In an earlier blog post of last year we shared the findings of a market segmentation study in Mexico conducted by CGAP, in collaboration with McKinsey & Company. The study (available in English and Spanish) sought to better understand the financial needs and wants of low-income customers, in an effort to improve product design by financial service providers. A recent CGAP Brief summarizes several key findings from the study and reminds us of the following puzzle: While we may know a lot about the supply side of financial inclusion, the demand side remains poorly understood.
In a perfect market for micro-financial intermediation, product offerings would reflect the distinct needs of a diverse clientele. An artichoke producer in Caraz, Peru would be able to access a loan with flexible repayment schedules to match his revenue stream around the harvest dates. Micro-insurance would allow this same farmer to secure cash flows against adverse weather conditions such as frost and rainfall brought about by “El Niño”. A garment factory worker in Bihar, India would have a savings account with “pockets” for separate financial goals: her daughter’s primary school expenses, university tuition and ultimately her wedding. Ex-ante imposed cut-off dates would determine as of when she is allowed to draw on the accumulated capital.
Alas, product diversification often falls short of the wide gamut of micro-consumer’s financial needs and preferences. Standardized credit products originally designed for small merchants in urban areas are retailed wholesale in rural communities with idiosyncratic cash flows. Salaried workers in the formal sector with regular income-streams are enticed into expensive borrowing schemes, whereas first-time entrepreneurs may remain underserved. Take Mexico’s “base of the pyramid”: 22 million mid-to-low income families, or 85 percent of the population. Even though 52 percent of households have an active account with a financial institution, few providers understand what these customers need: as many as 90% of them choose to use informal options when it comes to saving.
CGAP’s recent brief, “A Structured Approach to Understanding the Financial Service Needs of the Poor in Mexico” goes some way in closing what appears to be a knowledge gap of micro-customer’s financial habits and practices. How do low-income families manage cash flows? How do people confront cash shortfalls? What makes households save and borrow money in one way or another? In answering these questions the brief cites lessons from a study that CGAP commissioned to explore the financial planning behavior of different low-income segments in Mexico.
The study’s initial hypothesis was that the principal driver for financial practices is essentially people’s livelihoods, or more simply their occupation. Later, this assumption was expanded to also include locality (geographic location) and level of income as additional factors determining product needs. Based on a national survey of households with a monthly income below US$1,440, data was collected to inform about income structure, aspirations, concerns, and money management strategies. In addition to the survey, in-depth interviews and focus groups were conducted to substantiate the findings.
After all the data slicing one message stood out: money management strategies and income structures (amount, variability and regularity of income) are strongly connected. The cash flow patterns in each of the lower-income segments shown in the chart below illustrate the diverse financial product needs:
- A store clerk with stable and predictable income who ordinarily saves to meet goals might find more value in a suite of savings options, such as commitment or long-term savings.
- A construction worker struggling to manage fluctuations in income to meet expenses would find value in simple savings products that help him plan for foreseen expenses, commitment savings to achieve longer term goals and short-term credit to smooth out shortfalls (as displayed by the red circles in the above graph).
- A street vendor with highly variable daily income would value a portfolio of credit options providing liquidity for business opportunities or to smooth out expenses, as well as a transactional/payment account to manage his daily cash flows.
- A small-holder farmer with probably the most irregular income of all segments, usually has to supplement income with other sources. In addition, the farmer might benefit the most from microinsurance, microsavings products and small-value credit for emergencies.
In concluding, the Brief offers three overarching lessons. First, liquidity management and consumption smoothing are the top needs for most households. Second, regular income is an important driver of savings patterns. And third, informal financial and social networks are an important source of finance for low-income households, forcing formal providers to understand their added value compared with informal options.
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