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Alternate Delivery Channel (ADC) in Banks

The term Alternate Delivery Channel (ADC) generally used for Alternate Service Delivery Channel (ASDC) or Alternate Banking Channel (ABC) in the Banks for its services to the customers. Channel means the system of intermediaries between the producers, suppliers, consumers, etc., for the movement of a goods or service.

The augmented competition and rapid acceleration in trade & business, acquiring, and releasing technology has put all populations under a continuous technical revolution. Their advancement is no longer measured by their strength and readiness, but rather by their technological competence. Technology has given escalation to a new, peaceful furnished service named ‘Channels’.

A channel is a gateway for execution of a service. A channel can be an office, media, tool, or an application; it can be manipulated by human interaction or through a systematic front-end interface.

The ‘Alternate Delivery Channel (ADC)’ approach emerged as a result of a pressing need to ensure proper handling and communicating of scattered services, products, and/or commodities that were previously not following a systematic process flow. ADCs have evolved gradually and adapt to serve consumer needs at their convenience. ADC serves as an alternate to complement the existing delivery channels. At this stage, it cannot be considered as a replacement to the existing structured delivery channels, but rather as an advanced interface to leverage the use of any service that is also being offered through conventional channels. For more than 20 years, ADC has proven its ability to meet consumer’s expectations by ensuring accuracy, convenience, and timeliness in service 24/7.

In the banking sector, Alternate Delivery Channels are channels and methods for providing banking services directly to the customers. Customers can perform banking transactions through ATM / POS / Multi-functional Kiosks, contact the bank’s Call Center for any inquiry, access the digital Interactive Voice Response (IVR), perform transactions through Internet Banking, and even on smartphones through mobile banking, etc. These channels have enabled banks to reach a wide consumer-base across geographies.

ADCs ensure the smooth flow of regular transactions and provide banks with higher profits with lower operational expenses and transaction costs. “Channelize through channels” is the new paradigm for banking today, which in earlier times relied solely on the branch network – where expanding the business meant adding more branches at high establishment costs.

The evolution of ADCs has changed the dynamics of the branch network. The traditional branch services which included, Cheque/Cash deposits, Teller Services, etc. have now shifted to other channels; ADCs have now become independent of branch to provide unique services including, Cheque/Cash withdrawal, Foreign Exchange services, Funds Transfers, Bills / Fees / Service Charges Payments, e-trading / e-shopping, Agent Banking, and now even mobile top-ups. This exponential expansion of services has now made the customers more inclined towards ADCs.

One of the growing tools of ADC is the invention of mobile banking or m-Banking, which is now even changing the dynamics of ADC. With inclusion of thousands of mobile applications, mobile banking applications are now also becoming the part of the regular services provided by the bank. Customers are now expecting m-banking as a default service from the banks. Social Media has also set new standards and articulation in ADC, which is fully dependent on technology and its gadgets and will eliminate the entire need of any human interface. Social Media would create an environment of competition among international banks to acquire more customers and better business opportunities and, of course, by maintaining the highest level of security to ensure risk-free interaction.

As the chart below indicates consumers (U.S.) are indicating an increasing preference in both mobile and internet banking. These numbers will likely continue to grow year-over-year.

Development of main channels:

 ATM: During the 1990s, the number of active units in Europe rose by a staggering 50%. Originally only used to withdraw cash, the ATM has evolved to support a wide variety of services, including deposits and account details. To counteract the impersonal impression of the so-called “hole in the wall”, the Spanish bank BBVA has developed its “future ATM”, an innovative touch screen interface with customized shortcuts to reflect individual user requirements.

⇒  Telebanking: The first call center was launched in 1983 in the U.S. by MCI. This marked a shift by many organizations towards centralized customer service centers, often with an automatic reply service (IVR) incorporating voice recognition systems. However, despite these efforts away from personal interaction, the majority of call center activities still involve human representatives, particularly when dealing with transactions.

⇒ Online banking: Another channel to emerge in the 1990s but one which still showed low penetration by the end of the decade. Initially used to present an institute’s marketing platform, the websites are now enjoying a new lease of life as a door to the world of 24-hour online transactions. Some countries even prefer the instant access to online account information and transactions to that offered by traditional banking, as confirmed in a survey conducted at the end of 2009 by the American Bankers Association (ABA).

⇒ Mobile banking: This channel is relatively new but is already showing steady growth. Used in its early stages as a push/pull tool for information text messages, cell phone banking now supports personal account access and is forecasted to become the new mobile payment method or “digital wallet” of the future.

