Reaching the poor with a range of useful, convenient, and affordable financial services is challenging for all the reasons we know. In the context of Mexico, access has increased significantly in the past few years (nearly 60% of all households), and changes in regulation enabling correspondent banking are likely to bring the access barrier down even further. However, the challenge of delivering a relevant offering, tailored to the needs of the lower-income population still remains. This may be one of the reasons why many people who have access to formal financial services are not using them.

While consumer goods companies have developed an understanding of these segments, few actors in the financial services space have a deep knowledge of how “bottom of the pyramid” (BoP) customers use money and financial products, and what sort of products these customers may want in the future.

We conducted a study (available in both English and Spanish) in collaboration with McKinsey and Company, seeking to provide a closer look at the financial habits, needs, and wants of low-income customers in Mexico. The goal is to provide the kind of information that will enable financial service providers to design better products (i.e. products that reach more people and solve felt needs) and to implement products and business models with a greater chance of success.

We hope this study will help orient assumptions about customer behavior that can lead to improved product design and less risk in business models. Even though the study is intended to serve the Mexican market, we intend it to be useful and applicable to other markets.

Here are the key findings:

• Segments at the BoP save significantly. Deposits (both short term and long term) represent an amount equivalent to 20.4% of these segments’ annual aggregate income. If these deposits were to be held in formal financial institutions, the current deposit base in the formal financial sector would increase by 23.4%. Read the rest of this page »

ASHAs (Accredited State Health Activists) in Bihar receiving their incentive payments through Eko's mobile money transfer service

We often write on this blog about the potential to link government-to-person (G2P) payments to financial services. We also closely follow branchless banking developments in India and have recently shared our take on the market. So imagine our excitement when we can talk about both together!

India is just one of a handful of countries that is implementing financially-linked G2P payments at scale. And of course, “scale” in India – a country with nearly 1.2 billion people – means something a bit bigger than in most countries. In India in 2008-2009, 22 welfare schemes paid out a total $65 billion to tens of millions of Indians – which doesn’t even include the substantial G2P flows for government salaries and small savings schemes. The yearly budget of the National Rural Employment Guarantee Scheme (NREGS), one of two welfare schemes that dominate the G2P payments space is $6.7 billion. And, most excitingly from our perspective, these schemes are leveraging emerging branchless banking models to disburse these payments, moving from the former branch- and cash-based distribution model to the distribution of funds into no-frills bank accounts serviced by business correspondents outside of branches.

Not surprisingly, though, this is only the start of the story. While the ambitious link of G2P payments to bank accounts is exciting and can be a source of learning and inspiration for other countries, challenges and complexities persist. We visited India this summer to learn more about G2P payments as they relate to financial inclusion. Our full overview note is available here, but here’s a summary of our key insights.

• State governments exercise significant control over the management and administration of central government-mandated G2P schemes, and there is great variability in the fees paid by state governments to banks for disbursing funds to citizens – some states pay 2% of values disbursed (or more), but others refuse to pay anything. This weakens the business case for banks and fails to generate enough money to feed the many mouths in the G2P value chain.
• Business correspondent network managers (BCNMs) are particularly squeezed, as they must compensate their network to keep them engaged and reliable, but the current fee structures from banks leave little money left over.
• In the absence of transaction fees, many banks appear motivated to disburse G2P transfers because they view this as a “foot in the door” for future business from governments, an especially compelling prospect for private banks who have traditionally been boxed out of this business by public-sector banks.

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As we look globally for innovative business models and technologies, it’s a shame how little we (as two Americans) focus on our backyard in the U.S. Despite our comfort drawing similarities and lessons across markets as different as Brazil, India, and Kenya, we seem to assume that the U.S., with its technology and banking infrastructure, relative wealth, and uniquely complex regulatory context, is truly different. To test this and see what we might uncover “locally,” we attended the 6th Annual Underbanked Financial Services Forum in June to learn more about the state of the art in the domestic financial inclusion world and look for ways where global and local conversations overlap and can be integrated.

