Agency Banking: Is Uganda ready to get on board?

By Ronnie Wonder

Ugandans (especially in remote areas) are forced to travel long distances and spend huge amounts on transport to access a bank branch. In addition to the cost of transport, is the time spent commuting to and fro that could have been spent more productively.

Though the banking industry continues to invest in rolling out brick and mortar branches that are complimented by various delivery channels, the challenge of access to formal financial services remains a big impediment to financial inclusion.

To curb these challenges, Government is yet to pass legislation that will allow commercial banks to contract third party retail networks as agents. Upon application, vetting and approval, these agents will be authorized to offer selected products and services on behalf of the banks.

This relationship will create an ‘Agency Banking’ business model where these agents will be empowered with a proper banking mandate of bank tellers to open accounts, receive deposits and effect withdrawals in a bid to improve turn over.

Why Should Banks Adopt Agency Banking?

The key factor is certainly cost reduction in the provision of banking services.
However, cost reduction, customer service enhancement, stiff competition, the need to look for new markets and the need to bank the unbanked in remote areas are other factors that could influence adoption of agency banking by commercial banks.

However, the operational and reputational risks involved in using agents could trigger operational, technological, legal/compliance, reputational, and other risks.

Challenges to Agency Banking

Uganda being new to this model, may see some agents disclosing customer information to third parties without their knowledge that the bank owes its customers the duty of confidentiality, and a breach of which could lead to customers taking legal actions against the bank.
Besides, in case most of these agencies are in areas that are ‘high risk’, say along high risk streets like down town Kampala, the agents may not be able to protect the customers.

Customer service could be a huge challenge for the banks as they need to train and retrain the agents so as to maintain high levels of customer service. The agency staff could be a target by fraudsters as they are aware that they will not be able to easily identify fraudulent transactions, for example identification of documents for originality.

One wonders if these agents will be properly trained on knowing your customer (KYC) and will be able to know how to distinguish fake identification documents from real ones. Accounts opened at agent locations may be prone to money laundering transactions owing to irregularities that may happen during account opening.

Mobile phone network failures will impact on agency banking. Besides, liquidity related problems may lead to agents losing their hard won clients to competitors. Lack of startup capital may deter the recruitment of suitable agents.
The use of non-employees (agents) to service bank customers will birth operational risks that may stem from lack of capacity, poor training, and lack of necessary tools and systems.

Probable Risks

These could include agent fraud or theft, unauthorized fees, abusive service by agents of customers or misrepresentations regarding the agents role as acting on behalf of a bank, loss of customer assets and records, data entry errors, poor cash management resulting in agents not having sufficient cash on hand to enable the customer make a withdrawal, and agent failure to resolve or forward customer complaints to the bank to name a few.

The agents themselves may also be subjected to theft and third-party fraud (including the use of cash-in transactions to pass counterfeit bills to agents ill equipped to identify them).
There are also technological risks involved. For instance, utility disruptions or software or hardware failures that may cause lack of service availability and information loss.

There could also be legal and compliance risks. Customers may sue a bank as a result of agent theft or agents’ violation of privacy laws/bank secrecy laws or other misuse of confidential customer data. Agents may sue the bank for breach of contract or for broader claims. Uncertainty in the applicability of agent-related laws or regulations and the interpretation of contracts will give rise to the risk of lawsuit.

Reputational risks are derivative of the risks noted above: underperformance by agents or agent fraud, robbery, agent liquidity shortfalls, loss of customer records, leakage of confidential customer data, and violation of consumer protection rules regarding price disclosure. There may also be negative media due to systems failures. Typically, this model will require increased attention on the part of the bank due to the banks’ ultimate liability for actions of their agents.

Importance of Agency Banking to Consumers

Despite the challenges, the adoption of agency banking by commercial banks will impact positively on the lives of the consumers both at local and international levels. According to Bank of Uganda, the regular FINSCOPE surveys reveal that 54 percent of the population now has access to formal financial services up from 24 percent in 2009.

Agency banking will thus increase financial inclusion in Uganda greatly – making financial services cheaper for customers, since it will be cheaper to withdraw at an agent location than withdrawing from an automatic teller machine.

Agency Banking and Financial Inclusion

The emergence of agency banking will increase the level of financial inclusion in a sense that increasing the area covered by agents within the country will have the effects of increasing the reach of the financial services to the people thus raising the levels of financial inclusion because a certain proportion of the population would not visit bank branches for various reasons.

What could be the effects of Agency banking on commercial banks performance?

Since agency costs affect the performance of banks to a great extent, there will be need to strengthen their financial infrastructure for electronic transactions to minimize these costs since infrastructure costs will be a major influence to their effective performance. Other costs may include marketing, security and insurance costs. Over time, banks will reduce on the need for investment in new infrastructure and new branches. This will lead to lower costs for mobile transactions as the agents will be cheaper than branches.

Players take

Sharon Nabweteme, the Corporate Communications Officer, Centenary Bank affirms that the bank’s physical and electronic infrastructure (ATMs & Point of Sale services – POSs) and customer oriented staff countrywide will help them manage this model, while Bernard Mogaka, dfcu Bank’s Head of E- Banking attests to their varied choice.

“We may opt to engage with convenience stores like supermarkets, malls, petrol stations and so on, directly sign agents on contracts, directly control agents, or partner with existing networks such as pay way, mobile cash and easy money and telecom networks like Airtel among others,