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This is a personal blog. Although the authors are affiliated with Coda Payments, the views expressed here are their own.

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Monday
Nov122012

Man vs. machine

One of the key innovations of M-PESA is shifting transactions—especially cash in and cash out—outside of expensive bank branches and into low-cost independent shops, or agents. (Ignacio Mas’s article “The Economics of Branchless Banking” remains the best overview of this; for real cost data, you can look here.) Over time, the use of agents has come to be understood as an essential component of branchless banking efforts.

Except when it isn’t. I remember being shocked when chatting with the then-General Manager of True Money in Thailand, who was brimming with excitement about the rollout of a network of cash-in kiosks. Surely, I asked, it would be cheaper to appoint agents, rather than investing in buying and then maintaining a network of expensive machines. But as we worked through the numbers, he convinced me that these kiosks would, in the long run, be a lower-cost channel than agents.

The reason why this was the case in Thailand, but wouldn’t be in, say, East Africa, is labor costs. In East Africa, you don’t have to pay agents very much in commissions to compensate them for labor. But where wages are higher—as they are in Thailand, a middle-income country—you do. In contrast, machines, which unlike labor are tradable, cost mostly the same everywhere, so using them for cash out and cash in becomes increasingly attractive the more expensive labor is. 

It turns out that Thailand is not an aberration; in a number of other middle-income countries there is a profusion not just of ATMs but also of machines that are capable of accepting cash. These machines are used by banks to collect deposits and by nonbank payment service providers to allow customers to pay bills, send money, and so on.

We can see this divergence very clearly in the numbers. The countries where agent networks have blossomed over the last decade—Tanzania, Uganda, Kenya, Rwanda, Pakistan, etc.—are all poor: Pakistan's GDP per capita in 2011 was $1,194 (expressed using exchange rates to US$ from 2000), and the rest had figures that were far lower. The countries where I've seen widespread use of machines for cash-in and cash-out—such as Russia, Thailand, and Malaysia—are far richer: Thailand, the poorest of this bunch, had a GDP per capita of $4,972, four times that of Pakistan.

This implies that it is only in low-wage/low-productivity counties where leveraging agents is going to be a game-changer. In middle-income countries, the labor-cost component will make it significantly harder to run agent networks profitably, suggesting that the burden of transforming cash into digital form and back again is likely to fall on networks of cash-in and cash-out kiosks, not agents.

The implication for banks and payment service providers trying to find new low-cost channels is pretty obvious: the wealthier the country, the less attractive agents, and the more attractive machines, become for cash acceptance and disbursal. Providers in middle-income countries will need to be creative when it comes to assigning responsibilities like account opening and customer education that agents can handle but kiosks can't.

I am less sure this point is clear to financial regulators. Of course, I am happy any time barriers that prevent institutions from leveraging agents as a transactional channel are torn down. But regulators in middle-income countries should be realistic about the role that agents will play in fostering financial inclusion. A number of middle-income countries made Maya Declaration commitments to boost financial inclusion through agents. Simple economics suggests they may be barking up the wrong tree.

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