More Retailers Are Banking On Mexico's Unbanked

  Approximately 70% of Mexico’s estimated population of 109 million is unbanked, operating in an informal, cash-based economy with no participation in savings or credit products. But a new crop of financial-services providers led by retailers is working to change the landscape by offering credit and debit cards to these typically lower-income consumers.
  Visa Inc. has a solid foothold in the lower-income credit card market, through Mexico’s most-prominent retailer-owned bank, Banco Azteca, owned by Grupo Elektra. Banco Azteca won a banking charter in 2002 and expanded rapidly, adding Visa credit cards in 2005.
  Other Mexican retailers, including supermarket operator Chedrau and household-goods retailers Grupo Coppel and Grupo Famsa, followed suit by getting their own bank charters and recently began offering similar in-store banking options. Citigroup’s Banamex last year formed a joint partnership with general-goods retailer Soriana to make similar offerings available.
  The newest entrant is Wal-Mart Stores Inc., which plans to open 100 Banco Wal-Mart outlets this year at its Mexican stores. Wal-Mart has announced plans to offer a range of financial-services products, and industry observers expect Wal-Mart to offer MasterCard- or Visa-branded cards to low-income consumers. Banco Wal-Mart officials could not be reached for comment.
  The surge of financial services and credit card offerings for low-income consumers is causing a flurry of fresh competition in the sector. A result may be a wider array of credit offerings for Mexicans and less reliance on under-the-mattress savings.
  Card networks recognize the potential for substantial growth in the low-income market.
  â€œMasterCard has identified the lower-income consumer market in Mexico as very attractive, and there is a huge opportunity here to drive development of credit and debit products,” says Lizbeth Hasfield, country manager, MasterCard Mexico.
  MasterCard is in discussions with several retailer-owned banks interested in issuing credit and debit cards, says Hasfield, declining to reveal the merchants’ names.
  Despite the demand for banking services for low-income consumers, Mexico’s traditional banks long have ignored this market, focusing instead on corporate and affluent customers. Their operations typically are based in urban centers, which can make them inaccessible to lower-income consumers who live in outlying areas and lack savings, credit histories and payroll data.
  Retailers, however, see a variety of opportunities in this market. The billions of dollars workers based in the United States send to impoverished relatives in Mexico through remittance services have created a demand for savings and credit products in lower-income sectors. Although remittance activity slowed from historic double-digit growth last year, likely because of declines in the U.S. housing market and in construction workers’ income, Mexicans received about $24 billion in remittances from U.S.-based workers in 2007, according to the Bank of Mexico (see chart at top of page).
  Retailers saw how remittances could be converted into installment loans for store merchandise, and they began to offer in-store credit years before they sought formal banking licenses. Annual interest rates for credit in the higher-risk, low-income sector are high–between 50% and 120% on consumer loans, say industry observers, which makes them profitable for retailers.
  The Mexican government identified the need to expand banking services to a wider audience, and in recent years approved banking licenses for several nonbank players and retailers. Industry groups and the government are backing other initiatives to stimulate banking competition and greater use of credit and debit card products (see story on page 44).
  Customer Knowledge
  Deep knowledge of their customers and a willingness to experiment with nontraditional credit-scoring and risk models have been central to the retailers’ success, experts say.
  â€œLow-income Mexican consumers operate in an informal economy where they are paid inconsistently, primarily in cash. So income must be estimated, credit limits are kept low, and banking products must be oriented around small weekly or monthly in-person payments,” says Stephen Palacios, an executive vice president based in the New York office of Cheskin Added Value, a Redwood Shores, Calif.-based marketing consulting firm that has worked with banks and retailers in Latin America. “With their foot traffic and penetration in smaller cities in Mexico, retailers are the perfect conduit for banking services for this emerging market.”
  Banco Azteca is a prime example of the emerging retail-to-banking model in Mexico that other retailers appear to be copying, says Nelson Irizarry, a principal with Linthicum, Md.-based First Annapolis Consulting, an expert on Latin American banking.
  Just six years after the first Banco Azteca outlets opened at Grupo Elektra stores, the retailer now operates 1,600 banking outlets in about 300 cities across Mexico, says Daniel McCosh, spokesperson for Grupo Elektra’s parent, Mexico City-based conglomerate Grupo Salinas. Most are located within parent Grupo Elektra’s retail outlets, but Banco Azteca also has 300 freestanding banking outlets in Mexico.
  Banco Azteca also opened outlets in Panama, Honduras and Guatemala within the last few years, and in February it launched operations in Peru. This month Banco Azteca plans to make its debut in Brazil, according to McCosh. Industry experts say Banco Azteca contributes about 20% to Grupo Elektra’s US$5 billion in annual revenues.
  The key to Banco Azteca’s success is its ability to adapt its credit-scoring methods to its audience.
  â€œMost of our customers work in the informal economy and are paid on an irregular basis, so there is no payroll history to determine credit history,” says Daniel McCosh, a spokesperson for Grupo Salinas, which owns Banco Azteca’s parent. “We do a lot of estimating and physical verification of our customers’ credit history.”
  When necessary, Banco Azteca sends lending agents into the field to visit prospects’ homes to verify their addresses and assets and to interview neighbors and references. Those deemed creditworthy become qualified for consumer loans or a Visa card with an average credit limit of about $200, McCosh says. They may open interest- bearing savings accounts with as little as $5 and time-deposit accounts with an initial deposit of about $450.
  Banco Azteca issues between 3 million and 4 million credit cards, the majority of which are equipped with an EMV-compliant smart chip that stores an image of the cardholder, according to McCosh. The bank also uses biometric fingerprint readers throughout its operations and at most of its branches to prevent fraud and to authenticate employees and customers. Redwood City, Calif.-based DigitalPersona Inc. supplies the fingerprint-based biometric technology.
  Wal-Mart’s Plans
  Few details are known about Banco Wal-Mart’s proposed financial-services product, says Maru Cortazar, executive director in Mexico City for Appleseed Network, a Washington, D.C.-based nonprofit organization that provides pro-bono legal help to low-income consumers. But she expects Wal-Mart to follow Banco Azteca and other retailers’ examples.
  Consumer advocates and the Bank of Mexico welcome competition in the marketplace for banking products because it may increase access, drive down the costs and improve the quality of services, she says.
  â€œThe retailers charge high interest rates for their financial-services products, so a consumer repaying a loan at a few dollars per week might pay back five times the value over the life of the loan,” Cortazar says.
  She says some industry abuses have been noted, such as retailers refusing to give consumers cash in exchange for remittances, insisting instead on giving them store credit for merchandise.
  Competition ultimately may affect their pricing for banking services, but retailers believe there is much room for growth in a relatively untapped banking and payment card market for low-income consumers.
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