Friday, February 8, 2013

Agent Banking in China: The Thousand Mile Journey has Begun

Chinese philosopher Laozi is quoted as saying that a thousand mile journey begins with a single step. I thought of that proverb when I recently had the opportunity to visit the far north east of China to investigate opportunities for agent and mobile banking in rural communities. As I outlined in my previous blog on the opportunity for mobile money in China, there have been positive developments from a regulatory perspective recently. The People’s Bank of China is supporting a pilot this year to allow agent banking in some provinces with an aim to develop financial services down to the village level.  This is very exciting, as although China has banking penetration of 64%, access to finance through branches, ATMs and other channels is another matter. 

Village Life in Rural China in Winter
I had an interesting insight when I visited a village in China this week. By all accounts, China has nearly 1 million villages, and from what I understand, it is unusual for a village to have a bank branch or ATM (although I would love to see research on the distribution of branches at the village level in China). This presents significant challenges to the residents, who will often have to travel many kilometers to reach a branch. Despite the fact that the cash economy prevails, this barrier of access still presents issues, as rural residents will often receive pensions or subsidies that will be paid into a bank account. In addition, many villagers will spend much of the year working in larger cities and industrial areas, so domestic remittances are common. Accessing these payments when you live 30 kilometers from the nearest branch, you don’t own a vehicle and it is minus 30 degrees presents significant challenges!

Typical Grocery Store in a Chinese Village
A merchant I spoke to was overcoming these challenges in a fascinating way. He runs a small grocery store in a village of a couple of thousand people, and his customers shared their frustrations on not being able to deposit or withdraw cash from their bank accounts without visiting the nearest town some distance away. His solution was simple and effective. He has set up an Internet banking account with a PC and modem, and now does electronic transfer of cash from his account to the recipient for a small fee. He also allows withdrawals when the sender has transferred to his bank account. He sets transaction limits so he can manage his own liquidity and he keeps a log book to track transactions. He has also branched into prepaid airtime direct from his bank account where he tops up the customer’s phone from his balance and receives a small cash commission. In essence, he is a banking agent, albeit on an informal basis.

I am always amazed at the ingenuity shown by customers and agents in emerging markets. This example demonstrated to me that firstly, there is absolutely an unfulfilled need for agent banking in China, and that secondly smart merchants will realize this need and will embrace formal agent banking solutions as they develop. I have said previously that I believe China and other markets in Asia like Bangladesh and Pakistan will eclipse anything happening in mobile money in Africa once the programs gather momentum and the regulatory environment is established. China is on the cusp of an exciting time in financial inclusion. 

- Brad Jones