⇒Social media: Recent years have seen social media creeping up alongside cell phone banking. Banks feel the need to counteract the impersonality of our digital age by offering customers greater contact on a perceived one-to-one level. Although most social media platforms still rely heavily on marketing content, the trend is firmly set towards development of more interactive services.

On September 2010, the New Zealand bank ASB opened its first virtual branch on Facebook. This offers personal banking-related advice from 10 am to 6 pm, Monday-Friday but does not support actual transactions. While the options on this channel are still limited, this is indeed the first step towards utilizing a high potential and increasingly popular platform.

World Trend in ADC (An example of Kenya)

Engaging customers at the receiving end of remittance flows is perhaps the most important factor in driving Financial Services transaction volume. Banked customers have at their disposal many channels which compete with their mobile wallet: electronic funds transfer (ETFs), debit/credit cards, mobile banking and internet banking, and even cheques. However, for unbanked customers, the wallet is predominantly the only channel he/she has to make payments or transfer money.Unbanked customers have more potential to drive wallet transactions through P2P, bill pay, and retail payments. For example in Kenya, in 2006, only 26.4% of adults in the country had access to formal financial services, but by 2013, the percentage of adults that are formally included had increased to 66.7% – mainly driven by previously unbanked adults who are now financially-included via mobile wallets. Additionally, these newly included adults have contributed significantly to the $331M USD mobile money industry which facilitated financial transactions to the tune of 37% of Kenya’s GDP in 2014. To put things in perspective, the revenue of the Kenyan mobile money industry is about 12% of the country’s banking industry revenue. The message is clear: mobile money has become a key revenue driver and a critical source of competitive advantage.

Impact of ADC

Alternative channels are taken as a cost saving method that can be used to reach a large number of customers especially the low income market segment for business sustainability. Bringing the retail hours of operation of each branch in-line with historic consumer traffic patterns can have a significant impact on a financial institution’s bottom line. Channels like the ATM and Internet Banking enable banks to reach a wide consumer base across geographies with little effort. Alternative banking minimizes the cost of transactions, saves time, minimizes inconvenience, provides up-to-date information, increases operational efficiency, reduces HR requirements, facilitates quick responses, improves service quality and minimizes the risk of carrying cash. Banks can attract more low cost deposits by adopting alternative banking channels innovation. Customer deposits are cheap sources of funds thus it enable banks to maximize on interest spread, which results higher profitability.

Alternative banking channels are faced with risks including performance risk, financial risk, and operational Risk among others. Alternative delivery channels are prone to issues including Customers‘ reluctance to use electronic interactions for wealth management decisions, Cyber-attacks on portals, Server maintenance in order to support high traffic and unauthorized access and fraudulent transactions. These occurrences can have a negative effect on the financial performance of the banks.

Convenient Banking

Convenience is defined by the simplicity of design and the ability to access or open and manage accounts online or with a mobile device. Actually convenient Banking means ANYTIME, ANYWHERE, ANY DEVICE convenience in accessing and managing his / her own Bank account.

Few years’ earlier physical convenience mattered tremendously. Most customers banked with financial institutions right down the street. As recently as a decade ago, it was the only way to easily deposit money or get a loan. Today, consumers can open or expand relationships with a range of financial providers all over the world. Banking can now be ‘local’ to digitally engaged consumers worldwide.

This increased digital convenience poses a challenge for banks that have previously based their value on being part of a ‘local’ community. Today, local banks publicize their superior customer service and attention to community causes.

 

A paradigm shift to ‘global convenience’ is the new mentality that all banks need to grip if they want to flourish in the digital age. Consumers are all embracing brands that provide the ability to open and use accounts 24/7/365 without visiting a ‘local’ branch.

Better than Cash in NY

In October 2012, at a gala event in New York City, the BETTER THAN CASH ALLAINCE (BTCA) was officially launched. With a stated objective to “make the transition from cash to digital payments to achieve the shared goals of empowering people and growing emerging economies,” BTCA represents an important step forward in developing a unified industry voice for the effective deployment of new disruptive technologies. A major emphasis of the initiative is on expanding the universe of government and donor to person cash transfer programs (government to person, or G2P) as a means to enhance efficiencies, increase transparency, and ensure security and minimization of “leakage” through the use of new delivery channel technologies.

The truth remains that in developing economies most electronic payments still originate from cash-in/cash-out agent outlets with a relatively minimal engagement in the formal financial sector, including in the form of stored value and current, savings, and other formal financial sector instruments. To a large degree, this reality is driven by the limited engagement of formal financial institutions in electronic payment platform delivery. On the other hand, many banks are only interested in alternative channels as a means to reduce the delivery-cost barriers to historically unprofitable consumer market segments.

