Who owns the customer? This is a question that arises inevitably when discussing the value chain and corporate joint ventures in the context of financial services. Often, this misleading question leads parties to focus too much on the ownership component and less on customer acquisition costs which are a critical foundation of the business case.
We recently presented a research study at the 2012 Mobile Money Summit that looks at the synergies of retail and telcos for the provision of financial services in Latin America and which shows potential efficiency gains in customer acquisition costs of 35%.
When it comes to financial inclusion, retail has been one of the late driving forces in Latin America. While in the past, banks have been unable to cater to over 50% percent of households in the region, retailers have filled some of this gap and have started offering formal financial services to millions of previously unbanked customers.
For example, Cencosud, the region’s second largest retailer with USD 15 billion in revenues in 2011, has issued more than 4.6 million credit cards in Chile, Argentina, Peru and Brazil, and according to our research around 25% of them were issued to previously unbanked customers. As a point of comparison, in Chile the largest commercial bank has approximately 1.8 million active credit cards while Cencosud has 2.1 million (see here and here).
Additionally, retailers have not only become key players in the credit card business, but are now also expanding their portfolio of financial products to offer insurance, pre-paid cards, cash advances and loans, among others.
However, the incursion of retailers into the financial services realm has not always been a smooth ride, as attested by the ongoing accounting fraud investigation of Chilean retailer, La Polar.
It is evident that retail businesses have been able to compete with traditional financial services mainly by leveraging their existing core business, reducing costs and applying their customer service know-how. Competitive advantages such as store space and traffic, in-person sales, and cross-selling have been streamlined to reduce customer acquisition and service costs.
Also, the fact that retailers have had to compete with mainstream credit cards at their own checkout lines has resulted in greater efficiency in their operative model. One of the more important strategic advantages that some retailers have achieved is their ownership and control of four key elements of the credit card payments business: the merchant, the POS-device/network, the acquirer and the issuer. This reduces coordination costs and gives them full control throughout the payment value-chain.
According to our research, overall this innovative model for financial services has enabled retailers to achieve a 35% reduction in customer acquisition costs when compared to traditional banking. This number is obtained by comparing outsourced customer acquisition services.
In addition, with the growth of Mobile Virtual Network Operators (MVNOs) in the region, the potential benefits of intersecting financial services and mobile connectivity are becoming more evident. Assuming that by leveraging the previously mentioned advantages, retailers could attain similar customer acquisition costs reductions, we have modeled a retailer-backed MVNO 50/50 joint venture aimed at enhancing the provision of retail financial services in Latin America.
Our main findings are:
- A critical mass / profitability threshold could be lower than standard MVNOs, around 350,000 MVNO customers, which in our model represent only one third of the retail credit card-holder base.
- Innovation playground: Retailers’ full control of the payment chain simplifies coordination costs and therefore encourages innovation.
- A positive impact in Average Revenue per User (ARPU) could be expected through more intensive mobile use, although there is no conclusive evidence yet.
- Retailers would add a sound new service offering while gaining unparalleled access to mobiles as a platform for expansion and enhanced services, e.g. mobilizing existing financial services, as well as gaining customer loyalty.
- MNOs would gain additional customers at lower costs, with potential for increased ARPU.
Nonetheless, there are still important challenges ahead. There is a deeply engrained paradigm in retail, whereby all business units are subsumed to retailing itself. From this perspective, financing customer purchases in competing stores is an oxymoron, which signals that the scope of retail financial services will still be limited to its own closed loop.
On the other hand, these challenges relate directly to issue of pricing: Consumer interest rates tend to be higher in retail financial services than traditional banks. As a result of this, it is reasonable to expect that lower prices would encourage the adoption of formal financial products, and thus lead to financial inclusion. Retail has done a great job in leveraging financial services through increased efficiency. A joint venture with telecoms would yield additional benefits and potentially lower prices for consumers by fostering competition at the base of the pyramid.