The banking correspondent (BC) model was a key piece of India’s financial inclusion strategy. Rather than building brick-and-mortar bank branches in every village, banks appoint local agents — often a shopkeeper or entrepreneur — who provide basic banking services on the bank’s behalf.

The model makes economic sense. A BC can serve a village of a few hundred people at a fraction of the cost of a full branch. Customers get local access to deposits, withdrawals, and account opening. The BC earns commission. Everyone benefits.

That was the theory. In practice, the BC model works in some places and struggles in others. Let’s look at why.

The Commission Economics Don’t Always Work

BCs earn commission on transactions they process. For a cash withdrawal, they might earn ₹5-10. For account opening, ₹25-50. For deposits, similar amounts.

In a village with decent transaction volume, those commissions add up to meaningful income. In smaller or poorer villages where people transact infrequently, the BC might earn a few hundred rupees per month. That’s not enough to justify keeping the BC point operational, maintaining cash floats, and dealing with technical issues.

Many BCs end up treating the banking work as a side activity rather than a primary income source. When their main business — the shop, the mobile repair stall, the provision store — is busy, banking services take a backseat. Customers arrive to find the BC unavailable or unwilling to process transactions because they’re occupied with more profitable work.

The banks and NPCI understand this but haven’t solved it. Commission rates have increased somewhat, but not enough to fundamentally change the economics in low-volume locations.

The Cash Float Problem

BCs need to maintain cash floats to process withdrawals. In a village where people primarily withdraw rather than deposit — which is common in areas dependent on remittances or government transfers — the BC’s cash depletes quickly.

Replenishing that float means traveling to the nearest bank branch, which might be 10-20km away. That’s time and transport cost. For a BC earning modest commissions, these trips are a significant burden.

Some BCs solve this by limiting withdrawal amounts to preserve their float. Others simply stop processing withdrawals when their cash runs low, leaving customers without service until the BC can replenish.

Banks have experimented with cash logistics services and BC coordination networks to address this, but coverage is patchy. In remote areas, cash management remains the BC’s individual problem.

Technology Failures

BC banking relies entirely on technology. A point-of-service device connects to the bank’s system via mobile network to authenticate transactions using biometric verification. When technology works, it’s seamless. When it doesn’t, the whole system stops.

Common failure points:

Network connectivity. Many rural areas have weak mobile signals. Transaction processing requires stable connectivity for biometric verification and backend communication. When the network is intermittent, transactions fail or time out.

Device issues. The biometric readers and terminals BCs use are often low-cost devices that break frequently. Getting them repaired or replaced can take weeks. During that time, the BC point is non-functional.

System downtime. Bank backend systems go down. Aadhaar authentication systems have outages. When these systems are unavailable, BCs can’t process any transactions.

Customers who travel to the BC point only to find that technology failures prevent service lose trust in the system. After a few failed trips, they stop trying and revert to whatever informal financial arrangements they were using before.

Customer Trust and Authentication Issues

Biometric authentication using Aadhaar works most of the time, but fingerprint recognition fails for people with worn fingerprints — common among manual laborers, elderly people, and those with certain health conditions.

When authentication fails repeatedly, customers can’t access their accounts. Banks have fallback procedures — OTP-based authentication, in-branch authentication — but BCs often aren’t equipped to handle these alternatives. The customer is stuck.

There’s also a trust gap. Some customers, particularly older or less educated individuals, are suspicious of technology-mediated banking. They’re comfortable handing cash to a trusted local person but uncomfortable with biometric scans and digital transactions. That limits adoption even where BC services are available.

Regulatory and Compliance Burden

BCs are subject to KYC requirements, anti-money laundering rules, and various regulatory obligations. For someone running a small village shop with limited education, navigating these requirements is challenging.

Banks provide training, but it’s often insufficient for the complexity involved. BCs make mistakes — incomplete KYC documentation, errors in transaction recording, non-compliance with operational guidelines. When regulators audit, these issues create liability for both the BC and the bank.

The regulatory burden has increased over time as financial crime risks have been taken more seriously. BCs who signed up years ago under simpler rules now face more complex compliance expectations without corresponding increases in commission or support.

What’s Working

Despite challenges, the BC model has brought banking access to millions of people who wouldn’t have it otherwise. In areas with decent connectivity, active BCs, and reasonable transaction volumes, the system works well enough.

Government schemes that deposit money directly into bank accounts — MNREGA wages, pension payments, scholarships — have driven BC usage. People who previously had to travel to distant bank branches to collect benefits can now withdraw locally through BCs.

Digital payments via UPI have also helped. When BCs double as UPI merchants, they benefit from both payment acceptance commissions and traditional BC transaction fees. This multi-revenue model makes the economics more viable.

Where It’s Struggling

Remote villages with poor connectivity, low transaction volumes, and limited economic activity remain underserved. BCs in these areas often stop operating after the initial enthusiasm fades and the economic reality sets in.

States with better infrastructure and higher financial literacy show much stronger BC performance than states where both are lacking. This creates a geographic disparity that the BC model was supposed to address but has in some ways reinforced.

Possible Improvements

Several approaches could strengthen the BC model:

Better technology. More reliable devices, offline transaction capability, better fingerprint scanners. Technology failures are the most frequent customer-facing problem.

Improved economics. Higher commission rates, additional revenue streams, or direct subsidies for BCs in low-volume areas. Without viable economics, the model doesn’t sustain itself.

Enhanced training and support. Ongoing training for BCs on regulatory requirements, technology updates, and customer service. One-time training isn’t enough for a model that evolves continuously.

Cash logistics infrastructure. Coordinated systems for BC cash replenishment that don’t require individual BCs to make frequent bank trips.

Alternative authentication. Better fallback options when biometric authentication fails, deployed at the BC level rather than requiring customers to visit branches.

Firms like Team400.ai have worked with financial institutions on process automation and customer experience improvements that could apply to BC network management — automating training delivery, monitoring BC performance analytics, streamlining compliance documentation. Technology can help, but it’s not a complete solution to fundamentally economic and infrastructural challenges.

The Bottom Line

The BC model has expanded financial access significantly. It’s not a complete solution, and it works much better in some contexts than others.

For the model to reach its full potential, banks and regulators need to address the economic viability in low-volume areas, improve technology reliability, and reduce the compliance burden on small operators who aren’t sophisticated businesses.

Financial inclusion through BCs is happening, but unevenly. The villages most in need of banking access are often the ones where the BC model struggles most. That’s the gap that still needs closing.