Merchants in the Philippines are finding they have the capacity and the interest to offer financial services to consumers as a new line of business. However, in order for these new ventures to succeed, a network of providers will need to be selected, and issues such as cash management, investment levels, large loan disbursement capability, profitability, and agent network management will need to be addressed.
Those were the findings of a recent study involving 62 merchants that were assessing their suitability to serve as cash-in/cash-out agents for Nationlink, the operator of an interbank network of ATMs. Survey participants included businesses in urban, semi-urban, rural, and island locations—all areas that are typical locations for microfinance institutions (MFIs) to operate and reach the most customers.
Researchers looked at factors including cash flow, profitability, scale and type of business, bank usage, years of operation, security, and infrastructure to determine if businesses were currently equipped to serve as agents. Additionally, they surveyed interest and level of enthusiasm for offering the service, as well as the merchants’ expected commissions and desired volumes.
Sari sari stores, small neighborhood convenience shops that are often individually owned and operated, accounted for nearly 20 merchants surveyed, about a third of the total. The others included hardware stores (14), general stores (11), pharmacies (10), gas stations (4) and a few that sold assorted goods including water, salt, and cell phone accessories.
Overall, the surveyed merchants had an average of $495 per day in purchases, but sales volumes varied widely between businesses. Gas stations and general stores handled the most business, while island and sari sari stories had much lower sale volumes. Profit margins ranged from 8% to 12%– comparable to the margins merchants could expect operating an agent business. The expected profitability from providing financial services to consumers as a ratio of commissions to current profits per day ranged between 2.9% for gas stations to 35.8% for sari sari stores. The annual return on investment on a PHP 50,000 (1,072 USD) investment by the merchant in a minimum balance account is estimated to be at 120% of a 10 PHP (0.21 USD) commission per transaction, not including cash management overhead.
The survey also showed a wide variance in bookkeeping practices. Overall, surveyors found that hardware stores, gas stations, and pharmacies were the most capable at maintaining accounting books. They recommended that training or structured account books be provided to the other merchants. Almost all businesses were registered and more than half appear to pay taxes.
With the exception of island merchants, the majority of store operators had access to banks. Almost half of the general and sari-sari stores and more than 90% of the other stores had bank accounts.
Only about a quarter of island merchants had bank accounts and these storekeepers also had to travel the longest distance (75 minutes on average) to get to the nearest bank. Researchers noted that this presents a potential area of opportunity for cash-in/cash-out services, given that customers would have similar transaction costs to go to a bank directly.
In most cases, respondents expressed a strong interest in becoming service providers— 86% agreed to attend an agent training program. However, readying stores to offer agent services presents some hurdles. Current cash balance levels at most shops do not appear sufficient to handle the transaction level of a typical agent. Although average end-of-day cash balances were highest at gas station and hardware stores, they were still only sufficient to handle from one to three loan disbursements.
A few merchants also expressed a number of concerns, including becoming targets of crime, cash handling becoming a burden, frequent trips to the bank, and cumbersome accounting. Merchants with prior experience with GCash or Smart Money, the Philippines’ two major mobile banking and payments systems, were also wary of the level investment on their part and other specific responsibilities.
For the service provider to offer services to MFI customers, merchant networks also pose challenges. One challenge is forming and managing an agent network that can include roughly 50 agents per branch office. Establishing the correct insurance against theft may also be challenging, as well as balancing cash-in and cash-out at the end of the day. MFIs must also ensure that core repayment collection is never compromised.
Overall, hardware stores, general stores, pharmacies and gas stations look to be better candidates to serve as agents than sari sari stores, due to the small scale as well as limited infrastructure and cash handling ability of sari sari stores. However, since they are the only option on islands, they have an infrastructure comparable to island standards.
Going forward, MFIs and merchants will need to evaluate the level of investment for a deposit or settlement account and the effective profit on transactions. For now, survey results seem to indicate that the merchants’ desired commission appears within an acceptable range and compares favorably to ATM fees.