four critical challenges in the bop market

FOUR CRITICALCHALLENGES IN THE

BOP MARKET

Addressing the Challenges

• Challenge 2: Reducing the Cost of Small, Dispersed Transactions


• The unforgiving arithmetic of small transactions hits the business case for the BOP market directly. A Bolivian shop owner may need only $300 to refurbish her market stall,


• but if a lender’s break-even minimum loan is $1,000, she won’t get it, especially if her shop is in an outlying town on the sparsely populated altiplano.


• The revenues from small transactions must be affordable to the client while covering the provider’s costs. The arithmetic of small sizes becomes even more implacable when infrastructure is weak,


• as in poor urban neighborhoods, or when clients are dispersed, as in mountainous regions. It is only because these challenges are increasingly solvable that inclusive finance is spreading.


• Simplification of products and processes is an important part of the solution, as is hiring a low-cost, high-productivity staff. Microfinance institutions and credit unions have traditionally done both, which put them into the BOP market early on.


• The most promising new developments are happening at the “last mile,” where providers meet clients face-to-face. At this point technology is making it possible to sidestep bricks and mortar with branchless banking.


• Successful providers to the BOP must get close to clients because the last mile is costly for clients as well as for providers. Coffee farmers in the highlands of Uganda who had traveled to the market town of Mbale to receive their crop payments in cash because there was no bank branch in the mountains.


• These farmers faced highway robbery on the narrow mountain road back home, and one or two people from their community had lost their lives during past holdups.


• Even making the journey safely had cost these farmers days of lost productivity. It is hard to imagine a more striking illustration of the importance of the last mile.


• The last mile may be “owned” by a financial institution, a big-box retailer, an electronic payments company, or anyone with a network of outlets that reaches deep into rural or low-income urban areas.


• Nonfinancial retailers already have locations and client contacts to position themselves to perform payments transactions. It may be only a short step from there to banking services.


• Piggybacking on the existing infrastructure dramatically reduces the cost of opening new service points, as cost is shared by several service delivers.


• In Brazil, acquiring a new customer through a partnership (between a bank and a retailer, for instance) costs less than $20, compared with more than $100 in a full bank branch.


• Among all the cases presented in this project, the fastest growth, and quite likely the largest profits, belongs to models that leverage existing retail outlets.


• Banco Azteca of Mexico builds on the infrastructure of Grupo Elektra’s nearly 800 stores, and Banco Bradesco of Brazil outsources client transactions to post offices through a partnership with Banco Postal.


• Microfinance institutions can also manage the last mile, as envisioned in India’s banking correspondent regulations, which allow microfinance institutions to collect savings and handle payment transactions for banks.


• Branchless banks are technology driven. Card products hold out enormous promise of reducing the cost of delivering financial services while at the same time dramatically increasing convenience and security for the customer.


• While card products have deeply penetrated developed-country markets and the middle classes of some developing markets, they have yet to fully realize their promise at the low end.


• With a few important exceptions, many experiments with BOP markets and card products have not achieved genuine scale and customer acceptance.


• For example, the South African government issues prepaid Visa cards for its social payments, such as pensions, which cuts costs and simplifies government administration. Yet recipients typically cash out their prepaid cards, rarely using them for purchases and account management. Why?


• In some cases recipients do not know how they can use the card, and financial education is needed. More important, card use is stymied by the chicken and egg dilemma surrounding merchant participation in card systems.


• Customers in the informal sector do not use cards because the merchants they buy from do not accept them; merchants do not accept them (in part) because too few customers want to pay with cards.


• The greatest success with card products in the BOP market to date has come through basic credit cards for relatively welloff consumer credit customers, such as those of Banco Azteca. Expectations are high that prepaid cards (which do not require a bank account) will make major inroads in these markets.


• Cell-phone banking could be another way to dramatically increase client convenience while reducing bricks-and-mortar costs. With many experiments now underway, tremendous growth is likely in the next few years.


• To date, all of the well-known BOP examples—G-Cash in the Philippines, Wizzit in South Africa, and M-pesa (Vodafone) in Kenya—are still young.

Challenge 3: Managing Informality Risk

• Bankers have traditionally mistaken informality for risk, using it as a criterion to exclude clients. They may have assumed that people who live from hand to mouth wouldn’t pay their debts, or they feared that without formal records, clients would conceal important information.


• An intuitive response to such concerns is to pile on documentation, fees, and collateral requirements, but this raises lender costs and excludes too many prospective clients.


• Microfinance practitioners discovered early on that informal clients could be even less risky than clients who are better off. They learned that the best approach was not to force clients to formalize, but to adjust their own means of managing risk.


• In the early days, ACCION’s staff met market vendors whose methods for separating business from personal finances were no more rigorous than putting money for family into the left pocket and money for business into the right.


• At first ACCION required clients to attend training in account keeping, but it turned out that training had no effect on repayment, and clients disliked attending a class they viewed as just one more hassle standing between them and a loan.


• ACCION staff eventually recognized that clients were already expert money managers. Today, ACCION’s partners lend to millions of clients who keep few or no written accounts.


• There are two key insights for understanding how to manage risk in the BOP market for financial services. The first is about clients.


• Because they know how vulnerable they are, clients value the lifeline that a relationship with a financial institution represents. Continued access matters to them.


• Nothing will suspend motivation faster than interrupted access. I recently learned of an African bank that began a small pilot microloan program.


• As loans were repaid, they were not renewed, on the grounds that the loan capital set aside for the poor should be spread to as many people as possible— a typical charity-based intuition.


• Clients got wind that the first loan would be the only loan. Repayments plummeted, and the bank dropped the pilot.

Summary

• Challenge 2: Reducing the Cost of Small, Dispersed Transactions

• Challenge 3: Managing Informality Risk

four critical challenges in the bop market

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