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Financial Services for Brazilians in the C, D & E classes:Snapshot of recent CGAP research
April 2, 2012
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CGAP Technology and Business Model Innovation Program
We Build Knowledge on issues such as customer needs, agent
networks, and business models
We Strengthen Markets so that promising
branchless banking services can thrive
We Promote Policies and Regulations that allow branchless banking
to expand and reach unbanked populations
The Technology and Business Model Innovation Program at CGAP works with banks, microfinance institutions, mobile network operators and retail stores to deliver financial services through new technologies, such as mobile phone, magnetic stripe or chip cards, and biometric applications.
Status of CGAP work in Brazil
• Partnership and close ties with Brazilian Central Bank on financial inclusion
• Partnership with major Brazilian banks
• Support to innovative start-ups
• Public good research:– Profitability and mechanics of agent channel– Qualitative research on low-income consumers
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What is special about Brazil?
What has CGAP learned from the CDE classes?
How can Brazilian banks serve these segments?
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What is special about Brazil?
What has CGAP learned from the CDE classes?
How can Brazilian banks serve these segments?
• Between 1992 and 2009, 47 million individuals migrated from the D and E classes to the C class, doubling the size of the C class in relation to what it was in 1992.
The “pyramid” has become the “diamond”
Global view: Brazil leader in agent banking
Country # of agents Brazil 160,000Kenya 24,000Philippines 20,000Pakistan 18,000India 10,000South Africa 7,000Colombia 6,000
• All of Brazil’s municipalities have at least one correspondent
• 3.1 billion transactions in 2010 through this channel
• Unconditional transfers of different kinds—child, old age, disability reach 14 million people
• Various payments methods: cash, prepaid smart card, or debit card linked to account
• Savings, credit, insurance offered by some providers
South Africa’s Social Security Agency
• Workfare program reaching over 45 million people• Various payment methods: post office savings accounts, village officials, and smartcards linked to no-frills bank accounts
• Savings, insurance offered by some providers
India’s NREGA • CCT program started in 1997 reaching 5 million households (18% of population)• Various payment methods through Bansefi and Telegrafos/Telecomm• Bansefi has various payment mechanisms, including cash, debit cards, agents• Savings offered by Bansefi
Mexico’s Oportunidades
•CCT program reaching 2.2 million families •Tender won by state bank Banco Agrario to pay grants through savings accounts
•1.8 million interest-bearing savings accounts opened
Colombia’s Familias en Accion
• Salary and pension payments; cash transfers under BISP and emergency relief
• BISP has piloted various payment approaches: post office, smart cards issued by bank, mobile service providers
Pakistan’s BISP and other programs
Global view: pioneering financial services link to government benefits
Key challenges and opportunities for financial inclusion
• High physical channel access…but low-cost models underutilized to target financially excluded
• Brazilian banks are product innovators…but there is product mismatch with low-income consumers’ needs
• Lots of public research on new emergent C class…but research has not increased foundational knowledge of C, D & E classes
Source: Plano CDE, 2010 Sample: Recife 609 – São Paulo 1006 (non relevant data)
Travel
Travel
Private school Car
Car
Pay debts
Pay debtsSave or invest
Buy or renew Save or invest
9%
9%
Travel
13%
Pay debts
4%
3%4%
3%8%
6%
DE
C
AB 32%
43%
48%
14%
Own business
6%
5% 4%
2nd home
15%
Own education Private school
3%
Car
Food
2%
2%
Health Plan
Leisure
2%
Buy or renew
Buy or renew
2nd home
2nd homeSave or invest
Own educationPrivate school
Health Plan
What would you do if your income doubled?
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What is special about Brazil?
What has CGAP learned from the CDE classes?
How can Brazilian banks serve these segments?
