Financial Services for Brazilians in the C, D & E classes:Snapshot of recent CGAP research

April 2, 2012

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CGAP Technology and Business Model Innovation Program

We Build Knowledge on issues such as customer needs, agent

networks, and business models

We Strengthen Markets so that promising

branchless banking services can thrive

We Promote Policies and Regulations that allow branchless banking

to expand and reach unbanked populations

The Technology and Business Model Innovation Program at CGAP works with banks, microfinance institutions, mobile network operators and retail stores to deliver financial services through new technologies, such as mobile phone, magnetic stripe or chip cards, and biometric applications.

Status of CGAP work in Brazil

• Partnership and close ties with Brazilian Central Bank on financial inclusion

• Partnership with major Brazilian banks

• Support to innovative start-ups

• Public good research:– Profitability and mechanics of agent channel– Qualitative research on low-income consumers

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What is special about Brazil?

What has CGAP learned from the CDE classes?

How can Brazilian banks serve these segments?

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What is special about Brazil?

What has CGAP learned from the CDE classes?

How can Brazilian banks serve these segments?

• Between 1992 and 2009, 47 million individuals migrated from the D and E classes to the C class, doubling the size of the C class in relation to what it was in 1992.

The “pyramid” has become the “diamond”

Global view: Brazil leader in agent banking

Country # of agents Brazil 160,000Kenya 24,000Philippines 20,000Pakistan 18,000India 10,000South Africa 7,000Colombia 6,000

• All of Brazil’s municipalities have at least one correspondent

• 3.1 billion transactions in 2010 through this channel

• Unconditional transfers of different kinds—child, old age, disability reach 14 million people

• Various payments methods: cash, prepaid smart card, or debit card linked to account

• Savings, credit, insurance offered by some providers

South Africa’s Social Security Agency

• Workfare program reaching over 45 million people• Various payment methods: post office savings accounts, village officials, and smartcards linked to no-frills bank accounts

• Savings, insurance offered by some providers

India’s NREGA • CCT program started in 1997 reaching 5 million households (18% of population)• Various payment methods through Bansefi and Telegrafos/Telecomm• Bansefi has various payment mechanisms, including cash, debit cards, agents• Savings offered by Bansefi

Mexico’s Oportunidades

•CCT program reaching 2.2 million families •Tender won by state bank Banco Agrario to pay grants through savings accounts

•1.8 million interest-bearing savings accounts opened

Colombia’s Familias en Accion

• Salary and pension payments; cash transfers under BISP and emergency relief

• BISP has piloted various payment approaches: post office, smart cards issued by bank, mobile service providers

Pakistan’s BISP and other programs

Global view: pioneering financial services link to government benefits

Key challenges and opportunities for financial inclusion

• High physical channel access…but low-cost models underutilized to target financially excluded

• Brazilian banks are product innovators…but there is product mismatch with low-income consumers’ needs

• Lots of public research on new emergent C class…but research has not increased foundational knowledge of C, D & E classes

Source: Plano CDE, 2010 Sample: Recife 609 – São Paulo 1006 (non relevant data)

Travel

Travel

Private school Car

Car

Pay debts

Pay debtsSave or invest

Buy or renew Save or invest

9%

9%

Travel

13%

Pay debts

4%

3%4%

3%8%

6%

DE

C

AB 32%

43%

48%

14%

Own business

6%

5% 4%

2nd home

15%

Own education Private school

3%

Car

Food

2%

2%

Health Plan

Leisure

2%

Buy or renew

Buy or renew

2nd home

2nd homeSave or invest

Own educationPrivate school

Health Plan

What would you do if your income doubled?

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2

3

What is special about Brazil?

What has CGAP learned from the CDE classes?

How can Brazilian banks serve these segments?

Background on CGAP research

• Research conducted between June 2011 and March 2012 in partnership with Brazilian banks

• Focus on qualitative research

• 75 interviews with C,D & E consumers (88% D&E)

• 5 areas: Rio de Janeiro, Sao Paulo, Recife, Porto Alegre and Maceio

• Conducted with Plano CDE and independent consultant Juliana Estrella

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Overview of profiles

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“Orkuterati”21 years oldD2 segment

