In our first post in this series on the role of consumer goods retailers in financial inclusion, we discussed how retailers are similar to MNOs in their ability to reach unbanked customers. However, the opportunity for financial inclusion via organized retail, while significant, is not present in every country and not necessarily for every type of retailer. We expand on those points in this post.
According to a framework developed by McKinsey & Co., retail markets can be placed on a spectrum from “fragmented” to “mature.” We show a modified version of this framework in Figure 1.
The financial inclusion opportunity via consumer retail chains is biggest in countries that have both a growing consolidation in the retail market and still relatively high levels of unbanked people. Mexico, Brazil and South Africa are examples of such countries.
Mexico is a leading example, with at least ten retail networks involved in financial services. Pharmacy chains like Super Farmacia and Farmacias Benavides offer remittances and bill payments and serve as transactional agents for some banks. Retailers like Elektra offer credit card services in addition to being a bank agent and offering payment services. Supermarket chains like Soriana offer simplified savings accounts.
The diversity in Mexico can be explained in part by the enabling regulatory environment that allowed for non-banking entities like retailers to provide financial services. This is not the case in every country. For instance, for a number of years in India, organized retail chains could not serve as agents. Retailers could potentially play an even bigger role where regulation allows them to be licensed either as limited-purpose or narrow banks, as is the case in Mexico and as is being considered in South Africa under the highly anticipated but much delayed Dedicated Banks Bill.
In “mature” retail markets, retailers may still have a role to play, however the transformational impact is unlikely to be as significant. And the extent to which organized retailers can play a transformational financial inclusion role in “fragmented” and “exploratory” markets depends on the extent to which other players, such as MNOs, MFIs and banks, manage to bank the unbanked during the time that retail is getting organized.
Despite the diversity in markets like Mexico, our view is that certain types of retailers might be naturally better placed to offer financial services to low-income consumers. Because of their footprint and pre-existing retail specialization, convenience store chains and specialty low-income focused chains in particular have certain clear advantages (as shown in figure 2).
Convenience stores typically have a widespread footprint which puts them in a favorable position to offer low-cost bill payment and remittance services where convenient location of stores makes a big difference. Their footprint also makes them attractive agent partners for banks as we see in Mexico and Brazil. For example, Oxxo has plans to expand from its profitable bill payments product to offer domestic and international remittances and an e-wallet product.
Specialty stores focused on low income segments often don’t have as widespread a footprint as convenience store chains. However, what they lack in footprint, they can make up in other areas such as their understanding of low income customers, implicit customer trust and specific choice of location. Further, their niche product offerings often result in specific customer financial needs. In South Africa, for example, there are collectively over 9,000 outlets of specialty retailers that offer credit to low to mid-income segments, mostly linked to the sale of furniture, clothes and appliances. In fact, furniture store Ellerines has been acquired by microlender African Bank to leverage the credit opportunity.
In subsequent posts, we expand on the business case for retailers in financial services and share some evidence on challenges and lessons.