Increased smartphone penetration and GSM coverage are setting the stage for digital finance & commerce (DFC)’s success across emerging markets, yet certain countries are experiencing a plateau in usage. The ability to effectively distribute financial services and concurrently educate consumers is central to the progression of both DFC and financial inclusion, and may be the weakest link in the DFC ecosystem. Although the construction of an agent network is accepted as one of the most critical steps in DFC deployment, the mere existence of a distribution network does not translate into DFC success – it only provides the skeleton of a system. Agents are the physical foundation of DFC, providing the medium for digitizing and disbursing cash and equally educating the consumer on how to use the services. The maintenance of these agent networks is as important of a factor to DFC success as its creation.

Distribution networks are live, changing structures that require nurture, investment and careful strategy. Perhaps service providers need to better tend to their distribution networks to ensure that they are healthy and properly managed. According to CGAP, the emergence of large, well-functioning agent networks is a “game changer” for financial inclusion, and the continued upkeep of these agent networks is debatably the most vital component for extending DFC to unbanked populations.

Evolving Models Over Time

The GSMA defines a good agent network as one that is ubiquitous, trusted, affordable and highly liquid. During the initial deployment phase of DFC, it is common practice to carefully consider which type of distribution will be most appropriate for a given launch, and the relative prioritization of the four key factors. For example, if speedy, pervasive coverage, or ubiquity, is needed in a low-cost manner, a partnership model may be preferred to leveraging already established agents in remote areas.

Overall, most of the steps for a proper DFC deployment revolve around creating and managing the distribution channel. From the get-go, selecting a clear distribution model, and determining the strategic alliances that will be at the center of that model, will be a defining characteristic of that network, but the model is not, and should not remain, static. Based on the distribution requirements, agent networks will likely require evolution. As the layers of agent networks become more sophisticated, each level needs to be clearly segmented and appropriately managed. The network should ultimately be managed as an entirely different business model from the DFC service. Different structures are required for rural and urban agents, as well as agents that perform transactions and those who register new customers.

In the case of EasyPaisa in Pakistan, the goal of the MNO in the initial launch was to build the DFC network quickly and inexpensively, and thus Telenor Pakistan decided to achieve this by leveraging their current GSM distributors as DFC agents. However, due to the fact airtime voucher sales both offer more commission and necessitate less education and time with the customer, many agents refused to offer the DFC service. Operators that build off of pre-existing airtime distribution networks must recognize that airtime is often more commercially viable for agents and thus investing in the training and distribution of more complex offerings may appear less attractive.

While Telenor Pakistan was ultimately able to overcome this obstacle through good relationships with distributors, they were eventually forced to readdress their model. Demographic data illustrated that their airtime agents were not adequately registering new customers or able to provide customer service for more sophisticated propositions. In response, the MNO invested heavily in branding and marketing to draw new customers since they knew their agents would require significant growth in its customer base to remain competitive. They also launched “Over-the-Counter”, or OTC, transactions, allowing agents to transact on behalf of the customer, who then do not need a mobile wallet, and thus enabling a less hands-on approach with the customer.

This model shift attracted many more agents and allowed customers beyond their mobile subscribers to use the service. As competition rises, however, the OTC model may require reconsideration for many reasons, as discussed in a recently published Mondato Insight. The issue for agent networks is that as OTC hands over ownership of the customer to the agents, operators become vulnerable to the competition wooing their agents. The good news is that while OTC continues to be a substantial piece of the DFC game, growth rates of OTC are decelerating relative to account adoption. Last summer, the State Bank of Pakistan announced that all OTC transactions require the presence of a biometric national ID. While it’s unclear whether this announcement is the sole reason for the deceleration, the decrease in users and new government requirements means that EasyPaisa will need to closely monitor and study their users and prepare for another shift if necessary.

Incentivizing from Airtime to Mobile Money and Beyond

EasyPaisa is not the only telecom operator, however, who has built its DFC distribution network from the foundation of its airtime agents – MNOs from across the globe have modeled this approach. For agents, airtime is a “cash cow”, with higher margins and immediate cash. With DFC, commissions are offered as a lump sum at the end of the month, and many operators are guilty of late payments. MNOs prefer the lump sum payment because if a larger sum is received at the end of the month, agents are more likely to invest in their business and convert the commission into float. Thus, the need for timely rewards and promotions to those agents who do achieve high levels of transactions is essential.

Commissions and dynamic incentives for agents must be carefully managed to suitably motivate the agents to integrate DFC into their product offerings, as well as to ensure that agents do not migrate to the competition. Incentivizing agents requires those managing the network to develop a segmented understanding of the business models of agents. The needs of ranging types of agents, like super/ master agents, or retail agents, vary depending on their business. At minimum, agents should be assured that the commission for DFC is more than their least profitable good at any given time, which is not necessarily a static margin.