“Cash Prince”18 years oldD2 segment

“Self-Satisfied”33 years oldC2 segment

“Lazy-optimists”33-38 years old

D1 segment

“Seasonal-Jack”51 years oldD1 segment

“Community Maven”28 years oldD2 segment

“Savings Addict”47 years oldD2 segment

“Tempted”45 years oldE segment

“Budget Artist”65 years oldE segment

“Just Welfare”32 years oldE segment

Finances• Owns his home• Current account at Bradesco, savings

account at CAIXA and 3 credit cards (2 Itau, 1 Bradesco for Casas Bahia)

• 33 years old• Lives in Rocinha• Monthly income: R$1900• Is a sommelier at a restaurant and

cleans motorcycles on weekends• Is evangelical / no lottery• Buys appliances in installments• Has internet at home• Has post-paid cell plan with Nextel

Customer Profiles: The New Comer

• 33 and 38-years old• Monthly incomes: R$800-1000• Both sell arts & crafts outside of

historic church in Olinda.• Buy their appliances in parcelas• Play lottery every week

What do you think?Do they own their homes? Do they have a savings and/or

current account?Do they have credit cards?Do they have internet at home?

Customer Profile: The Lazy Optimists

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• He is 51 years old• Lives in Maceio, Alagoas• Has been a jangadeiro and fisherman for

34 years • 5 children, 7 grandchildren• Variable income: will do boat tours and

fish during one half of the year and then needs to save for the ‘low-season’

Finances:Owns his own homePrefers to save up and buy ‘a vista’Has a savings account at CAIXA and a hipercard credit cardHis granddaughter has BF for her child (both live with him)Has a cell phone and dislikes being in debt

Customer Profile: The Seasonal Jack

• 28-years old• Lives in Morro dos Macacos in RJ• Unemployed, with 2 kids• Husband’s monthly income: R$900• Used to sell Açai

What do you think?Does she own her home? Does she have a savings and/or current

account?Does she have internet at home?

Customer Profile: The Community Maven

• 21-years old• Lives in Santo Amaro, SP• Works as a copier• Monthly income: R$600• Lives with her mom and nephew, mom’s

income from ‘bico’

What do you think?Does she own her home? Does she have a savings and/or current

account?Does she have internet at home?

Customer Profile: The Orkuterati

• 18 years old• Moved to São Paulo from Paraiba• Is a helper at a store• Monthly income: R$700

What do you think?Does he own or rent?Does he have a savings and/or current

account?Does he use his cell phone mainly for calls

or for SMS?

Customer Profile: The Cash Prince

• 47-years old• Monthly income: R$700• Has a stall at fair in Olinda (sells

coconut fiber tablecloths)• Buys everything ‘a vista’

What do you think?Does she own her own home? Does she have a savings and/or

current account?What kind of cell phone plan does

she have?

Customer Profile: The Savings Addict

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Customer Profile: The Tempted

• 45 years old, has 5 kids & grandson• Lives in Restinga, Porto Alegre• ‘Faxineira’• Makes R$300/month (if she gets extra

jobs, add R$100)• Receives Bolsa Familia for 2 kids• Her sister helps her out with food

Finances:Recently got a Minha Casa, Minha Vida apt

(pays R$65/month)She has a simplified account, but only uses

it to withdraw BFUses ATMs and lottery to withdraw Used to have a credit card at Itau (but

couldn’t pay it off)Tried buy insurance, but cancelled

“I buy everything I get offered on the street– it’s so tempting!”

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Customer Profile: The Budget Artist

• She is 65 years old• From Penedo, Alagoas• Very recently widowed• 12 people live in her home, including four

adopted grandchildren• Her income is variable: She is a ‘bordadeira’.

She is part of an embroidery association and her salary is based on how many of her pieces sell (~R$100/month).

• She gets R$192 BF/month and her husband’s pension of R$600.

Finances:Owns her home Has a savings account at CAIXA (no balance)Receives pension in Bradesco accountHas a hipercard CC that she loves “People sometimes do things they

can’t… the more [products] people have, the more they spend.”

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Customer Profile: Just Welfare

• 32-years old• Lives with her two sons• Lives in Sao Carlos, a favela in Rio• Has no job, lives from BF income• Bolsa Familia benefit: R$113• She has a pre-paid cell phone account

(spends R$7-12/month)• Both of her sons have a rare blood

disease

Finances• Owns her home• Her mom, who receives disability welfare

helps her out at home• Has bought appliances in installments

with her mom’s CC

C$1575 - $5250

50% of pop

Short-term savings

Payments

Advisory

Housing

Pens

ions

Long-term

savings

Insurance

Credit

Credit cards (via banks),

payroll-consigned loans,

installment loans (via

Casas Bahia and private

label cards). Credit for

cars, motorcycles and

household goods.

