PARTNERS AT THE LAST MILE: RETAILERS, BANKING AGENTS, AND INSURANCE COMPANIES

PARTNERS AT THE LASTMILE: RETAILERS,BANKING AGENTS, ANDINSURANCE COMPANIESSummary of the Last LectureInstore Banking, banking Agents, Retailers become bankers, variations

Overcoming the Core Challenges

Given the triple win nature of the banking agent proposition, there is an enormous opportunity not only for financial institutions and retailers, but also for auxiliary businessesOvercoming the Core Challenges

such as POS suppliers, technology designers, agent managers, or market research firms to assist in design, implementation, and ongoing support, provided key challenges are addressed.Technology.Specialized technology is needed to equip banking agents: computer, printer, scanner, POS devices, and communication devices such as a fax or modem. Technology.For models in which the financial institutions and retailers systems need to communicate, selecting the right technology interface and ensuring quality data synchronization are perhaps the trickiest issues to resolve. Technology.The latter, in particular, usually hinges on a robust core banking platform that may not always be present, particularly in smaller scale financial institutions.Marketing.It is still unclear what type of clients will prefer using banking agents and how they feel about interacting with a retailer rather than a banker.

Marketing.Will they trust the retailer with their banking transactions? Financial literacy programs devoted to building trust and informing clients on safe use of credit and debit cards may help. Marketing.Market research and segmentation are needed so that both the financial institution and retailers can make informed decisions about where to open banking agents (versus branches or ATMs) and what products to offer.Marketing.Branding is a concern, particularly when the financial institution leverages the retailers employees. Marketing.Lemon Bank, a completely branchless bank that offers mainly bill payments in Brazil through a network of over 6,500 locations, has low brand recognition, owing to the restrictions placed by the regulators on brand prominence when using agents. Marketing.This may limit higher margin cross-sell opportunities for Lemon Bank in credit and especially savings, where brand confidence is essential.Agent NetworkManaging a network of retail agents is a significant undertaking for any financial institution, whether the agents are employees of a single chain or a series of small, independently owned stores. Agent NetworkAgents, who may see provision of banking services as their second or even third priority, must provide adequate customer service, and problem-resolution mechanisms must provide back-up support. Agent NetworkTraining manuals and incentive programs for agents are essential, as are customer satisfaction metrics. Financial institutions also need to provide their own direct link to customers, preferably through a call center, to handle questions, disputes, or complaints.Agent NetworkIn response to the complexity of developing and managing many agents, network agent managers have emerged. These managers simplify the task for banks, but reduce its revenue stream. Agent NetworkNetwork managers identify agents, supply them with the necessary equipment and training, and own the relationship with them. Most of these are in Brazil, such as Netcash and Pague Facil, though they are starting to emerge in other countries, too.Insurance Companies Face the Channels ChallengeFinding cost-effective distribution channels is also at the heart of insurance for the BOP market. Insurers look for aggregations where groups of clients can be insured at once, especially in the BOP market where premiums must be small. Insurance Companies Face the Channels ChallengeThey turn to churches, labor unions, schools, and employersany form of association with a stable, predictable membership. One of the most used channels involves sales through the existing customer relationships of other businesses. Insurance Companies Face the Channels ChallengeThe ideal distributor will handle money and process transactions. For this, the distributor must be financially sound and have strong IT systems. Insurance Companies Face the Channels ChallengeThe distributors look to insurance to enhance customer loyalty as well as for the commissions it provides. Insurance Companies Face the Channels ChallengeMicrofinance institutions have become a favored entry point for insurers trying to reach BOP clients who have few other contacts with large, well-organized institutions.Direct SalesThe simplest but not necessarily best channel for insurance is direct sales through the insurers own network. Direct SalesBirla Sun Life Insurance, a joint venture between Canadian insurer Sun Life and Indian insurer Aditya Birla, has been providing term life insurance in rural India since 2001, using a very simple and traditional approach based on direct sales through its branch offices. Direct SalesIn order to cut costs so premiums are affordable, Birla stripped down documentation requirements and eliminated medical exclusions. Direct SalesThe result is a simple policy with limited payouts; the maximum is about $130, about one-third the per capita income of rural India. Direct SalesIt is highly doubtful whether Birla would grow this product if not for regulations requiring it to devote a small percentage of its total business to the poor and disadvantaged.The Partner-Agent ModelA more cost effective way to bring insurance to low-income people is a piggybacking model. The Partner-Agent ModelAmerican International Group was among the first to develop this approach, in Uganda. With more than 20 years in Uganda, AIG dominated the mainstream insurance market in the country.The Partner-Agent ModelIn 1996, FINCA Uganda, one of several large MFIs, asked AIG to create a partnership. Together, the partners designed group life insurance and accident policies that covered clients and their families in case of death, disability, or hospitalization. The Partner-Agent ModelFINCA loan officers distributed insurance certificates, collected premiums (folded into loan repayments), and helped process claims in the course of their weekly rounds to borrower groups. The Partner-Agent ModelBecause coverage was mandatory for all borrowers, there were no costly individual negotiations or sales, and no problem of adverse selection (in which only the riskiest people choose to buy insurance), which is especially important in a country with a high HIV infection rate. The Partner-Agent ModelBased on the success of the two-year pilot, AIG refined the product and expanded it to other microfinance institutions and other countries in the region, finding ways to reduce premiums over time.The Partner-Agent ModelAIGs ability to rely on a trusted MFI partner was critical to profitable entry into the low-income market. The Partner-Agent ModelBy 2003, microinsurance generated 17 percent of AIG Ugandas overall profits, and MFIs earned significant income by charging small fees for administration. The Partner-Agent ModelBy 2005, AIGs product covered about1.6 million people through 26 MFIs in Tanzania, Malawi, and Uganda.The Partner-Agent ModelAIGs work with FINCA helped create demand, in effect developing a new market. FINCAs clients, most of whom had no experience with insurance, told their friends about the coverage, The Partner-Agent Modeland over the next several years clients of other MFIs began demanding insurance, too. Eventually, nearly all MFIs in Uganda tied up with insurance companies.The Partner-Agent ModelThe model AIG created in Uganda is now widely applied by insurers using microfinance institutions as distribution channels. The Partner-Agent ModelCompartamos Banco in Mexico, for example, is a conduit for Banamex Seguros insurance. In one program twist, Compartamos combines mandatory basic life insurance coverage with voluntary additional coverage available on demand.In the next LectureThe Microagent Model: Barefoot AgentsSummaryInsurance Companies Face the Channels ChallengeDirect SalesThe Partner-Agent Model