifts happening in African finance today.

The state of agency banking today

In Africa, cash is still king for most retail payments, despite the surge in digital payment options. Regulators and financial institutions dream of a digital future, but they still need to design for this cash-driven reality. Initially, this meant providing access to cash through physical bank branches and ATMs, but there’s still a significant gap between the high demand for financial services and the limited supply of banking infrastructure. This gap has driven the use of agents to provide financial services across Africa.

The first variations of agency banking started in Brazil in the 2000s and adoption eventually spread to the rest of Latin America and Africa. In the mid-2000s, South African legacy banks and mobile money upstarts like MTN Mobile Money and WIZZIT began offering cash deposits and withdrawals through a network of post offices and retail outlets. Across the continent, banks also employed bank sales representatives who would venture into bustling markets and tight-knit local communities, engaging potential customers to open bank accounts and set up debit cards.

The landscape began to shift dramatically in 2007 when telecom operator Safaricom introduced the M-PESA mobile payment service, using a network of agents as intermediaries for domestic money transfers. This model proved to be a game-changer. Their success sparked a trend, with the model being replicated across the continent by mobile money providers, banks, and fintechs.

Today, agency banking is synonymous with mobile money, but its scope has expanded. Payment providers like Nigeria’s Paga, Egypt’s Fawry, and legacy banks like Nigeria’s First Bank, have successfully scaled agent networks in their respective markets. These financial players team up with businesses and individuals firmly rooted in local communities. The reason is simple but powerful: these agents often have existing relationships with people in the community, building a level of trust that’s crucial for dealing with money. That kind of connection hits home in a way a formal, roaming sales rep can’t match.

Agency banking models in Africa are as diverse as the continent itself, adapting to the unique cultural, economic, and regulatory landscapes of the various markets.

In a country like Nigeria, cash withdrawals remain the dominant use case for customers interacting with agents. Here, agents act as human alternatives to ATMs and bank branches, equipped with POS devices and bundles of cash, ready to serve in both dense metropolitan areas and rural regions that lack access to traditional financial services.

In countries like Kenya and Ghana where mobile money is predominant, agents largely act as cash-in/cash-out points for customers to deposit into or withdraw from their mobile wallets. The customers then use their mobile wallets for bill payments, remittances, loans, etc.

This table breaks down the broad characteristics of the financial service industries one might observe in different African markets, and how their agent networks operate.

The economics and mechanics of agency banking

Agency banking customers include everyone from people withdrawing cash or paying bills, to traders making deposits or supplier payments.

Traditional banks generate most of their revenue by earning interest on customer deposits. So by design, banking customers are charged zero to minimal fees to make deposits, but usually have to pay to move money out. Agency banking, on the other hand, generates most of its income from transactions; therefore, customers are charged for both depositing and withdrawing money.

The business model for agency banking services is a function of both market forces and regulation. These factors affect not just how much providers can earn from agency banking but also how commissions are split with agents.

In Nigeria, for example, the fees that providers charge agents for bank transfers and POS transactions are regulated and capped by the Central Bank of Nigeria (CBN). However, the fees the agent charges the end user for deposits and withdrawals are mostly determined by market forces.

In mobile money markets like Ghana, Kenya, and Senegal, both the fees charged to agents and commissions charged to the end users are set by the mobile money provider.The fees charged to the customer are usually flat rates but can end up costing the customer up to 5% of the transaction amount. Agents earn most of the gross commissions, irrespective of the model, capturing up to 80% of the total commission per transaction.

The agency banking provider, who either takes an agreed cut of agent commissions or charges a percentage of the transaction value, earns the smaller share. The take rates for providers are small but large players are able to leverage their scale and transaction activity to negotiate better margins with payment partners and in some cases, cut off these middlemen entirely.

Smaller agency banking providers that lack the scale and leverage to obtain better terms with payment partners have to contend with thinner margins and usually struggle to compete in the market without losing money.The reasoning behind these fees? Agents save you both the time and the travel costs you’d spend getting to and waiting at an ATM or bank branch. Put another way, the fees that agents charge roughly correlate to the average distance to the nearest ATM or bank branch, as well as the average time spent there.

