In November 2019, Taiwo Iredeji Adedotun had a difficult decision to make. After a few months of working as an auditor at a microfinance bank in Lagos, Nigeria’s commercial capital, he wanted a change. Just 23 years old at the time and earning a net salary of $85 (35,000 naira) per month, Adedotun wanted to increase his income. “I started asking contacts about business ideas,” he told Rest of World.

One of his older colleagues introduced him to the world of agency banking. Agency banking, also called agent banking, delivers essential financial services to customers through a network of third-party agents on behalf of a licenced financial institution or a mobile money operator. So instead of traveling to far-off metropolitan areas to withdraw money, users can reach out to an agent banker, deputized by a large financial institution or phone company, to provide access to cash withdrawals, deposits, and transfer funds.

Adedotun raised $340 (140,000 naira) in startup capital to launch his own agent banking business. He registered and paid around $50 for point-of-sale (POS) devices and started his first shop — a tiny 1 meter by 2.1 meter kiosk.

Location is key to being an agent, said Adedotun. He located his first shop off the busy Idiroko-Sango highway in Ota, a commuter town less than 20 kilometres from the outskirts of Lagos. A few minutes down the road is the Faith Tabernacle, headquarters of Living Faith Church Worldwide, a megachurch with a sitting capacity for over 50,000 people, promising regular foot traffic past his shop. Everything was set.

In the first few months in operation, his business grew gradually, he said. His younger sister worked at the shop in the morning and afternoon, while Adedotun split his time working his day job and spending the evening at the shop. His small shop helps people send and receive money while he earns a commission between 25 cents (about 100 naira) and $2.50 (about 1,000 naira) as an operator. On average, before the pandemic, the shop completed around 25 customer transactions per day, worth collectively over $120 (50,000 naira).

At the end of December 2019, his first month in business, he was making slightly more money just from commission revenue than he was from his day job’s salary. By March 2020, an excited Adedotun quit his banking job, opened a second shop, and started working full time as an agent. Then the pandemic hit.

By the start of April 2020, Nigeria’s confirmed Covid-19 cases spiked to 139 cases with two fatalities, prompting new health measures and an extension of the initial two-week long lockdown that crippled formal businesses in three Nigerian states, including Ogun, home to Adedotun’s agent banking operation. The new health measures limited bank opening hours and capped the number of customers. This led to longer queues at banks, including at the ATM, where some banks included new machines to accept deposits from customers. These restrictions forced customers into the realm of agency banking.

Adedotun said his business has seen significant growth over the last year. He currently has five shops just outside Lagos and employs four people, each earning a fixed salary of $60 (25,000 naira)  per month — slightly below Nigeria’s minimum wage of just over $70 (30,000 naira), but still more than half his previous salary. Combined, his shops process hundreds of customer transactions monthly, with revenue from commissions frequently topping $1,200 (500,000 naira) .

“Business has been good,” he said.

Since the mid-2000s, agent banking has emerged as a strategy to improve financial inclusion in many Global South countries. The Brazillian government first pioneered it to provide banking and other financial services to millions without bank accounts.

Agency banking is one arm of mobile payments. “Agency banking is really a distribution channel for last-mile delivery,” said Raliat Sunmonu, vice president of the Middle East and Africa Program Management at Accion, a global fintech impact investor. According to data analyzed by Alliance for Financial Inclusion (AFI) in an August 2018 report, an estimated 140 million or 87% of Brazil’s adult population was banked at the time, up from 60.8% a decade ago, partly thanks to banking agents.

The model caught on famously in Kenya. In 2007, Safaricom, the country’s biggest telecoms company, introduced M-Pesa, its mobile money service, a combination of mobile wallets that serve as bank accounts for customers and agent services. Thanks to M-Pesa and other financial initiatives, 82.9% of Kenyans now have formal financial services, compared to just 26.7% in 2006, according to a 2019 report by the Central Bank of Kenya.

Since 2009, the Central Bank of Nigeria (CBN) and some local fintech startups have been aiming to replicate the success of agent banking and mobile money models in Nigeria.

“When we started, our goal was to bank the unbanked and bring financial services to the mass market,” said Jay Alabraba, co-founder and director of Business Development at Paga, the Nigerian mobile payments company." In 2011, two years after its founding, Paga launched its mobile payments platform in the West African country at a time when a license didn’t exist and when fewer than  21% of Nigerian adults had a bank account.

Agency banking has risen to become part of a broader conversation about the “sachetization of the Nigerian economy” — which essentially means cutting down products and services to smaller, affordable sizes for a predominantly poor mass market.

In a 2018 survey by Enhancing Financial Innovation & Access (EFInA), 65% of Nigerians said affordability barriers, such as irregular income and the cost of maintaining a banking account, have discouraged them from formal banking institutions. A quarter of respondents said “banks are too far” which is unsurprising given there are fewer than 8,000 bank branches in a country of 200 million people, and most branches are concentrated in the big cities.

