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Summary of Last Lecture • Managing Informality Risk • Building the Industry PRODUCTS FOR THE BOP MARKET Products • Low-income people need a full range of financial services—often the same services most readers of this book take for granted. What’s more, these services make an important impact on the quality of their lives. Products • It comes as some surprise that few inroads have been made to widen the range of services that reach the poor beyond a very basic loan or savings account. Products • Before we explore the keys to product design for bottom-of-the-pyramid (BOP) clients, we ask readers to consider how meaningful financial products can be for people’s lives. Products • These products are not luxuries. They are intimately connected with some of the deepest human needs: safety, shelter, and family. Products • Lacking good financial services, people either find informal solutions that are often unsatisfactory, or they have no solution at all. Without health insurance, they may not get medical treatment. Products • Without housing finance, they may wait years before they obtain decent housing. When they use informal money transfers, the money too often goes astray. Imagine the range of products that could be developed to fill unmet needs in this realm. Products • It is precisely because the needs these products address are universal and basic that their market potential is so great. Hundreds of millions of families around the world will value and therefore be willing to pay for these services. Designing Effective Products • The Subprime Fallacy • The private sector brings deep expertise and often deeper pockets to the research, development, and market testing of new products. Designing Effective Products • But successful product design for the BOP market also requires a new outlook. While a suite of financial products for these clients may sound like a standard banking mix— insurance, savings accounts, leasing—beneath the surface they operate very differently. Designing Effective Products • The first lesson for any financial-services designer for the BOP market is this: products for low-income people are not just scaleddown versions of products for the middle class. We call this the subprime fallacy. Designing Effective Products • At ACCION we frequently encounter bankers committing the subprime fallacy, especially those who have been working in the United States. Designing Effective Products • We try to convince them that the subprime lens prevents them from seeing the right solutions for the BOP market in developing countries. Designing Effective Products • With deep and sympathetic understanding of the economic lives of their clients, product designers in developing countries can avoid the subprime fallacy. Designing Effective Products • And after the failure of the subprime market in the United States, developed markets are also crying out for a fresh approach. Designing Effective Products • In U.S. and European markets, subprime loans look a lot like prime loans, only worse. Subprime loans are smaller versions of standard loans, but because they are small and the clients have poor credit ratings, they are riskier. Designing Effective Products • To compensate, subprime loans are higher priced and often carry stiff fees, especially for late payment or prepayment. The subprime game often boils down to a risk/cost/return calculation with little product adaptation. Designing Effective Products • Group-based microcredit illustrates one answer to the subprime fallacy. The pioneers of group lending—Grameen Bank in Bangladesh and ACCION in the Dominican Republic—modeled their products on local folkways. Designing Effective Products • They observed poor people, especially women, forming groups to help each other save and borrow, and even covering for a member who had a short-term problem. They saw that people preferred small, frequent payments. Designing Effective Products • The group loan products used today by millions of women around the world incorporate these features. The loans that result are more expensive than standard commercial-bank loans (because they are small), but they are not riskier— often quite the opposite. Housing Microfinance • Housing microfinance in Andean countries demonstrates another way to avoid the subprime fallacy. It meets clients where they are, rather than where the bank expects them to be. Housing Microfinance • In Bogotá, Lima, and Quito, migrants from the countryside squat on unoccupied land at the urban fringe. Housing Microfinance • Over time, they upgrade from tin shacks to small brick huts and eventually to larger houses with improvements, all on the same plot of land, to which they gradually acquire the rights. Housing Microfinance • They build the houses themselves or hire skilled, informal builders from their local communities. This pattern is an integral part of the culture of urban Latin America. Housing Microfinance • Traditional mortgage lenders have ignored the housing-finance needs of these migrants (who number in the millions). The lenders simply could not scale down the mortgage product to make it affordable, nor would they lend to clients with quasiformal land title and informally built structures. This is classic subprime thinking. Housing Microfinance • Mibanco, the Peruvian microfinance bank we met in the profile of Delia, has a better solution. Mibanco devised a homeimprovement product— Micasa—that follows the progressive building patterns of slum residents in Lima with loans of one to three years, each financing a specific homeupgrading project. Housing Microfinance • Rather than scaling down a mortgage product, Micasa is an adaptation of Mibanco’s standard microenterprise loan; it is based on cash flow rather than asset value. Mibanco has seen excellent results with Micasa and keeps about 15 percent of its $320 million loan portfolio in this product. Radical Simplification • Only simple products can be delivered at affordable prices to low-income people. Simple products also fit the life circumstances of BOP clients and may even reduce psychological barriers. Radical Simplification • Some researchers point out that complex processes may heighten clients’ fear of banks because they signal mistrust and reduce the transparency of the transaction. Radical Simplification • At the same time, simplified products must incorporate risk reduction in creative ways. Group microloans meet the simplicity and risk control tests: they omit elaborate business analysis and reduce risk instead through peer guarantee. Mibanco’s housing microfinance is simple: it does not register formal mortgages; Radical Simplification • instead, it ensures that borrowers have longstanding and locally accepted claims to their residences even if they lack formal titles. Radical Simplification • The need for simplicity is very apparent in insurance, where the claims process must be stripped to its barest essentials to become affordable. Radical Simplification • For example, some health insurance programs for BOP clients skip expensive screening for preexisting medical conditions. That may mean the policies provide less complete coverage, but at the base of the pyramid the alternative to good enough coverage is usually none. Partnering for Product Creation • Product design may require creating relationships that do not already exist, especially through partnerships that bring providers closer to customers. Many of these partnerships involve delivery channels, but some also involve specialists such as schools, hospitals, home builders, or energy companies. Partnering for Product Creation • In this course we discuss many partnerships between companies and microfinance institutions, such as the health insurance examples cited in the next lecture. Partnering for Product Creation • In Ghana, Barclays Bank has even created a linkage with the indigenous susu system. Traditional susu collectors act as barefoot tellers. They roam the markets collecting deposits from clients and depositing them in the bank at the end of each day. Partnering for Product Creation • These collectors have been around for decades or even centuries without a formal link to a bank. Barclays’s program improves the safety of deposits for the collector’s customers even as it widens its customer base. Raising the Bar on Market Research • Of course, the starting point for solid product design is market research, the gathering and refining of knowledge about clients. Mainstream market research companies may not be adept at learning about the BOP customers, Raising the Bar on Market Research • making it worthwhile to contact organizations that specialize in this market, such as MicroSave, a pioneer in financial-services market research for lowincome populations in Africa and South Asia. Summary • Designing Effective Products