We were not disappointed. The event, terrifically organized by the Center for Financial Services Innovation (CFSI) and sponsored by the American Banker, played host to hundreds of participants representing banks, nonbank financial service providers, retailers, regulators, and other policymakers and researchers. Some of our takeaways:

• Prepaid is the talk of the town. Prepaid instruments, particularly the general purpose reloadable (GPR) card, seemed to be one of the most talked-about innovations in the domestic market. The general feeling (particularly among the various prepaid vendors in the crowd) was that prepaid has a number of characteristics that make it better for the underserved – lower cost structure, more accessible reload points, less intimidating, easier to open, and lower/more transparent fees. Certainly the recent IPOs of prepaid giants NetSpend and GreenDot help fuel excitement around these business models.
• “Mobile” may not be as exciting in the U.S. Given the strong build-out of various types of channels and infrastructure in the U.S., many were skeptical that mobile phones hold the kind of transformative potential we’ve seen realized in markets like Kenya – at least when it comes to banking the underbanked. The biggest topic within mobile is near field communications, but NFC’s potential value seems to lie more in convenience and marketing tie-ins (particularly for data collection and in connection with location-based and loyalty services) and has limited potential to deliver significant access benefits for the financially underserved. Read the rest of this page »

MTN Mobile Money ad in Cote d'Ivoire

Many branchless banking implementations have struggled with low customer uptake and high levels of inactivity. Inadequate investment in marketing, especially advertising, has come under the spotlight as a key culprit. However, several high-profile deployments that made huge initial investments in marketing have re-tooled their strategy after disappointing results. Marketing a new product like mobile money – especially to an unbanked, mostly rural population – requires more than flashy ads and blanketing every agent shop with the right shade of green or red. Beyond brand awareness, customers need to understand what the product is, why they should use it and how they can get started.

We’ve collected examples of branchless banking advertisements from around the world and interviewed providers about the lessons they’ve learned and how they’ve adapted their marketing strategies. The results – including case studies and examples of marketing collateral – are in this compilation deck. Some of the things we’ve learned are:

• Mass media marketing is important to build the brand, but not enough – While a heavy investment in above the line marketing (TV, radio and other mass media) is important to raise awareness and establish the brand and product as legitimate, it is not sufficient. Increasingly, branchless banking providers are shifting resources into below the line marketing.
• Education-based marketing, preferably done face-to-face, is increasingly seen as critical to customer adoption – Below the line marketing (especially face-to-face interaction) has been critical in many markets, especially those with low literacy rates. Some providers believe it takes 15-30 minutes of personal interaction before a customer understands a branchless banking or mobile money offering. Until a critical mass of customers is reached (when they start teaching one another), providers need to find a way to do education-based marketing.
• Keep the messages simple and use scenarios that are relevant to the average customer – M-PESA’s simple yet effective ‘Send Money Home’ advertisement is well known and conveyed a simple solution to a problem faced by many Kenyans. However, many implementations since then have tried to market multiple messages or more complex functionalities. These ads were not only confusing to unbanked people but seemed to advertise a premium service for high-end users. Successful ads have used simple messages and are relevant to the average (often unbanked and rural) potential customer.

Check out our deck to see many marketing examples ranging from M-PESA’s classic ‘Send Money Home’ (and the strikingly similar ads it inspired) to Haiti’s TchoTcho Mobile ad featuring a grandmother using TchoTcho Mobile to keep her money away from the prying hands of her family.

- Claudia McKay & Paul Breloff

Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. Last week we presented our learnings from Brazil. Today we continue with our analysis of Mexico and share this summary note on the Mexican branchless banking industry.

Mexico’s financial sector is beginning a significant transformation. It is setting the stage for a broad commercial offering through innovative products that reach lower-income segments of the population. Appetite to reach lower-income segments grew in the past decade following the notable growth of Banco Azteca and Compartamos. More recently, regulation enabling the use of non-bank correspondents (or banking agents) has expanded the possibility to increase the reach of financial institutions at a reduced cost both for banks and for potential customers. These regulations proactively reduce competitive barriers in the banking sector and open opportunities for banks to serve lower-income segments historically served by other financial service providers (financial cooperatives, MFIs, microfinance banks and retail stores-cum-banks). Large retail chains (including Telecom, the state-owned telegraph network) are developing shared correspondent networks, and most major players are adopting aggressive outreach strategies.

However, most of these strategies are still about reducing the cost to serve existing customers and much less about growing towards new lower income segments. The price points of shared channels, the lack of sensibility to poor people’s needs, and to certain extent, the mandate to banks to give away free transactions on their own ATMs are slowing the development of a meaningful offering. New partnership models and ambitious experiments involving key players may drive the market towards more efficient models and more affordable low-income offerings beyond credit, but the learning curve is uncertain and is likely to require time.

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