Overdraught.

Save in cash at hom

e, som

e have savings account (esp w

ith C

AIX

A). S

ome savings

capabiity.

Only program M

inha

Casa M

inha Vida. All

banks offe

r mortg

age

programs for C

+

(need to do m

ore

research

here).

Common to receive

salary in current a/c

(Bradesco, CAIXA)

but make payments in

cash (via agents) or at

ATMs

Those

with

form

al jobs

get IN

SS autom

atica

lly.

Those in

depen

dently

emplo

yed p

ay in

to INSS.

Retirement

savin

gs ar

e

rare.

Form

ally

em

ploy

ed

auto

mat

ical

ly e

nrol

led

in IN

SS

. S

ome

mig

ht

have

priv

ate

pens

ion

prog

ram

s.

PROCON: Federal consumer protectionGovernment. Banks’ customer service. Fin Education program

(limited to some areas)

Everyone uses free public state/city clinics. Insurance industry still

has no reach.

A view of financial services supply in the Brazilian Market

D$525 - $1575

30% of pop

Short-term savings

Payments

Advisory

Housing

Pens

ions

Long-term

savings

Insurance

Credit

Credit cards (via banks),

payroll-consigned loans,

installment loans (via

Casas Bahia and private

label cards), loans from

MFIs.

Save in cash at hom

e, som

e people have a savings account (esp

with C

AIX

A) but

withdraw

funds. Only

program Minha

Casa M

inha Vida and

no micr

o mortg

age

market

Common to receive

salary in current a/c

(Bradesco, CAIXA)

but make payments in

cash (via agents) or at

ATMs

Few pay I

NSS, and

few

maintain

a ret

iremen

t-

type a

ccou

nt av

ailab

le via

CAIXA an

d mak

e

spora

dic pa

ymen

ts int

o

this a/c

INS

S a

vaila

ble

but D

se

gmen

t not

pay

ing

into

it o

r una

war

e

Elig

ible

for p

ensi

on o

f 1

min

sal

ary.

PROCON: Federal consumer protection

Government Fin Education program

(limited to some areas)

Microinsurance industry still too small. Everyone

uses free public state/city clinics.

A view of financial services supply in the Brazilian Market

E<$525

10% of pop

Short-term savings

Safe storage

Any Bolsa beneficiary

gets Conta Facil

automatically unless

they refuse (and many

don’t use it actively to

save)

Payments

Housing

Adv

isor

y

Long-term

savings

Insurance

Credit

• Rely on family members for health emergencies

• Free clinics for health or specific programs

Mostly use family

members credit cards to

make purchases at

retailers for home

appliances

PR

OC

ON

: Fed

eral

co

nsum

e r p

rote

ctio

nG

over

nmen

t Fin

E

d uca

tion

prog

ram

(li

mite

d t o

som

e ar

eas)

Only program M

inha

Casa M

inha Vida and

no micr

o mortg

age

market

If they have job, mainly receive in

cash. Pay utilities in cash through lottery

housesS

ave in cash at home,

if BF beneficiary, could

save in Conta Facil.

Mostly do not have enough to save.

No prac

tice o

f long

–term

savin

g. Alm

ost a

ll use

d

for im

mediat

e

cons

umpti

on.

A view of financial services supply in the Brazilian Market

Issues that impact financial decision-making

1. Low, irregular, unpredictable income

2. Financial shocks

3. Consumption/ 'temptation shock’

4. Poor mental accounting

5. Easy credit

6. Psychological hurdle big amount

7. Indebtedness practical and psychological

• Many in the D Class are informally employed. Informal work leads to some months earning an income and other months not. Plus, to exacerbate the irregularity, it’s not certain when work will pick up

• Lumpy income and expenses including utilities create financial stress. It’s difficult for people to match the timing of income with that of expenses.

• Uneven cash flow and lack of ability to plan make saving in anything other than the mattress difficult.

Issue 1: Low, irregular & unpredictable income

• Bill shock: though recurring, utility bills are not always fixed; they are usually unpredictable in their amount.

• Health shock: public health services force people to lose days when dealing with family illness. The expense of medicines can be shocking.

• Other unpredictable expenditures can throw a family’s economy for a loop.

Issue 2: Financial Shocks

• Some cannot resist a culture of consumption.

• General consumption: What do people do when there’s extra income left? People seem to buy superfluous or more expensive food, purchase clothing or footwear and electronics.

