December 19, 2013
Grameen Foundation and Grameen Foundation India has worked with Intellecap to create a 4-part highlighting challenges and solutions for various aspects of the Business Correspondent Model. This blog was created by Kimberly Davies and Abby Addis. Click here for full studies about dormancy, the business model, channel innovation, or operational challenges.
In India, the Business Correspondent (BC) model of banking is being tested as a way to incorporate the unbanked into mainstream financial services. A BC is an entity that acts as a teller for the bank and carries out a range of transactions on behalf of the bank and is paid commissions for the services provided. BCs promote accessible branchless banking and the financial inclusion of a country’s poorest citizens.
Even though BCs have been entrusted with the task of making financial inclusion a reality, the financial viability of the model has emerged as a concern, as various BCs struggle to break even. A MicroSave study with leading BCs in the country found that half of them could not cover their costs and the other half had just started earning nominal profits.
The Business Correspondent model is a cost and people intensive model which requires high investment in technology and capacity building, which makes it difficult to create a financially sustainable business model.
Grameen Foundation worked with Cashpor Microcredit, ICICI Bank, and Eko Technologies to understand whether Cashpor could leverage its existing credit infrastructure to cost-effectively offer BC savings services. The results of our efforts have been released as a case study: Building Sustainable Business Models for Providing Financial Services to the Poor
This case study analyzes Cashpor's Business Correspondent model and describes the infrastructure used to deliver BC services. It studies the financial viability and strengths of Cashpor's business model and attempts to arrive at some general principles of financial viability.
Insights from the Cashpor project show that leveraging existing infrastructure, rather than creating a parallel BC infrastructure, helps not only to keep the fixed costs low but also proves beneficial in acquiring customers for the savings operation. The BC model is cost intensive at first, requiring initial investments in capacity building, technology, setting up processes and modifying them in tune with the field realities.
BCs need to be encouraged to offer an array of financial services, particularly by layering savings services on top of an existing infrastructure such that only marginal costs are incurred, which can be cross-subsidized. Cashpor, for example, is guided by the 'total customer profitability' concept in offering savings services whereby the total costs of providing a basket of financial services to the customers is covered through total revenue from that customer.
Finally, the BC model is a low return high cost model where scale and efficiency will be critical to achieving profits and making the model sustainable in the coming fiscal years.