Lecture Micro financing and micro leasing - An Introduction - Lecture 8

Lecture 8 - Four critical challenges in the bop market. After reading this chapter, you should be able to answer the following questions: 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? 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?

FOUR CRITICAL

CHALLENGES IN THE

BOP MARKET

• WHO SERVES THE BOP MARKET— AND

WHO DOESN’T?

can barely put food on the table?

interest rates?”

customers? Won’t they default and

disappear into the slums?”

ATM machine?”

from businesspeople who have little

exposure to the clients of the the-pyramid (BOP) market

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 low-income people They

demand answers

hesitations, we can also ask:

market? Do they want the same products

as the middle class?

small loans and processing tiny

transactions? Is technology the solution?

fear? Where exactly do the risks lie?

risk? Can the private sector use the same techniques?

good reasons to avoid serving the BOP market, because they had no good

answers to questions like these No

longer

answers exist and that they can be

applied effectively if companies adapt their business models to market demands

innovations, and greater market

understanding provide potential solutions

to the core challenges of the BOP market

decades of experience with commercial microfinance and in the experience of

private-sector companies that entered the low-income financial market early on

Four Critical Challenges

mentioned into four challenges inherent in providing financial services to BOP

customers:

1 Understanding the clients.

kinds of financial services as middle-class customers However, it is a classic

mistake to treat products for the poor

simply as scaled-down versions of those for higher-income customers

Understanding the clients.

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.

the Middle East have learned how to

approach Muslim clients who worry that it might be a sin to pay interest

Understanding the clients.

learned to relate to the informal lending

circles—tontines and susus—that many

West Africans join.

2 Reducing costs.

transactions associated with the poor is the fundamental challenge to profitability

Reducing costs.

clients and those in rural and remote

areas Rather than just squeezing costs down, serious rethinking is needed

Reducing costs.

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.

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.

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.

create or enter a virgin market alone

Other providers help develop the market, attract supporting businesses

Building the industry.

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.

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

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

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 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

financial services, and therefore are likely

to value them highly and perform well as clients

Challenge 1: Understanding

Clients

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

need to consider include these:

Challenge 1: Understanding

Clients

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

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

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

or mistrust banks—a fact of life that

marketing strategists must confront early

on

Challenge 1: Understanding

Clients

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

finance include savings, money transfers, and insurance, but these are only the

broad areas ripe for growth

Challenge 1: Understanding

Clients

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

product design in the next lectures

Challenge 1: Understanding

Clients

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

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

clients—such as retailers with large client databases— have an enormous

advantage

Challenge 1: Understanding

Clients

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

information may want to partner with

organizations that possess it, such as

microfinance institutions

• FOUR CRITICAL CHALLENGES IN THE BOP MARKET