Between 2010 and 2018, a flurry of regulatory activity brought in new regulations for agent banking and opened it up to dozens of companies. But despite these changes, agent banking grew slowly. In early 2019, Iniabasi Akpan, country manager at Chinese-backed OPay, one of Nigeria’s biggest agency banking companies by transaction value, shared that very few people in the financial sector believed in the model’s viability.

“You have to get the commercials right,” Accion’s Sunmonu explained, noting that agency banking is a “high-volume, low-margin business.” Companies — banks and fintechs — looking to make inroads to this industry with third-party agents need to do so in a profitable way.

But over the last three years, the industry has entered new growth territory, picking up significant interest from customers, agents, companies, and even investors. As a distribution channel, the model is forcing banks to rethink their retail strategies, and it has also spurred the rise of a new crop of fintechs that moved quickly to dominate the agent banking landscape.

OPay, TeamApt, Paga, and MTN, Nigeria’s telecoms behemoth, have emerged as four of the biggest agency banking fintechs in the country. Last December, OPay claimed its transaction volume jumped to $2 billion monthly, up from about $300 million in November 2019. And TeamApt, a newcomer to the industry in 2019, gained traction. It claimed it had 50,000 agents and processed $3.9 billion in transactions by the end of 2020.

And the revenue of these fintechs — particularly MTN and OPay — is on track to match and possibly overtake the digital banking revenues at many Nigerian banks, recent research showed. Now banks are doubling down on agency banking.

In 2020, two of Nigeria’s biggest banks, Access Bank and FirstBank, reported explosive growth in their agent banking units with around 59,000 and 100,000 agents, respectively. Access Bank has said it added 4.46 million new bank customers through its agents within the last two years. FirstBank, the commercial bank with the largest agent footprint, reported a 167% growth in annual agency banking transaction value to $16.2 billion in 2020, compared to the previous year. Both banks plan to recruit and increase support to agents across the country.

What is fueling the growth of agency banking in Nigeria?

One major enabler of agency banking in Nigeria is the relative ease of becoming an agent. While agents are typically depicted as dedicated financial services outlets within communities, today, anybody with a shop can serve as an agent for a bank or a mobile payments company. Many mom-and-pop shops and informal traders, among others, are doubling as agent outlets, with a POS device in their possession. A June 2020 study by EFInA showed 30% of Nigerian agent outlets are dedicated shops, while over 60% operated it alongside their regular business.

The absence of exclusive arrangements — an agent can serve multiple companies simultaneously — has introduced incentives to attract and retain agents. However, competitive pricing and a reliable platform are two things that keep agents around, said Tosin Eniolorunda, CEO of TeamApt.

Pricing is tricky: while companies have fixed fees on transactions, agents frequently take advantage of the industry’s flexible fee structure to adopt higher pricing on customers, creating an inconsistent pricing regime across the country. This isn’t often a problem in urban locations where fierce competition among agents limits such practices; however, in rural areas or remote neighbourhoods — the areas with the highest rate of financial exclusion — this lack of consistent pricing could lead to exploitation, undercutting the value of agency banking for the unbanked.

And agency banking does have some challenges. For one, agents have to contend with unstable internet connectivity, particularly in rural neighborhoods where broadband access is limited. And in many locations, agents also struggle with new levies by regional governments hell-bent on collecting taxes, which many agents believe is unlawful and unfair. “If you don’t pay, they’ll harass you,” Adedotun said.

But that low barrier to entry and Nigeria’s rising unemployment rate — which stood at 33% in March 2021 — is pushing even more people to agent banking. In 2018, the Central Bank of Nigeria set up the Shared Agent Network Expansion Facility (SANEF) to recruit, train, and support more people to become agents. SANEF also provides some funding to companies, incentivizing them to expand agent networks in underserved cities across the country.

But crucially, the diminishing importance of bank branches to both customers and the banking industry is also driving interest in agent banking. While the financial industry has been lowering the access barriers customers have long complained about, opening new branches to reach more people in small towns and rural areas is not a popular option.

Banks are expensive to operate, said financial industry insiders. Building a new bank branch in Nigeria could cost more than $600,000 (250 million naira) to start up and possibly more in monthly operating expenses related to staff, ATMs, security, and off-grid electricity fees to offset the country’s unreliable power supply, estimated one industry source. In recent years, banks and other financial services providers have started to realize they don’t need to make these hefty outlays, said Henry Chukwu, a program specialist for Agent Networks at EFInA. 

“It is clear that there is a significant portion of the population that is underbanked, and there is a ton of services that can be brought to these people,” Paga’s Alabraba said. His company is now broadening its attention beyond the unbanked after seeing a steady growth in its digital wallet adoption in 2020.

Today, agency banking companies have less-stringent terms for getting a POS device but require agents to meet a transaction threshold every month, Adedotun explained. “When I fell below the threshold last year, the company asked me to return the device,” he said. “But I reapplied and got it back.” Like gig workers, these rules incentivize agents to remain productive or risk losing the essential tool they need to operate.