How Chile's BancoEstado keeps cash available to entire nation

While digital payments have made significant inroads in Australia, Europe and North America, in Latin America, banknotes and coins remain the chief medium to settle retail transactions.

Not surprisingly retail bank branches in Latin America are often full of people — customers and non-customers — queuing up to deposit money, cash checks, pay bills or conduct remittances. 

Providing access to cash in rural areas has proved challenging. Many Latin American countries lack a dense retail branch network outside the main commercial cities. And established banks don't offer convenient access to ATMs as regulation denies possibilities for independent ATM deployers.

To get around that, some financial institutions in Latin America have examined every aspect of their cash management journey, identifying inefficient processes and areas where new technology can make a difference. Some of their initiatives to solve the problem work in tandem with established financial institutions; others aim to work around them.

Enter correspondent banks

An example of the former is a remote banking service commonly known as correspondent banking. A correspondent or agent bank can facilitate wire transfers, conduct business transactions, accept deposits, and gather documents on behalf of another financial institution.  

Correspondent banks first emerged in early modern capitalism. Financial institutions envisioned a contract where one financial intermediary provided services on behalf of another for a fee, charged to the agent bank, the customer or both. A correspondent bank typically keeps cash deposits from the agent bank to facilitate customer transactions. 

The relationship has allowed many banks to grow their footprint substantially. For instance, thanks to its correspondent banking agreements with London-based Midland Bank, HSBC was able to claim the accolade of "biggest bank in the world" in terms of assets in the 1940s and 1950s.^[1]

Correspondent banking grew as long as it enabled international trade in the absence of electronic transfers and global banks. Interestingly, in the U.S., correspondent banking also enabled small- and medium-sized banks to provide commercial services with restrictions and contribute to the geographic growth of retail banks and retail bank branch networks.

According to a recent survey by the International Monetary Fund, correspondent banking remains an important although less significant function at the turn of the 21st century.^[2] The trend continues to facilitate foreign exchange operations, international trade and cross-border remittances.

Correspondent banking thus emerged and has been used in financial markets primarily to solve the problem of geographic distance. In the late 1990s, however, Brazilians transformed the correspondent banking model by legally nominating and delegating commercial establishments to offer services otherwise provided in the retail branches of financial institutions.^[3]

The Brazilian innovation spread throughout Latin America. Banks used the correspondent banking model to ameliorate not only geographic distance but also rugged terrain, high crime rate in cities and inadequate retail banking and communications infrastructures. Most of these initiatives sought to increase financial inclusion by enabling cost-effective access to banking services for people living in regions where it was uneconomical to operate fully owned retail bank branches and ATMs. 

BancoEstado's solution

This was indeed the rationale that led BancoEstado, a government-owned but commercially run bank in Chile, to approach retailers of different sizes and launch a network of correspondent banking retailers in 2005 called CajaVecina.

The CajaVecina network envisioned the deployment of a purpose-built point-of-sale terminals at small grocery retailers in urban and rural settings to provide low income Chileans access to cash withdrawals and deposits, balance enquiries, money transfers and credit card payments amongst others.  

Because CajaVecina operates simplified bank branches in every municipality in Chile, nearly everyone in the country has access to its services. More than 7.8 million people, 30% of the total population, use these branches. When people visit a local store that has a CajaVecina point-of-service device, they can make withdrawals and deposits, pay bills or transfer money, just as they would if they were going to a regular bank branch. 

Social context plays key role

A key feature of correspondent banking is that both the customer and her bank expect the service provider (sub-agent/correspondent bank or in this case, a small retail shop) to act as if the customer was dealing with her bank — in this case BancoEstado.

However, our fieldwork in Chile amongst retailers who signed up to CajaVecina suggested the shop owner often departed from the norms of the agency agreement in at least two ways. First, we found behavior aimed to reward loyal customers and preserve cash on hand. Shop owners would, for instance, protect the level of their cash float through mendacity, that is, telling non-recurrent customers that the CajaVecina terminal was broken when that was not the case.

Alternatively, they would keep the recurrent customer's details and cash and finish the transaction at a time of low foot traffic — when they have to finalize with client present.

A second form of departure, which is also very difficult for BancoEstado to police, relates to security. Shops with CajaVecina terminals are often located in high crime zones or rural areas, that is, locations where BancoEstado was particularly keen to increase financial inclusion and seldom serviced by bank branches or ATMs. Meanwhile, the shop owner and neighbors are well aware that a CajaVecina service could increase the cash located at the shop, thus increasing the rewards to a potential heist. In response, the shop owner would adopt strategies that reward recurrent customers or limit the service to hours of high foot traffic.

In summary, the case of CajaVecina suggests that for all the promises of greater efficiency and financial inclusion on the back of technological innovation, system designers must not lose sight of the social context in which these innovations will operate.

This article draws from "Trust and Agency Redistribution in CajaVecina's Payment Ecosystem" by Batiz-Lazo; Jose Alarcón-Molina, Chile's Ministry of Health; and Juan Espinosa-Cristia, faculty member at Andrés Bello University.

Image courtesy of Bernardo Batiz-Lazo. 

[1] Holmes, A. R. and Green, E. (1986). Midland: 150 Years of Banking Business. London, B.T. Batsford
[2] Liu, Yan and others (2017) Recent Trends in Correspondent Banking Relationships: Further Considerations, Washington, DC: the International Monetary Fund. (Accessed 11-Jul-2019).
[3] Loureiro, E., Madeira, G., & Bader, F. (2011). Expansão dos correspondentes bancários no Brasil: uma análise empírica. Trabalhos para discussão, Banco Central Do Brasil.