Last week, the State Bank of Pakistan allowed the exchange companies (ECs) to participate in the growing sector of branchless banking (BB). The rules are clear. ECs can only act as agents of existing BB service providers; they will not impersonate themselves as BB providers; and they will be allowed to function as BB agents only after due approval from the central bank.
To understand what will happen after the regulatory approval, let’s recap how the sector is operating. Existing BB operators – which include telcos, commercial banks and microfinance banks – function as licensed service providers. To further their geographical reach, they partner with small retailers, which are found even in the nooks and carnies. The agent network had reached 186,618 individual agents as of September 2014. These agents are a fragmented bunch and BB providers enjoy power over them.
Now, after the SBP’s approval, ECs have also qualified to become agents for BB service providers like Easypaisa, MobiCash, etc. ECs do not have a geo-footprint comparable to the small retailer-agents – reportedly ECs have about 1,500 branches. But they have a few key attributes that make them a unique partner for BB players compared to small agents.
One, exchange companies control a very lucrative channel, which is inbound remittances. Their share of the channel flows is said to have gone down to 40 percent – the rest is being handled by commercial banks – but their outreach on both remittance-origin and reception sides is amazing. So, although those 1,500 odd branches are not even 1 percent of the existing agent network’s reach, they tend to be weighty in terms of inflows and disbursements.
And two, ECs, unlike small agents, enjoy concentration and lobbying power in the form of strong associations, e.g. Forex Association of Pakistan and Exchange Companies Association of Pakistan.
Factor number one would entice a BB service provider to bring an EC on board as an agent. It would tap into the nearly two billion rupees of average daily remittance flow passing through ECs’ pipe. The ECs would get to add a convenient delivery channel for their core products: remittance transfer and currency exchange. Moreover, they will be able to diversify their business, handling in-country funds transfer, bill payments and loan repayments.
Yet the ECs strength – there are only a few players and they are financially strong – may make BBs wary of any partnership with them. It will be tougher to negotiate with them regarding revenue split such as fixing and sharing the service fees. Moreover, ECs could be likely future competitors if some of them go on to acquire full-fledged branchless banking license. Whatever the case, it is obvious that customers may benefit from more choice and availability of service. Who knows competition may intensify and we see service fees coming down a notch.
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