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 Summary • WHO SERVES THE BOP MARKET— AND WHO DOESN’T? Challenges • • 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?” Challenges • • “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?” Challenges • We sometimes hear questions like these from businesspeople who have little exposure to the clients of the bottom-ofthe-pyramid (BOP) market Challenges • While the questions may reveal a lack of 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 Challenges • To surface more potential doubts and hesitations, we can also ask: Challenges • • What’s different about the low-income market? Do they want the same products as the middle class? How can we reduce the cost of making small loans and processing tiny transactions? Is technology the solution? Challenges • • Are low-income clients as risky as we fear? Where exactly the risks lie? How microfinance institutions manage risk? Can the private sector use the same techniques? Challenges • In the past most private companies had good reasons to avoid serving the BOP market, because they had no good answers to questions like these No longer Challenge 1: Understanding Clients • Some of the characteristics providers need to consider include these: Challenge 1: Understanding Clients • Much of the BOP market is self-employed, 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 • Low-income people may need financing 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 • The lives of low-income people are 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 • Customers in the BOP market often fear or mistrust banks—a fact of life that marketing strategists must confront early on Challenge 1: Understanding Clients • Successful approaches include hiring staff 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 • Important product areas for inclusive finance include savings, money transfers, and insurance, but these are only the broad areas ripe for growth Challenge 1: Understanding Clients • Much creativity is needed to address the 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 • We will see more examples of creative product design in the next lectures Challenge 1: Understanding Clients • To gain market knowledge, it is sensible to 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 • ANZ discovered that vulnerability to 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 • Businesses that already connect with BOP clients—such as retailers with large client databases— have an enormous advantage Challenge 1: Understanding Clients • Banco Azteca in Mexico used the client 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 • Businesses without access to such information may want to partner with organizations that possess it, such as microfinance institutions Summary • FOUR CRITICAL CHALLENGES IN THE BOP MARKET ... lenders (Banco Azteca) and microfinance institutions (Compartamos Banco), telecoms and technology companies (Vodafone, Visa Inc., Temenos), investors (Sequoia Capital), and investment banks (Credit... performance, so much so that in a 20 08 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... 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 • Microfinance institutions