BTCA initiative brings a welcome effort to raise important financial inclusion issues at the policy level enabling and defining effective business and partnership models that maximize the value of alternative channels to the consumer. They are, after all, the ones who will ultimately decide what is better than cash.

Agent Banking worldwide

Agent banking is a retail outlet contracted by a financial institution to process clients’ transactions. Instead a branch teller, it is the owner or an employee of the retail outlet who conducts the transaction and lets clients deposit, withdraw, and transfer funds, pay their bills, inquire about an account balance, or receive government benefits or a direct deposit from their employer etc.

Bangladesh Bank issued the Agent Banking guideline as per authority conferred to it by Article 7A(e) of Bangladesh Bank Order, 1972, Section 45 of Bank Company Act, 1991 and Section 4 of Bangladesh Payment and Settlement Systems Regulations, 2009.

The services that may be provided by bank agents can be divided roughly into four categories: • Transmitting information • Processing information • Cash handling • Electronic funds transfer etc.

Brazil is probably the most developed market where banking agents have significantly increased financial system infrastructure. Pioneering banks, microfinance institutions, and mobile operators started to experiment with banking agent networks in various countries around the world such as Brazil, Peru, Colombia, Kenya, Mexico, Pakistan, the Philippines, and South Africa. Here governments concerned about expanding financial sector infrastructure have adjusted regulation and are providing incentives for banks to reach new geographies and new client segments through banking agents.

The use of agents can trigger operational, technological, legal/compliance, reputational, and other risks. The range and complexity of services provided by agents do not necessarily translate into significantly increased attention required by the supervisor. Rather, it more typically requires increased attention on the part of the bank due to the bank’s ultimate liability for actions of its agent.

Banks manage and mitigate risks triggered by the use of agents through various policies and procedures, internal audits, and review processes. Regulations may specify the required policies and procedures and corporate governance arrangements or the supervisor may impose them.

Challenges of ADC

While banks have succeeded in leveraging available technology and provide alternate avenues to customers for banking services, the challenge it faces today is optimizing the usage of these channels. While ATMs are becoming popular among customers for cash withdrawal, the other channels viz., internet banking, mobile banking, etc. are less popular. The alternate channels have greatly reduced the transaction costs for the banks. But banks can realize the full benefit of the roll out of alternate channels only if there is a perceptible increase in the usage by customers. It is imperative therefore those banks take steps to regulate the customers to move to the new modes of banking so as to cross the minimum critical mass.

Customer education plays an important role to induce customers to use ATMs, e-banking, mobile banking, etc. They should remove the fear of cyber frauds from the minds of customers by educating them on proper use of the technology. They should appraise the customers the steps taken by them for securing the systems. They should also constantly educate the customers on safe keeping of the plastic cards, securing USER ID and password, periodically changing the passwords, not sharing the passwords with any one, known or unknown, etc.

Banks should train their staff on new channels, products and services and make them fully conversant with the new technology based banking products and services. They should make all staff to use them so that they in turn can market / cross sell these products better and educate the customers on the use of new devices, products and services. Banks must realize that giving a hand up to the customers on technology products, rather than handouts will help their business strategy and provide opportunities to optimize these services.

Many consumers are apprehensive of using their credit and debit cards over the internet because of the perceived risk of frauds. They do not shop online because they do not trust online payment systems. Banks would need to address these issues effectively if they have to remain customer centric.

It is as important that the banks remain as transparent, as their customers remain authentic. The main objective behind integrating banking services with technology is, undoubtedly, convenience. Technology has now become familiar to most individuals, to an extent that it influences their lifestyle. It, then, becomes vital for businesses to distinguish themselves in the digital space with unique offerings.

To cope up with this growing trend, ADCs must be backed by reliable technology; banks have to ensure data trafficking, server capacity, privacy issues, and disaster recovery sites. Technologies should be under continuous review and evaluation to avoid any adverse situations that could affect customer satisfaction.

        References: 1. Better Than Cash?: Reflections on “The Journey Toward Cash Lite” from a Practitioner by Jesse Fripp, SBI Vice President. 2. American Banker Association Journal 3. Singhnia H, “Economic Issues Global and National – A Business Perspective” 4. Hiru Bulani, “Globalisation – an Overview”, Heinemein Asia 5. Electronic Commerce 2008 E.King, J.Marshalls;

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