According to the Gates Foundation, between 30 and 50 transactions are required daily for agents to be profitable. The issue of managing float, which represents approximately 33% of the cost of managing their business, has become a concerning hindrance for both agents and customers. Because many markets do not yet have a substantial DFC ecosystem, the ability to cash-out is essential for end-users. If agents do not keep enough float on hand or if they are not incentivized to offer cash-out, end-users may not feel comfortable using the service.

Nomanini, a social enterprise that has developed a payments platform for micropayments, has been lauded for its success in managing distribution networks in the informal retail sector. According to Vahid Monadjem, Nomanini’s Chief Executive Officer, the informal retailer has become a pivotal actor for financial inclusion, but in order to motivate these retailers, the process must be simplified.

“The average informal merchant makes 10-15% of their sales in the morning, when people are on their way to work, and 60% in the evening when people are on their way home. This means that the majority of their business comes from barely 4 hours and so many merchants cannot afford to lose that valuable time registering new customers or troubleshooting.” Vahid Monadjem, CEO of Nomanini

He emphasized that the merchant experience needs to be optimized, which is why Nomanini’s focus has been on providing merchants the tools and service management layer to ensure that they are able to manage liquidity and turn a profit.

Another example of a network-focused approach is seen with iKhokha, a mobile payments solution targeted at merchants across South Africa. The company developed a low-cost payment device that enables retail outlets to accept electronic payments. Recognizing that the SME market requires more affordable hardware, as well as education, support and capital, iKhokha’s solution integrates their technology with the benefit of an education and customer support system, training and monitoring of activation and usage rates, as well as an option for a cash-advance to reinvest in the merchant’s business. Working closely with the SMEs to build a successful business ricochets to the customers, who are then eager to try the technology.

Go Big or Go Home

With global players salivating over the DFC success found in markets like Kenya and the Philippines, it is no surprise that various digital payment services are being deployed as quickly as they can be developed. As of last year, over 270 mobile money services were available in over 90 countries. It is clear that stakeholders are investing in the deployment of DFC technology, but without the appropriate investment in maintaining the distribution network, services are bound to see registrations, but not necessarily usage.

The main barrier to usage is the lack of initial and incremental investment in understanding and building agent networks, according to Jennifer Barassa, Founder & CEO of Top Image Africa, a below-the-line marketing firm, which currently operates agent networks in nine countries across Africa. It has been shown and proved that a copy-and-paste approach to agent networks does not work, Barassa explains. Top management needs to allocate adequate funds to appropriately and continuously invest in the training, marketing and branding their agents require.

Agents are the face of any given DFC service. They answer questions and perform the transactions, so it is important to assure that they are properly trained in the technology, as well as the corresponding customer service and even business management, when relevant. In countries where literacy rates are low, face-to-face training, with high levels of interaction with the agents, needs to be integrated – either at a central location if the agents are urban, or at local levels in rural areas. SMART Money in the Philippines, for example, organizes full day training sessions for all new agents solely focused on KYC (Know Your Customer) requirements.

While all stakeholders are keen for active agents, they often fail to dole out the commissions and promotions that reward and empower agents. A GSMA study found that systems with different classes or categories of agents are more empowering to those who achieve. In addition to financial rewards, agents associate value to brand and marketing novelties, like new t-shirts or promotional items. When the service invests in the brand, agents become more motivated. Agents that feel proud sporting their brand and feel content with their commissions create a ripple effect. The population then associates the service with money and success, and as a result, attributes more trust to the brand. In the same context, when agents are frustrated with commissions or fail to maintain adequate liquidity, those woes quickly trickle down to the customer.

Facilitating the Transformation

Low consumer confidence in financial institutions is often cited as a major barrier to financial inclusion and DFC uptake in emerging markets. In order to overcome this hurdle, the issue of trust must be addressed. Trust can only be built through the branding, marketing and servicing brought to the market by the distribution network. In order to construct a healthy system that encourages trust, the agents in that system must be properly trained, as well as appropriately compensated, incentivized and monitored.

To sum it up, across the board, successful DFC platforms require massive investment in agent networks. Building upon GSM distribution is only the first piece of the puzzle; there is a much greater investment necessary to attain meaningful market depth and usage. The mounting importance of distribution networks is illustrated by the exponential increases in agent numbers globally. Although the growth and sophistication of agent networks call for more attention to, investment in, and management of distribution strategies, these changes also mean that the DFC industry is becoming more mature. And that is something the industry must start to come to terms with.

To learn more and continue the discussion concerning the development and maintenance of robust distribution networks, join us at Mondato Summit Africa 2017, our fourth annual digital finance & commerce thought leadership event taking place in Johannesburg, South Africa on May 9th & 10th.

Image courtesy of WorldRemit Comms

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