Development funders have good reasons to support the expansion of agent networks into rural areas. Research has shown that having agents nearby can trigger the adoption of digital financial services (DFS) and advance not only financial inclusion, but other development goals in rural areas that are home to many of the world’s poor.
However, there are many obstacles to developing viable rural agent networks. Population sparsity, poor infrastructure and low connectivity drive up the costs of managing agents for DFS providers and limit revenue potential for agents. CGAP has identified solutions that policy makers, regulators and DFS providers can implement. But these market actors do not always have the required capacity and incentives, as these solutions require risk taking, innovative partnerships and significant investment ahead of financial returns.
In this context, funders have a critical role to play. Below are some ways funders can align incentives and build capacity among market actors to encourage the expansion of rural agent networks.
1. Build understanding of and stimulate demand for agents
People in rural areas generally have different needs for financial services than people in urban areas. The use cases that DFS providers have digitized in urban areas, such as bill payment and airtime top-up, may not be as valued in rural areas that are mostly cash based. Rather, demand in rural areas often centers around transfers between people, businesses and government, within agriculture or rural commerce.
DFS providers often have more experience with urban markets and can be reluctant to invest in rural demand-side research given the uncertainty of financial returns. Funders can incentivize them by co-funding research and building their capacity to develop new services. Funders can also incentivize providers by supporting measures to stimulate demand. Examples include helping to digitize government-to-person (G2P) or agricultural finance, as USAID is doing in Liberia, and financing communications campaigns to increase rural customers’ awareness and trust in DFS.
2. Support business model innovation
Share risks to encourage pilots and rural expansion. Building agent networks in rural areas requires DFS providers to recruit agents who tend to be smaller, more independent and less formal than their urban counterparts, who are often parts of chains or networks. Selecting, recruiting and training these new, unstructured types of agents requires a high upfront investment. Competitors can often free ride on these investments when hiring agents already trained at the expense of the first provider. This can disincentivize DFS providers from building out rural agent networks. To help address these concerns, funders can subsidize pilots or share risks. Examples include FCDO-funded technical assistance to DFS providers in DRC to enroll new agents, and a UNCDF startup grant to set up and capitalize agents in Fiji (funded by the Australian government, the EU and the New Zealand government). Equity could also be provided to share investments linked to expansion and growth in rural areas.
Encourage partnerships to improve viability. DFS providers also tend to be concerned about the economic viability of rural agent networks, given high operating costs and low revenue potential. But the viability of a network can be greatly improved by broadening the range of services offered by agents to generate more transactions per customer — offering a greater variety of financial services and adding non-financial services. It requires that DFS providers partner with other service providers such as telcos, fast-moving consumer goods distributors, agribusinesses, warehouse managers, e-commerce firms and government services. It can also require partnerships with new types of actors such as agent network managers, which manage and connect agents with different providers, or fintechs, which provide software and data solutions for agent and liquidity management. But providers might lack the incentives and capacity to broaden their usual circle of partners and test new partnership models. Funders can help by providing networking opportunities, sharing knowledge on partnership models (as UNCDF and the Bill & Melinda Gates Foundation are doing in Ghana) and providing the capital to test these models (as IFC did by supporting new agent business models and their expansion to rural areas in Africa).
3. Encourage regulators to tailor policies and regulations to rural contexts
To encourage regulators to take rural specificities into account when designing policies and regulations for rural agent networks, funders can facilitate public-private dialogue around constraints faced by providers to serve rural communities and the innovations necessary to address them (e.g., e-KYC, agent non-dedication, and a progressive move toward agent interoperability and non-exclusivity). Funders can then help strengthen the capacity of regulators to revisit the regulations and enable these innovations.
4. Strengthen the existing infrastructure
Improving rural infrastructure can also significantly reduce provider costs, consequently improving viability and incentivizing providers to serve rural areas. Financial infrastructure (e.g., rural bank branches) supports agent liquidity management. Widespread mobile connectivity and national ID systems make client and agent onboarding easier. Data tracking systems help providers and regulators identify outreach issues and improve their approaches. Yet policy makers and private actors might fail to see the importance of this infrastructure or lack the incentive to strengthen it because their constituents might be in urban areas. Funders can raise awareness and share the costs of these infrastructure projects, like the World Bank is doing in Morocco.
5. Think of agent networks as a market system
All these solutions center around measures to stimulate demand and improve supply, regulations and infrastructure. But one thing that that has become increasingly clear over the years is that ensuring impact isn’t just about one solution or the other; it is about all of these things working together in a market system that adapts and innovates to serve the poor. Demand, supply, regulation and infrastructure are all essential rules and functions that together enable agent networks to reach the rural poor. It is essential for funders to consider how all these functions work together, rather than support one in isolation of others. Improving regulation will not be enough to incentivize providers to target rural areas if providers do not see any business potential; providers will not see any potential if there is no demand; demand will not exist until relevant products are developed; providers will not tailor products until the infrastructure and regulations enable them to do so. Only a market system approach that considers all rules and functions can turn this conundrum into a virtuous circle.
6. Adopt a flexible and collaborative approach
The best way to build out a rural agent network depends on the country context. There are success stories from around the world, but what has worked in some countries won’t necessarily work in others. For example, in Kenya, the growth of rural agent networks was initially due to the huge need for person-to-person (P2P) urban-to-rural remittances, and the mobile network operator was best positioned to set up the agent network. In Colombia and India, network development was driven by the government's desire to expand G2P transfers to rural beneficiaries, and banks had a competitive advantage and played the lead role. In Kenya, the mobile network operator managed the whole value chain, while in Colombia, banks heavily relied on agent network managers to onboard and manage agents.
Hence, supporting agent networks requires that funders take the time to understand the context and to test solutions. Diagnostics should aim to get an understanding of stakeholder incentives and capacity. Project design should provide the time and flexibility to pilot solutions and adjust as needed. It is likely that some interventions may not lead to the expected outcomes, but this is part of any innovation process.
The path forward
Supporting rural agent networks is unlikely to result in a “quick win” for funders. But with risk comes reward — in this case, the possibility to improve rural population access to basic services and economic opportunities. Funders with local capacity, flexible processes, a wide range of funding instruments and the capacity to convene and collaborate with a variety of actors, are in a strong position to support rural agent networks in the countries where they operate. Other funders can also play a role, either by outsourcing project management to an implementer or by contributing to a program led by other funders or government agencies. Building rural agent networks is not an easy task, but it is one that is likely to significantly advance development goals.
Over the next two years, as part of a broader effort on agent networks for digital financial inclusion, CGAP will work with partners to test how funders can best support CICO network development.