Beyond just per-transaction fees to processors, agents have to incur other costs to generate these revenues. There are one-time costs like the purchase or lease of POS terminals and the setting up of physical locations. Agents also incur recurring expenses for trips to banks and ATMs, data for the POS devices, utility bills and other critical operational expenses.

According to a 2018 BCG study of different markets including Nigeria and Kenya, the average mobile money agent incurs about $100 in monthly expenses.

Because an agent’s income is closely tied to the number of transactions they process, you’ll often find them concentrated in densely populated urban areas with high foot traffic and lots of commercial activity. Agents in more remote areas charge higher transaction fees, both due to less competition (there are fewer agents in those areas) but also out of necessity, to make up for the lower number of daily transactions.

This landscape has created an interesting situation where underbanked customers in rural areas, who already have limited financial options, end up paying more for financial services than their urban counterparts. It’s a disparity that underscores the challenges of delivering equal financial access across different regions.

In addition to optimizing commissions and costs, agents have to also manage their liquidity. This requires maintaining a timely supply of physical cash (float) for customer withdrawals and an electronic balance (e-float) for transfers and deposits. This fluid mix of cash and digital money comes from a range of sources, including customer deposits, ATM or bank withdrawals, and cash flow from their other businesses.

One way that agency banking providers help agents better manage liquidity and earn more revenue is by providing faster access to funds.When a customer makes a cash withdrawal from an agent, the agent is essentially swapping physical cash with digital money from the customer. Agents then use the digital money available in their e-float to obtain cash from their sources and the cycle repeats.This means that an agent’s ability to access physical cash is dependent on how quickly they can access their e-float. Agency banking providers leverage real-time transfer rails to instantly settle that digital money from the customer to the agent (sometimes for a fee). This is particularly helpful for POS transactions which are traditionally not settled on the same day.

We can illustrate all this with an example: Let’s say I go to the agent on my street to withdraw ₦10,000 with my debit card. The agent will insert my debit card into a POS device and debit my bank account for ₦10,200, charging a ₦200 commission. I will be handed ₦10,000 in cash and the agent’s electronic balance will be instantly credited with ₦10,150, with ₦50 paid to the agency banking partner.

If that agent is able to withdraw the ₦10,000 from their electronic balance in cash, they can effectively sell the funds collected from me in cash to another customer. Ultimately, an agent can use the same $10 of monetary value to conduct up to $50 worth of cash transactions in one day, depending on how quickly they can turn over and sell cash in that time.

This combination of strong customer demand, sizeable gross margins for agents, and creative liquidity management has made agency banking a very attractive business model for all parties involved.

Shifting tides in agency banking

There’s no doubt that agency banking has had a significant impact on financial services in Africa in the 21st century. In some way, the story of digital payments in Africa is very much an offline one. These agents have played a critical role in onboarding new users into the financial system, while also driving activity from banked users.

Agency banking has also provided a healthy source of income for all stakeholders. Pure-play agents (agents who focus solely on agency banking) have been provided with employment opportunities. SMEs that offer agency banking products gain a dual advantage: direct revenue from agency banking and a boost in foot traffic to their establishments, enhancing their overall business.

But shifting tides are exposing gaps in current models and threatening the commission incomes that fuel the industry.

The number of active financial agents has increased rapidly in the last few years as banks, telcos, and fintechs have rushed into the market. While growth is often seen as a sign of vitality, here it could be a sign of an impending challenge.

According to GSMA, the number of global mobile money accounts per active agent dropped from about 113 in March 2017 to 85 at the end of 2021. By 2022, the number of active mobile money agents in Sub-Saharan Africa grew by 39%. In that period, the number of active accounts and value of transactions grew 21% and 15% respectively.

