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FOUR CRITICAL CHALLENGES IN THE BOP MARKET Summary • WHO SERVES THE BOP MARKET—AND WHO DOESN’T? Challenges • How can poor people save money if they can barely put food on the table? • How can they afford to pay high—or any— interest rates?” Challenges • “Aren’t informal entrepreneurs risky customers? Won’t they default and disappear into the slums?” • “Can an illiterate woman learn to use an ATM machine?” Challenges • We sometimes hear questions like these from businesspeople who have little exposure to the clients of the bottom-of-the-pyramid (BOP) market. Challenges • While the questions may reveal a lack of sector knowledge, and some verge on the politically incorrect, they are not frivolous. In fact, they address real challenges inherent in making a successful business that serves lowincome people. They demand answers. Challenges • To surface more potential doubts and hesitations, we can also ask: Challenges • What’s different about the low-income market? Do they want the same products as the middle class? • How can we reduce the cost of making small loans and processing tiny transactions? Is technology the solution? Challenges • Are low-income clients as risky as we fear? Where exactly do the risks lie? • How do microfinance institutions manage risk? Can the private sector use the same techniques? Challenges • In the past most private companies had good reasons to avoid serving the BOP market, because they had no good answers to questions like these. No longer. Challenges • We know from our experience that good answers exist and that they can be applied effectively if companies adapt their business models to market demands. Challenges • Advances in technology, financial innovations, and greater market understanding provide potential solutions to the core challenges of the BOP market. Challenges • Above all, success is found in nearly two decades of experience with commercial microfinance and in the experience of privatesector companies that entered the lowincome financial market early on. Four Critical Challenges • We can reduce all the many questions just mentioned into four challenges inherent in providing financial services to BOP customers: 1. Understanding the clients. • Speaking broadly, the poor need the same kinds of financial services as middle-class customers. However, it is a classic mistake to treat products for the poor simply as scaleddown versions of those for higher-income customers. Understanding the clients. • As with any market, a deep understanding of specific needs is required to get product design right. Local customs and economies, literacy, gender roles, religious taboos, or ethnic discrimination may need to be addressed. Understanding the clients. • For example, microfinance institutions in the Middle East have learned how to approach Muslim clients who worry that it might be a sin to pay interest. Understanding the clients. • Some banks, notably Barclays, have learned to relate to the informal lending circles—tontines and susus—that many West Africans join. 2. Reducing costs. • The small size of accounts and transactions associated with the poor is the fundamental challenge to profitability. Reducing costs. • The cost barrier is highest for the poorest clients and those in rural and remote areas. Rather than just squeezing costs down, serious rethinking is needed. Reducing costs. • Radical product simplification is one key, and technology may be another. When a Nepali woman can receive money from her husband working in Delhi without leaving her village, it will be technology and creative distribution channels that make it possible. 3. Informality and risk management. • BOP clients appear risky because they are economically vulnerable and operate informally. Much of the risk is only a perception, however, and actual risks can be managed with the right techniques. Informality and risk management. • Microfinance institutions using these best practices demonstrate consistently high repayment performance, so much so that in a 2008 survey of top risks, microfinance providers and investors ranked credit risk only tenth, well behind costs (which was fourth) and a range of institution management issues. 4. Building the industry. • Few providers possess the strength to create or enter a virgin market alone. Other providers help develop the market, attract supporting businesses Building the industry. • (for example, information-technology providers or payments networks), and speak with a united voice before regulators. Avenues for cooperation in industry-building need to be identified. Building the industry. • (for example, information-technology providers or payments networks), and speak with a united voice before regulators. Avenues for cooperation in industry-building need to be identified. Addressing the Challenges • Many private companies have already found ways to meet the four challenges. Our cases include international, regional, and national banks (Citibank, ANZ Bank of the South Pacific, and Equity Bank in Kenya). Addressing the Challenges • They include consumer lenders (Banco Azteca) and microfinance institutions (Compartamos Banco), telecoms and technology companies (Vodafone, Visa Inc., Temenos), investors (Sequoia Capital), and investment banks (Credit Suisse). Addressing the Challenges • In short, many different players operating in many different ways have found a profitable market niche in inclusive finance. Let’s look at some of the challenges in more detail. The remainder of the lecture will show how businesses are solving each of them. Challenge 1: Understanding Clients • Poor people have much to gain from good financial services, and therefore are likely to value them highly and perform well as clients. Challenge 1: Understanding Clients • The economic gains that clients reap from better services allow them to pay for the services and create the income stream providers need. But this virtuous relationship only works if the products are designed and delivered with a deep understanding of the clients. Challenge 1: Understanding Clients • Some of the characteristics providers need to consider include these: Challenge 1: Understanding Clients • Much of the BOP market is self-employed, and clients must allocate their scarce financial resources across family and business needs. Personal and business finance products are not neatly distinct, and credit analysts must assess both a client’s business and family activities. Challenge 1: Understanding Clients • Low-income people may need financing for purchases that wealthier people would pay for outright, making products like consumer finance or school fee loans especially important for the poor. Challenge 1: Understanding Clients • The lives of low-income people are characterized by vulnerability and the lack of economic safety nets. Natural disaster, unemployment or business downturn, theft, and health crises are all potentially devastating. Savings and, of course, insurance are especially important products. Challenge 1: Understanding Clients • Customers in the BOP market often fear or mistrust banks—a fact of life that marketing strategists must confront early on. Challenge 1: Understanding Clients • Successful approaches include hiring staff from the same communities as clients and sending staff into marketplaces rather than waiting for clients to appear at branch offices. Banco Pichincha of Ecuador uses a separate brand name for its microfinance arm, Credifé, to reach out to BOP clients. Challenge 1: Understanding Clients • Important product areas for inclusive finance include savings, money transfers, and insurance, but these are only the broad areas ripe for growth. Challenge 1: Understanding Clients • Much creativity is needed to address the more detailed range of needs. Equity Bank of Kenya spotted an opportunity to build a package of profitable services for parents, teachers, and students, using schools as delivery nodes. Challenge 1: Understanding Clients • We will see more examples of creative product design in the next lectures. Challenge 1: Understanding Clients • To gain market knowledge, it is sensible to begin by listening closely to clients at their homes and workplaces, as ANZ Bank did when it decided to reach out to rural Fijians. Challenge 1: Understanding Clients • ANZ discovered that vulnerability to natural disasters was a major concern for its potential clients, and consequently focused its product offer around this previously unacknowledged need. Challenge 1: Understanding Clients • Businesses that already connect with BOP clients—such as retailers with large client databases— have an enormous advantage. Challenge 1: Understanding Clients • Banco Azteca in Mexico used the client information from Grupo Elektra’s retail stores to move quickly from pure consumer lending into a full range of financial services, rapidly outstripping all other providers to the BOP market. Challenge 1: Understanding Clients • Businesses without access to such information may want to partner with organizations that possess it, such as microfinance institutions. Summary • FOUR CRITICAL CHALLENGES IN THE BOP MARKET