Reserve Bank paper calls for expansion of agency banking

A Reserve Bank working paper calls for policymakers to expand the network of licensed agents working with banks to facilitate transactions beyond retail stores as a means of deepening financial inclusion.

The paper says authorities could also consider dealing with the barriers to the adoption of agency banking to absorb more marginalised people into the mainstream banking system.

“Knowing that the use of savings services increases through agency banking should incline the banking sector to incentivise these savers, whose funds can be used for financial intermediation, which is perhaps not the case under the agency banking model,” the paper reads.

“We provide robust evidence that use of agents providing cash-in or cash-out services is associated with increased use of credit and savings services, as well as increased frequency of bank transactions in SA between 2015 and 2021,” it adds.

“We find that the positive results are driven by cash-in services, where consumers use retail shops and supermarkets to transfer funds and deposit payments. We also document the key drivers of demand for agency banking, which are proximity to financial institutions’ outlets … the lack of trust in financial institutions and self-exclusion from the formal financial sector.”

Agency banking in SA amounts to licensed third-party retail distribution channels such as retail stores and supermarket chains. SA lenders use the network of retail chains to expand their reach to underserved communities.

Alliances between banks and retailers include a partnership between Absa and PEP stores, TymeBank and Pick n Pay, Boxer and The Foschini Group (TFG).

The basic financial services facilitated through agency banking range from cash-in services (cash deposits, funds transfers and bill payments) and cash-out services (cash withdrawals and payment receipts) to opening new transaction accounts, such as Shoprite and Pick n Pay money market accounts.

Studies have shown that agency banking via retail stores has become the preferred distribution channel for South Africans after ATMs.

The central bank’s working paper says socioeconomic implications of extending access to financial services to underserved populations are enormous, which include reducing poverty, creating jobs, empowering women, and improving people’s savings and investment behaviour.

The Bank says its empirical findings indicate a significant increase in credit and savings penetration and bank transaction frequency associated with the growing demand for agency banking in SA via cash-in, cash-out services.

It says the profile of a typical financially excluded South African relying on agency banking to meet his or her financial services needs is a black person with a matric and a monthly income of R6,000-R10,000. Data also shows this individual is more likely to be a single female aged 25-51, living in the urban areas of Gauteng, the North West, Mpumalanga, the Eastern Cape or KwaZulu-Natal.

Vulnerabilities exposed

The paper also flags vulnerabilities that consumers excluded from the financial services sector are exposed to. It says data shows that credit provided by nonbank financial institutions has risen from 36% in 2014 to 43% in 2016 before rising further to 70% in 2021, relative to 18% for bank credit.

“The implication is that the banking sector does not seem to be the preferred credit provider. This anomaly is likely to be linked to supply constraints, including regulatory and collateral requirements, as informal credit providers do not have to bear regulatory compliance costs. However … this situation can also lead to consumers paying significantly higher interest rates.”

TymeBank last year said it planned to make it possible for its customers to walk into any TFG store and apply for loans as its partnership with the retailer takes shape, allowing it to better understand consumer credit demand.

The partnership, which was struck in 2023, has led to 1-million customers opening bank accounts in TFG stores and 280,000 customers who use its buy now, pay later service to pay for clothing or shoes over three months interest free.

khumalok@businesslive.co.za