If we consider a mobile money number to be a proxy for a customer to an agent, this implies that the number of agents is growing faster than the number of customers. Said differently, there is now a lot more competition amongst mobile money agents for customers.

More competition amongst agents is changing the power and pricing dynamics for everyone involved. Commission income now faces a delicate tug-of-war. On one side, customers are looking for ways to pay less, driven by their need for more affordable services. At the same time, agents are pushing to earn higher commissions. Agency banking providers are caught in this dynamic, particularly in Type-2 markets where there’s no exclusivity between agent and provider. A single agent acts as the representative of multiple providers, and an agency banking provider whose fees are too high might find themselves dropped by an agent.

It’s a delicate act; agency banking providers have to make pricing models sustainable for the business, while still delivering value to both their customers and their network of agents. Specifically, they must keep fees low for customers, while motivating agents with high commissions, while turning a profit.

In Nigeria, agents are becoming more united, shifting from a fragmented state to forming unions. In July 2023, the Lagos chapter of the Association of Mobile Money and Bank Agents In Nigeria (AMMBAN) proposed controversial fee hikesdue to an increase in operational expenses. Key costs like transport, fuel, and the price of POS devices have skyrocketed as many African countries are grappling with high inflation and weak FX.

Adding complexity to these tensions is the looming presence of digital payments, posing a significant challenge to the entire industry.

In Issue 174 of the Decode Fintech newsletter, we wrote about the idea of cash not just as money but as a physical good:

For the average consumer, cash is usually seen as a tool for commerce or a physical representation of monetary value. But a deeper way to look at cash is as a retail product that’s subject to the expected mechanics of commerce, much like a shirt or a tuber of yam.

This means cash has a chain (and cost) of production and distribution. Like any physical good, it can be bought and sold for a profit. It can be warehoused as a deposit with licensed financial institutions. It undergoes variable supply and demand motions that affect its cost, as acutely observed during the cash scarcity period in Nigeria at the beginning of the year. This last bit is particularly important in a country like Nigeria, where most retail transactions are conducted with cash.

Agents already contribute to the cost of distributing cash by earning commissions on withdrawals and deposits. As noted in our article about NIBSS Instant Payments, the cost of producing cash notes can be as high as 5.5% of the monetary value. Agents add to this by charging an additional 2-4% of the transaction amount for cash withdrawals, a practice common in markets like Ghana and Kenya.

So while cash might seem free at the point of commerce, the actual cost of getting the cash to the user to spend in the first place can be as high as about 7-10% of the transaction value. This “cash tax” is quite steep compared to electronic channels where the overall transaction costs range from 0.1% to 1.6% of the transaction value.

In the long run, it’s logical for regulators to aim for financial inclusion by cutting down on both the cost and use of cash. A future with low-cost, widespread digital retail payments offers convenience and cost savings for both governments and consumers. However, this threatens agency banking models which rely heavily on commission revenue from cash-based transactions.

The data shows that this trend is underway. According to GSMA, net cash out (cash withdrawals minus deposits) on mobile money has fallen over the last few years as more users are transacting digitally within the mobile money ecosystem.

During the first half of 2023, mobile money agents in Kenya handled less cash despite mobile money account usage reaching new highs. In all African markets, P2P transfers and merchant payments through digital channels have experienced fast growth.

So while agents continue to play a vital role in transforming physical cash into digital currency, the rise of frictionless digital payments threatens their long-term viability.

In late 2022, the Central Bank of Nigeria (CBN) conducted a monetary policy experiment that gave a preview of what the future of money might look like in the region. First, they announced a redesign of the ₦200, ₦500, and ₦1000 notes with an urgent deadline for the expiry of old notes. Shortly after, they set new cash withdrawal limits for individuals and businesses using banks, ATMs, and agents, leading to a sudden shortage of cash.

Faced with this cash scarcity, people turned to electronic channels more, like P2P money transfers and card payments at Point of Sale (POS) terminals to pay for goods and services. This shift away from cash led to a spike in transaction activity for banks and fintechs.