Background on CGAP research
• Research conducted between June 2011 and March 2012 in partnership with Brazilian banks
• Focus on qualitative research
• 75 interviews with C,D & E consumers (88% D&E)
• 5 areas: Rio de Janeiro, Sao Paulo, Recife, Porto Alegre and Maceio
• Conducted with Plano CDE and independent consultant Juliana Estrella
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Overview of profiles
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“Orkuterati”21 years oldD2 segment
“Cash Prince”18 years oldD2 segment
“Self-Satisfied”33 years oldC2 segment
“Lazy-optimists”33-38 years old
D1 segment
“Seasonal-Jack”51 years oldD1 segment
“Community Maven”28 years oldD2 segment
“Savings Addict”47 years oldD2 segment
“Tempted”45 years oldE segment
“Budget Artist”65 years oldE segment
“Just Welfare”32 years oldE segment
Finances• Owns his home• Current account at Bradesco, savings
account at CAIXA and 3 credit cards (2 Itau, 1 Bradesco for Casas Bahia)
• 33 years old• Lives in Rocinha• Monthly income: R$1900• Is a sommelier at a restaurant and
cleans motorcycles on weekends• Is evangelical / no lottery• Buys appliances in installments• Has internet at home• Has post-paid cell plan with Nextel
Customer Profiles: The New Comer
• 33 and 38-years old• Monthly incomes: R$800-1000• Both sell arts & crafts outside of
historic church in Olinda.• Buy their appliances in parcelas• Play lottery every week
What do you think?Do they own their homes? Do they have a savings and/or
current account?Do they have credit cards?Do they have internet at home?
Customer Profile: The Lazy Optimists
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• He is 51 years old• Lives in Maceio, Alagoas• Has been a jangadeiro and fisherman for
34 years • 5 children, 7 grandchildren• Variable income: will do boat tours and
fish during one half of the year and then needs to save for the ‘low-season’
Finances:Owns his own homePrefers to save up and buy ‘a vista’Has a savings account at CAIXA and a hipercard credit cardHis granddaughter has BF for her child (both live with him)Has a cell phone and dislikes being in debt
Customer Profile: The Seasonal Jack
• 28-years old• Lives in Morro dos Macacos in RJ• Unemployed, with 2 kids• Husband’s monthly income: R$900• Used to sell Açai
What do you think?Does she own her home? Does she have a savings and/or current
account?Does she have internet at home?
Customer Profile: The Community Maven
• 21-years old• Lives in Santo Amaro, SP• Works as a copier• Monthly income: R$600• Lives with her mom and nephew, mom’s
income from ‘bico’
What do you think?Does she own her home? Does she have a savings and/or current
account?Does she have internet at home?
Customer Profile: The Orkuterati
• 18 years old• Moved to São Paulo from Paraiba• Is a helper at a store• Monthly income: R$700
What do you think?Does he own or rent?Does he have a savings and/or current
account?Does he use his cell phone mainly for calls
or for SMS?
Customer Profile: The Cash Prince
• 47-years old• Monthly income: R$700• Has a stall at fair in Olinda (sells
coconut fiber tablecloths)• Buys everything ‘a vista’
What do you think?Does she own her own home? Does she have a savings and/or
current account?What kind of cell phone plan does
she have?
Customer Profile: The Savings Addict
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Customer Profile: The Tempted
• 45 years old, has 5 kids & grandson• Lives in Restinga, Porto Alegre• ‘Faxineira’• Makes R$300/month (if she gets extra
jobs, add R$100)• Receives Bolsa Familia for 2 kids• Her sister helps her out with food
Finances:Recently got a Minha Casa, Minha Vida apt
(pays R$65/month)She has a simplified account, but only uses
it to withdraw BFUses ATMs and lottery to withdraw Used to have a credit card at Itau (but
couldn’t pay it off)Tried buy insurance, but cancelled
“I buy everything I get offered on the street– it’s so tempting!”
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Customer Profile: The Budget Artist
• She is 65 years old• From Penedo, Alagoas• Very recently widowed• 12 people live in her home, including four
adopted grandchildren• Her income is variable: She is a ‘bordadeira’.
She is part of an embroidery association and her salary is based on how many of her pieces sell (~R$100/month).
• She gets R$192 BF/month and her husband’s pension of R$600.
Finances:Owns her home Has a savings account at CAIXA (no balance)Receives pension in Bradesco accountHas a hipercard CC that she loves “People sometimes do things they
can’t… the more [products] people have, the more they spend.”
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Customer Profile: Just Welfare
• 32-years old• Lives with her two sons• Lives in Sao Carlos, a favela in Rio• Has no job, lives from BF income• Bolsa Familia benefit: R$113• She has a pre-paid cell phone account
(spends R$7-12/month)• Both of her sons have a rare blood
disease
Finances• Owns her home• Her mom, who receives disability welfare
helps her out at home• Has bought appliances in installments
with her mom’s CC
C$1575 - $5250
50% of pop
Short-term savings
Payments
Advisory
Housing
Pens
ions
Long-term
savings
Insurance
Credit
Credit cards (via banks),
payroll-consigned loans,
installment loans (via
Casas Bahia and private
label cards). Credit for
cars, motorcycles and
household goods.