• Temptation shock: Lack of self-control observed in sudden urges to consume and helplessness to refuse children’s requests for expenditure.

Issue 3: Consumption & Temptation

“When my daughter asks for money, I can’t

say no.”

The appeal to satisfy current desires is much greater than that of planning for the future.

Savings

Planning for the future

Comfort, status, immediate gratification

Savings =

consumption deprivation

today

Consumption Credit

Access to consumer goods now

Savings

Versus

• For some, poor mental accounting is a barrier.

• “Bills and budgets are done in the head. This leads to mental under-spending.”

• People expect to have more money by the end of the month because of miscalculations.

Issue 4: Mental Accounting

• Loans of many kinds, despite blacklisting, are available. Store credit and split purchases, credit cards, and pastinhas.

• People also use overdraft facilities and get advances from family.

• “Even when indebted, they are still contacted by institutions offering them credit.”

Issue 5: Easy Credit

• People, for the most part, believe that savings are “a big deal.”

• “Bit by bit” is not the current mindset. People believe that small incremental amounts will not amount to much.

• People’s perception is that in order to save successfully, one has to make a substantial effort and put in substantial savings.

Issue 6: Psychological Hurdle- ‘Big Savings’

• Temptation in the midst of a consuming culture leads to indebtedness.

• Being burdened by paying off debt prevents people from saving. This creates vicious cycle.

• Potential users are overwhelmed by the amount of debt they have, thus creating psychological and practical barriers to saving and managing money.

Issue 7: Indebtedness, practical and psychological

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Source: PlanoCDE, 2010Sample: Recife 609 – São Paulo 1006 (dados não ponderados)

70%

54%

41%

34%

21%

17%

E

D

C-

C+

B

A

Nome sujoHaving difficulties cleaning your name has something to do with people your social class?

Issue 7: Indebtedness, practical and psychological

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What is special about Brazil?

What has CGAP learned from the CDE classes?

How can Brazilian banks serve these segments?

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Basic understanding of poor

Cost of delivery

View and process of product development

Enabling environment

Why few financial institutions are

organized for consumer insights to lead to products

consumers want

• Assumptions about the poor often constrain product thinking

• Poor consumers are treated as one segment

• Low margins on services to low income consumers mean dramatically cheap delivery channels

• Focus on channel slows down product development

• Managers feel alone in tyring unproven products or reaching new segments

• Inflexibility in the process• No ability to trial and iterate

• Restrictions on types of channels, products and prices

• Ability to strike partnerships

Few financial institutions are organized to use consumer insights

Collect ideas from Experts / Employees

Collect ideas from consumers

Global view of how financial intitutions

develop products and innovate

• Citibank’s Innovation Labs, Japan/NYC

• Bankinter Labs

• Standard Chartered and Singapore Management University

• BBVA Plant 29, Spain

Partnerships with start-up providers

• EasySave, Kenya

Test ideas, incubate• Standard Chartered China Innovation

Lab• Uganda AppLab

How financial institutions are developing products and innovating

From client observations to innovative products

• There are not enough efforts around the wrold to carry out this kind of research.

• One of the best known examples is Finscope: nationally representative research of consumers’ perceptions on financial services and issues.

• At CGAP we are considering foundational research in various select markets: Mexico, Ghana and Brasil

Challenges and Opportunities: Foundational Research

• Segmentation analysis of the base of the pyramid with qualitative insights by segment.

• Idea: to understand the financial needs and perceptions of the lower income segments in Mexico

• Mexicano context: Banks are increasing their capilarity, but they are still not reaching the poorest

• Existing studies are only demographic and offer information that is too general

Example: Foundational Research in Mexico

Mixed research methodology: qualitative and quantitative (carried out with McKinsey)

1. Quantitative survey (426 interviews, nationally representative); linked to household statistics (ENIGH)

2. 31 interviews in more depth (2 hs)3. 3 focus groups to validate conclusionsMarket research based on four dimensions: (1) structure of income and

expenditure flows, (2) preoccupations, (3) aspirations and (4) strategies in money management.

(1) Foundational insights for product development

(2) Common understanding of financial inclusion

Families at the BOP that have an active relationship with a formal financial institution

Only 50% of credit is formal

52%

Only 10% use formal savings mechanisms*

10% 50%

* In the broadest sense, including temporary storage

(3) Common understanding of impact of financial inclusion on GDP

Advancing financial access for the world’s poorwww.cgap.org

www.microfinancegateway.org