These policy changes had a detrimental effect on the agency banking industry. POS agents and their partner financial institutions (who earn revenue by charging fees on cash withdrawals) found themselves in a difficult situation. With cash in short supply, agents had to hike up their per-transaction fees, but the limited availability of physical money meant that there was less cash to dispense to customers. This led to fewer transactions overall and a drop in revenue.

These policies were later paused but still presented an existential risk to millions of agents and teased the fate of agency banking in a very possible cashless future.

For agency banking providers, the current landscape creates an immediate need to address several pressing concerns:

1. Identify ways to stand out from competitors to agents, beyond just pricing and reliability.
2. Extract the greatest value from agents and grow payments revenue in the short to medium term, especially as long-term trends shift towards digital transactions.

This presents an opportunity to tackle these existential threats while exploring new business paths. This is especially true for Type-1 market players like M-PESA and MTN MoMo, which are already experiencing slower revenue growth rates as they hit market saturation and the maturation of mobile money.

Agency banking providers are adopting a playbook that involves serving businesses and customers directly and bypassing the traditional agents who once mediated these relationships; this has mixed implications for the agents.

Small businesses, big opportunity

Small and Medium Enterprises (SMEs) form the backbone of Africa’s economy, making up 90% of the businesses and 80% of the jobs across the continent. Despite this concentration of economic activity, attention from legacy financial institutions has been lukewarm, and the tools and services on offer haven’t quite met the unique needs of these merchants.

SMEs often grapple with inconsistent cash flow, resulting in relatively low amounts of deposits at any given moment. Additionally, most SMEs, particularly micro-businesses, are informal establishments that rely heavily on traditional, paper-based bookkeeping and financial processes. Even those that are formally recognized still collect most of their payments in cash.

This makes it tough for traditional financial institutions with formal rules to earn sizeable interest on deposits or adequately underwrite these SMEs for loans. Limited access to funds and a lack of relevant business tools are critical problems that need urgent solutions. These challenges become more complex as we explore different industries, business models, levels of formality, and customer types.

Many traditional banking institutions tend to serve SMEs and retail customers in exactly the same way. That means for the majority of SMEs, the typical services banks offer include only a bank account, a debit card, and access to a mobile app or internet banking platform; there are rarely value-added services that successfully optimize for small business owners.

Governments and Development Finance Institutions (DFIs) have set up community banks and micro-finance institutions, but their success has still been mixed. African businesses continue to face a shortage in credit and other essential banking services like payments, foreign exchange management, and bookkeeping.

Agency banking providers typically have existing relationships with SMEs. This familiarity comes either from SMEs engaging in agency banking services themselves, or through business owners who transact with agents. The overlap of these connections could generate actionable insights.

• Foot traffic from customers seeking agency banking services from SMEs can act as a good signal of the overall business activity of the SMEs and can be used to profile these businesses for other types of financial services.
• Both agency banking and small business commerce require careful cash flow management. Agents need to balance physical cash and electronic funds, while SMEs must ensure the cash from sales covers expenses. Float management can be complex on its own, and the challenge becomes even greater when both operations are run from the same location.

Following these assumptions, there’s value in not only bringing commerce operations and agency banking together, but in using this knowledge to directly serve SMEs. Becoming a unified hub for banking and business management for SMEs offers additional benefits for financial institutions, such as:

• Increasing revenue opportunities: By understanding the business’ needs and behaviors, financial institutions can offer higher-margin services like credit, insurance, and payments, thereby enhancing the average revenue per business.
• Improving agent retention: In an environment where agents have no exclusive relationship with an agency banking provider, valued added services are a way for providers to differentiate themselves from competing institutions. Agency banking providers might even go as far as rewarding agents for higher volumes. For example, the agency banking provider might offer more generous credit terms on the condition of the agent/SME sending higher transaction volumes.
• Preparing for a digital future: In the long run, as payments and commerce shift towards digital and cashless transactions, the tools initially used for agency banking, like POS terminals or mobile money accounts, can evolve into platforms for receiving and managing customer payments. Agency banking providers that adopt this approach will also be better positioned to provide suitable online commerce and payment tools like web checkouts and online storefronts.

