Segmenting the “Bottom of the Pyramid” in Mexico
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%.
- The existing amount of savings is significantly larger (in the aggregate, five times larger) than outstanding credit. The leverage ratio (credit to savings ratio) seems low and may signal the potential for latent demand.
- Outstanding credit is equivalent to 4.2% of aggregate income.
- Formal financial institutions are the source of roughly half of that loan portfolio. ◦
- If the other half was originated by the formal sector, it would increase the current consumer credit portfolio by 7.6%.
- There is an overall negative image of banks – they charge high rates, have an unclear fee structure, do not provide adequate customer services and are difficult to address with issues or concerns. However, most people displayed a willingness to use banking services if conditions were right (i.e. the above issues were addressed). This included interest in using correspondents to access formal banking services, particularly through name brand stores/chains.
- People seem open to using mobile banking but key issues would need to be overcome:
- People would expect predictable service with simple and transparent rules.
- Marketing would be important to build trust.
- Key positioning around convenience would be critical.
- There are many areas of low hanging fruit:
- Offer a broad range of savings products. In particular, commitment savings seems to be an opportunity (40% of BoP customers are actively engaged in tandas).
- Broaden mechanisms to assess customer liquidity and to repay and increase consumer credit.
- Finance employer credit (though this would require providing additional tools for managing employee loans).
- Develop combined credit/savings instruments that increase the leverage of customers.
- Fill the large gap in life insurance and medical insurance.
- About 60% of people at the BoP live in urban areas, but they still have limited mobility and therefore highly value convenience. Financial service providers will need to adopt mass plays leveraging correspondents to expand reach, and reducing the transaction (and investment) costs. Additionally, they will need to:
- Develop alternative low-cost branch formats to maintain direct presence close to where these markets work and live.
- Expand the use of channels (mobile, agents).
- Increase financial education and use better marketing efforts to seed demand.
- Total revenue pool at the BoP is estimated to range from 1.9 to 2.65 billion USD.
- About 2.7 million households at the BoP today are expected to migrate to higher-income segments over the next 10 years. These people alone will expand the total revenue pool by 46% to 64%. Addressing the needs at the BoP today will help capture that additional revenue pool more quickly.