Overdraught.
Save in cash at hom
e, som
e have savings account (esp w
ith C
AIX
A). S
ome savings
capabiity.
Only program M
inha
Casa M
inha Vida. All
banks offe
r mortg
age
programs for C
+
(need to do m
ore
research
here).
Common to receive
salary in current a/c
(Bradesco, CAIXA)
but make payments in
cash (via agents) or at
ATMs
Those
with
form
al jobs
get IN
SS autom
atica
lly.
Those in
depen
dently
emplo
yed p
ay in
to INSS.
Retirement
savin
gs ar
e
rare.
Form
ally
em
ploy
ed
auto
mat
ical
ly e
nrol
led
in IN
SS
. S
ome
mig
ht
have
priv
ate
pens
ion
prog
ram
s.
PROCON: Federal consumer protectionGovernment. Banks’ customer service. Fin Education program
(limited to some areas)
Everyone uses free public state/city clinics. Insurance industry still
has no reach.
A view of financial services supply in the Brazilian Market
D$525 - $1575
30% of pop
Short-term savings
Payments
Advisory
Housing
Pens
ions
Long-term
savings
Insurance
Credit
Credit cards (via banks),
payroll-consigned loans,
installment loans (via
Casas Bahia and private
label cards), loans from
MFIs.
Save in cash at hom
e, som
e people have a savings account (esp
with C
AIX
A) but
withdraw
funds. Only
program Minha
Casa M
inha Vida and
no micr
o mortg
age
market
Common to receive
salary in current a/c
(Bradesco, CAIXA)
but make payments in
cash (via agents) or at
ATMs
Few pay I
NSS, and
few
maintain
a ret
iremen
t-
type a
ccou
nt av
ailab
le via
CAIXA an
d mak
e
spora
dic pa
ymen
ts int
o
this a/c
INS
S a
vaila
ble
but D
se
gmen
t not
pay
ing
into
it o
r una
war
e
Elig
ible
for p
ensi
on o
f 1
min
sal
ary.
PROCON: Federal consumer protection
Government Fin Education program
(limited to some areas)
Microinsurance industry still too small. Everyone
uses free public state/city clinics.
A view of financial services supply in the Brazilian Market
E<$525
10% of pop
Short-term savings
Safe storage
Any Bolsa beneficiary
gets Conta Facil
automatically unless
they refuse (and many
don’t use it actively to
save)
Payments
Housing
Adv
isor
y
Long-term
savings
Insurance
Credit
• Rely on family members for health emergencies
• Free clinics for health or specific programs
Mostly use family
members credit cards to
make purchases at
retailers for home
appliances
PR
OC
ON
: Fed
eral
co
nsum
e r p
rote
ctio
nG
over
nmen
t Fin
E
d uca
tion
prog
ram
(li
mite
d t o
som
e ar
eas)
Only program M
inha
Casa M
inha Vida and
no micr
o mortg
age
market
If they have job, mainly receive in
cash. Pay utilities in cash through lottery
housesS
ave in cash at home,
if BF beneficiary, could
save in Conta Facil.
Mostly do not have enough to save.
No prac
tice o
f long
–term
savin
g. Alm
ost a
ll use
d
for im
mediat
e
cons
umpti
on.
A view of financial services supply in the Brazilian Market
Issues that impact financial decision-making
1. Low, irregular, unpredictable income
2. Financial shocks
3. Consumption/ 'temptation shock’
4. Poor mental accounting
5. Easy credit
6. Psychological hurdle big amount
7. Indebtedness practical and psychological
• Many in the D Class are informally employed. Informal work leads to some months earning an income and other months not. Plus, to exacerbate the irregularity, it’s not certain when work will pick up
• Lumpy income and expenses including utilities create financial stress. It’s difficult for people to match the timing of income with that of expenses.
• Uneven cash flow and lack of ability to plan make saving in anything other than the mattress difficult.
Issue 1: Low, irregular & unpredictable income
• Bill shock: though recurring, utility bills are not always fixed; they are usually unpredictable in their amount.
• Health shock: public health services force people to lose days when dealing with family illness. The expense of medicines can be shocking.
• Other unpredictable expenditures can throw a family’s economy for a loop.
Issue 2: Financial Shocks
• Some cannot resist a culture of consumption.
• General consumption: What do people do when there’s extra income left? People seem to buy superfluous or more expensive food, purchase clothing or footwear and electronics.