In our 2022 review of African fintech, we noted the emergence of agency banking providers pivoting to serve SMEs directly:

… some agency banking providers adapted by transforming into full-service banks and converting their agents into business customers. Moniepoint, a major player in Nigeria, launched Moniepoint Microfinance Bank, offering loans and financial management tools to merchants. Similarly, Kudi rebranded as Nomba and introduced new savings and payment tools for businesses.

Similar trends are noticeable in markets like Kenya and Egypt, where merchant payments are becoming a substantial part of revenue from agent-based giants like Fawry and M-PESA.

Despite the opportunity, there’s no certainty of success. Informal, cash-heavy markets are tricky. There’s no guarantee that agents, who might also be SMEs, will readily embrace these new payment and banking solutions.

Also, agency banking isn’t the only route to business banking. With the market’s significant size and challenging issues, there’s been a surge in startups using various entry points. Whether through supply chain management, bookkeeping, working capital, online payments, or insurance, these companies are acquiring merchant bases and growing into full-service banks.

Finally, it’s worth considering that, given enough time and resources, most agency banking providers could reach a level where their merchant-focused products and value-added services are essentially the same. This lack of differentiation may become a hurdle. Ultimately, simply offering merchants a complete set of banking solutions might not be enough to stand out.

Closing the loop with consumer payments

Many agency banking providers already offer consumer solutions. Take Kenya’s M-PESA and Nigeria’s OPay, for example; they combine their agent networks with widely used mobile wallets for transfers, merchant payments, lending, and other financial services.

However, not all agency banking providers have ventured into consumer solutions. This is especially true in countries like Nigeria, where payment systems are interoperable, allowing consumers to engage with any agent using a payment card. Fintech companies like Moniepoint and Nomba have been able to grow by focusing solely on the merchant side of things. But this strategy isn’t without risks.

Recent events, such as the Central Bank of Nigeria’s (CBN) new policies on banknote swaps and cash withdrawals, have highlighted a potential danger in putting all their eggs in one basket and focusing only on businesses. It’s a reminder that a balanced approach, considering both merchants and consumers, may provide a more stable foundation.

In Issue 166 of the Decode Fintech newsletter, we wrote:

With the traditional banks struggling to handle this sudden traffic, mobile wallets and digital neobanks emerged as reliable alternatives[…] For a fintech like Moniepoint, the impact was a bit more nuanced. The merchant banking and payments acceptance side of the business likely saw increased activity as customers shifted to paying merchants via electronic methods. But the cash withdrawal business likely also saw a decline as the cash scarcity worsened.

Additionally, unlike its biggest agency banking competitors – First Bank’s FirstMonie, OPay, PalmPay, Paga, and Interswitch’s PayPoint – Moniepoint doesn’t own a consumer product. In December 2022, the volume of monthly POS transactions in Nigeria dipped year-on-year by 14%, the first decline on record. Mobile transfers and NIP transactions however reached YoY increases of 122% and 413% in February 2023.

This suggests that competitors who had a direct relationship with consumers were able to soften the blow to their agency banking cash withdrawal business with increased digital payments on their consumer interfaces. Also, because Moniepoint (unlike these consumer apps) only operates on the acquirer side of a merchant payment, they don’t have much control over issuer-side reliability which was a big reason for dips in service quality for merchant POS payments.

Following the reversal of the CBN policies, MoniePoint led a seed round into Payday, a consumer and cross-border payments solution with reports of a planned acquisition.

Since that time, mobile inter-scheme transfers (transfers done through institutions with mobile money operator licenses such as Opay and PalmPay) have exploded, surpassing POS transactions in December 2022 and on course to surpass bank transfers by 2024 at the current rate. Moniepoint has also launched its own personal banking product directed at consumers.

