Latin America

Why bother about savings and credit? News this week that remittances from the US to Mexico grew a measly one percent to $23.9 billion in 2007, compared to growth of 17 percent in 2006.  That hurts people who depend on remittances. The Mexican central bank recently cut its economic growth forecast for 2008 by half a percentage point.

Low-value remittances to some extent sit at the center of branchless banking channels both card- and mobile- based. Their significance for economies like Mexico or Philippines or Kenya and elsehwere has been a driver for new low-cost remittance solutions such as G-Cash and M-Pesa. These approaches have been the inspiration for the new banking channels that CGAP has been writing about and working on over the last year.

When it comes to branchless banking, the remittance volume helps make both the business case to financial providers and is an important part of customer adoption of branchless channels. The high volumes for some corridors ($12.8 billion in official international remittance to Philippines in 2006) make the case for banks (and telecoms and others) to possibly invest either themselves in a sprawling cash-handling infrastructure or work with gas stations, post offices and retail providers to set-up agent networks. Customers are likely to use these channels to access remittances that are an important part of their livelihood. Some would even argue that the high remittance flows and their impact on the economy serve as a motivator for regulators to encourage lower cost innovations as they have in the Philippines.

But we have yet to crack the puzzle of how remittance recipients get to savings and credit. The frequently used Brazil example is worth mentioning again: billions of dollars in government transfers to low-income people via over 90,000 points - but just one in 25 of them (based on a CGAP survey) are actually saving.�

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Around 45% of existing microfinance institutions still track and record their operations and accounting in excel sheets or even completely manually.  This costs a massive amount of time and resources, leaves room for error, prevents them from growing quickly, and undermines their ability to manage risk. Especially for smaller institutions the relative investment and maintenance cost is enormous compared to their size and operations.

How about completely outsourcing information systems (IS) to an external technology provider, so that the MFI can focus on its main business: handling client relationships and providing financial services?   Read the rest of this page »

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Mobile banking and other technologies need a balanced regulatory approach

Washington D.C. (January 31, 2008) – Basic, everyday financial services are out of reach for more than two billion people in developing countries. But the rapid growth of branchless banking – including mobile phone banking – is reducing the cost and expanding the availability of such services.

“All of this innovation presents challenges and opportunities for regulators,” says Elizabeth Littlefield, CEO of CGAP. “Policy will determine not only where branchless banking is allowed, but also which business models turn out to make economic sense - and how far they will go in reaching poor people.”

Regulating Transformational Branchless Banking is a product of collaboration between CGAP and the UK’s Department for International Development (DFID), in partnership with the GSM Association, the global trade association for over 700 mobile phone operators. The authors also benefited from conducting three of seven diagnostic missions with the World Bank’s Financial Markets Integrity Unit.

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It is nothing new that access to credit to small businesses and low-income individuals is limited in many developing countries. One of the many reasons, besides lack of collateral, informal economic activity, and physical distance to credit providers, is the lack of a formal credit history in a local credit bureau.

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Reaching poor clients with financial services in rural areas is often prohibitively expensive for financial institutions since low transaction numbers and volumes typically would not cover the cost of a branch. To overcome that challenge, financial institutions in developing markets are increasingly turning to banking agents, using retail outlets to process financial transactions that would usually be handled by a branch teller.  Lower set-up and running costs of banking agents should enable providers to viably offer a full range of financial services to low-income clients in rural and remote areas.

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Vodafone India Unveils Cost Cuts, IBM Deal
Vodafone has already taken a number of initiatives to grow in India, which has a population three times the size of Europe. In May, Vodafone launched two sub-$45 handsets, working with China’s ZTE Corp. (0763.HK), in a bid to make mobile phones more affordable to millions of Indians on low incomes.

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Brazil’s ACSP Launches Global FICO Consumer Credit Scores
Fair Isaac and Associacao Comercial de Sao Paulo (ACSP), one of the largest credit bureaus in Brazil, have announced ACSP’s launch of Global FICO Score for Brazilian businesses - saying that “the launch of this innovative consumer credit-risk score makes Brazil the first South American nation to access Fair Isaac’s global-standard FICO credit risk scoring technology.”

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The Economist this week takes on mobile banking and the challenges and opportunities regulators are dealing with when it comes to increasing access to finance, quoting CGAP’s own Tim Lyman: 

What can governments do to foster m-banking? As with the spread of mobile phones themselves, a lot depends on putting the right regulations in place. They need to be tight enough to protect users and discourage money laundering, but open enough to allow new services to emerge. The existing banking model is both over- and under-protective, says Tim Lyman of the World Bank, because “it did not foresee the convergence of telecommunications and financial services.”

CGAP has been working hard on this issue, in collaboration with DFID and the GSM Association - learning how regulation is working and how it could be improved in seven countries. The results of that work will be shared in a CGAP/DFID Focus Note in early 2008. For more information, please drop me a line or call me at +1 202 473-1084.

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The many in-store Mexican banks have only begun to scratch the surface of the unfulfilled demand for financial services among low-income Mexicans. Or so hope Banamex, Soriana, and Wal-Mart Mexico, the latest entrants into the consumer credit bonanza in Mexico. The success of Banco Azteca, Coppel and other retailers who opened financial services outlets in their branches has attracted a wave of new competitors.

Banamex and Soriana recently launched a partnership making Banamex services available in all 240 Soriana stores, which see an average of 25 million customers per month. “Mi Ahorro Banamex” offers two products: a prepaid MasterCard card, redeemable at all Soriana and affiliated stores, and a savings card. They plan to introduce additional products, such as remittances and savings, in the future.

Wal-Mart’s approach is slightly different. Instead of partnering with a bank, they’ve decided to do it themselves. Banco Wal-Mart de Mexico Adelante is set to begin operations before the end of the year. Wal-Mart is certainly known for its low-cost, high volume business model, but will this carry over into their banking services? With 964 stores covering nearly every region of Mexico, the potential impact on the estimated 80% of unbanked Mexicans is huge.

Without getting into the debate on whether or not consumer credit is better, worse, or in fact the same as what microfinance institutions are offering, the impact of these new entrants will certainly be felt by both the consumer outlets as well as the microfinance institutions. And perhaps that’s not a bad thing, especially if it finally brings about price competition in this notoriously expensive market.

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Financial literacy - the level of understanding that customers have when it comes to services - is significant. Danielle Hopkins is with Microfinance Opportunities, a Washington-based group that focuses on financial literacy and other issues facing microfinance. Here are her thoughts.
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