• Temptation shock: Lack of self-control observed in sudden urges to consume and helplessness to refuse children’s requests for expenditure.
Issue 3: Consumption & Temptation
“When my daughter asks for money, I can’t
say no.”
The appeal to satisfy current desires is much greater than that of planning for the future.
Savings
Planning for the future
Comfort, status, immediate gratification
Savings =
consumption deprivation
today
Consumption Credit
Access to consumer goods now
Savings
Versus
• For some, poor mental accounting is a barrier.
• “Bills and budgets are done in the head. This leads to mental under-spending.”
• People expect to have more money by the end of the month because of miscalculations.
Issue 4: Mental Accounting
• Loans of many kinds, despite blacklisting, are available. Store credit and split purchases, credit cards, and pastinhas.
• People also use overdraft facilities and get advances from family.
• “Even when indebted, they are still contacted by institutions offering them credit.”
Issue 5: Easy Credit
• People, for the most part, believe that savings are “a big deal.”
• “Bit by bit” is not the current mindset. People believe that small incremental amounts will not amount to much.
• People’s perception is that in order to save successfully, one has to make a substantial effort and put in substantial savings.
Issue 6: Psychological Hurdle- ‘Big Savings’
• Temptation in the midst of a consuming culture leads to indebtedness.
• Being burdened by paying off debt prevents people from saving. This creates vicious cycle.
• Potential users are overwhelmed by the amount of debt they have, thus creating psychological and practical barriers to saving and managing money.
Issue 7: Indebtedness, practical and psychological
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Source: PlanoCDE, 2010Sample: Recife 609 – São Paulo 1006 (dados não ponderados)
70%
54%
41%
34%
21%
17%
E
D
C-
C+
B
A
Nome sujoHaving difficulties cleaning your name has something to do with people your social class?
Issue 7: Indebtedness, practical and psychological
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What is special about Brazil?
What has CGAP learned from the CDE classes?
How can Brazilian banks serve these segments?
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Basic understanding of poor
Cost of delivery
View and process of product development
Enabling environment
Why few financial institutions are
organized for consumer insights to lead to products
consumers want
• Assumptions about the poor often constrain product thinking
• Poor consumers are treated as one segment
• Low margins on services to low income consumers mean dramatically cheap delivery channels
• Focus on channel slows down product development
• Managers feel alone in tyring unproven products or reaching new segments
• Inflexibility in the process• No ability to trial and iterate
• Restrictions on types of channels, products and prices
• Ability to strike partnerships
Few financial institutions are organized to use consumer insights
Collect ideas from Experts / Employees
Collect ideas from consumers
Global view of how financial intitutions
develop products and innovate
• Citibank’s Innovation Labs, Japan/NYC
• Bankinter Labs
• Standard Chartered and Singapore Management University
• BBVA Plant 29, Spain
Partnerships with start-up providers
• EasySave, Kenya
Test ideas, incubate• Standard Chartered China Innovation
Lab• Uganda AppLab
How financial institutions are developing products and innovating
From client observations to innovative products
• There are not enough efforts around the wrold to carry out this kind of research.
• One of the best known examples is Finscope: nationally representative research of consumers’ perceptions on financial services and issues.
• At CGAP we are considering foundational research in various select markets: Mexico, Ghana and Brasil
Challenges and Opportunities: Foundational Research
• Segmentation analysis of the base of the pyramid with qualitative insights by segment.
• Idea: to understand the financial needs and perceptions of the lower income segments in Mexico
• Mexicano context: Banks are increasing their capilarity, but they are still not reaching the poorest
• Existing studies are only demographic and offer information that is too general
Example: Foundational Research in Mexico
Mixed research methodology: qualitative and quantitative (carried out with McKinsey)
1. Quantitative survey (426 interviews, nationally representative); linked to household statistics (ENIGH)
2. 31 interviews in more depth (2 hs)3. 3 focus groups to validate conclusionsMarket research based on four dimensions: (1) structure of income and
expenditure flows, (2) preoccupations, (3) aspirations and (4) strategies in money management.
(1) Foundational insights for product development
(2) Common understanding of financial inclusion
Families at the BOP that have an active relationship with a formal financial institution
Only 50% of credit is formal
52%
Only 10% use formal savings mechanisms*
10% 50%
* In the broadest sense, including temporary storage
(3) Common understanding of impact of financial inclusion on GDP
Advancing financial access for the world’s poorwww.cgap.org
www.microfinancegateway.org