We expect even more agency banking providers to follow this route. Having a direct relationship with consumers through payments, credit and savings solutions has standalone benefits, but there are even more advantages in connecting that base of users to an ecosystem of merchants and agents.

• Cutting out middlemen and processing transactions in-house can lead to noticeable cost savings and increased reliability. As we’ve written in a past Decode Fintech issue, transforming external API calls into internal SQL queries can significantly enhance both transaction margins and success rates.
• These cost savings can be strategically invested in driving customers towards the businesses and agents within the provider’s networks. Tactics like promotions and special pricing for consumers who pay through merchants in the ecosystem can be effective in attracting more business and strengthening the relationship between merchants, agents, and customers.

Just like with building merchant solutions, this approach comes with its own set of risks. Acquiring and retaining African consumers can be a complex and costly endeavour, with uncertain revenue outcomes. However, a consumer offering can act as a valuable safeguard against disruptions in the cash-based system and can significantly enhance merchant-side operations.

In a sense, this is where Type-1 and Type-2 market types begin to converge. The playbook, successfully executed across various African countries, often begins with enabling a network of human agents, followed by building a digital ecosystem of consumers and businesses. The order of the steps might change, but the destination is often the same.

Interestingly, the success of this approach reveals something non-intuitive yet fundamental about cash-heavy markets like Africa: successful stories about reducing the use of cash often begin with developing solutions that make access to cash easier, safer, and faster, rather than diminishing it. The wisdom here lies in understanding and accommodating the prevailing needs before steering the market towards more digital solutions.

While digital-first solutions have found success by tapping into the growing digital trend across the continent, numerous failed government cashless policies and fintech businesses stem from a fundamental misunderstanding of why cash usage continues. It’s not just about pushing digital solutions; it’s about recognizing why cash is still preferred in many areas and finding the right ways to reduce its usage. Understanding the unique dynamics of cash reliance can lead to more effective strategies in moving towards a more digitally inclusive economy.

So what happens next?

Most of these shifts to merchant and consumer solutions mainly benefit consumers and agency banking providers, while agents may face challenges. For agents who don’t operate a primary merchant business, the transition to a fully digital system could lead to a significant loss of revenue or even the entire income from their business.

Fortunately for these agents, the grand transition to digital payments is still in progress, and a complete disruption is likely years away. Cash continues to reign as the preferred payment method across Africa, as many Africans still lack access to digital payment tools. The experience in Nigeria illustrates that a sudden push towards cashless payments can have serious repercussions on consumers, businesses, and the overall economy.

Also, historical trends suggest that there’s likely to always be a demand for agent-based models. Agents fundamentally help bridge trust gaps in low-trust economies like Africa. This trust gap is prominent in financial services but also exists in other areas.

In our 2022 review of African fintech, we noted:

Beyond fintech, various sectors embraced the agency model to deliver goods and services. Ecommerce companies like Copia Global (Kenya), Brimore (Egypt), and Tushop (Kenya) raised money in 2022 to drive their agent-led ecommerce models across different African markets.

Agents also solve distribution problems that are particular to emerging markets. From timed phone calls (where people who want to make a phone call pay walk to their local phone call agent) to agents selling airtime vouchers, and even agents selling access to time on Playstation consoles, variants of the agent economy have thrived in Africa where incomes per capita are still low compared to the initial costs of directly owning new technology. Eventually, these innovations become cheaper for direct distribution and personal ownership but the agent networks evolve and emerge for the next new thing.

However, it’s worth considering that the rising adoption of consumer platforms like smartphones and internet could eventually make it easier and cheaper to distribute new technologies in the future. This is what has essentially happened with software and mobile apps which are now available directly to consumers at almost zero marginal cost. In that situation, agents who act as mediators between consumers and technologies might see their role diminished in the future.

For the time being, these agents will likely be fine. But if they look around and ahead, there are signs of change that stand to benefit everyone but them.

source :  https://paystack.com/blog/operations/agency-banking-africa