Summary of the Last Lecture

Summary of the Last Lecture New Technology Corporate Choices

MODELS ANDCORPORATE CHOICES

Financiers • The financing of microfinance is especially appealing for international and investment banks, because they can use their status and deal-structuring creativity to bring microfinance institutions to new kinds of investors.

Financiers • Standard Chartered Bank, for example, has used its presence throughout Africa and Asia to develop a portfolio of $170 million across 13 countries financing 41 MFIs. In many cases Standard Chartered places funds from international investors who need its assistance to convert dollar or euro loans into local currency.

Financiers • International investors have also been pouring money into microfinance; total international investment increased from $1 billion in 2004 to $5.4 billion in 2008. At first, only socially responsible investors were interested in inclusive finance, and deals were far too small for institutional investors.

Financiers • As more mainstream investors enter, however, they rely heavily on well-known investment banks for quality assurance. This means that investment banks and venture funds have a unique market-making role to play in bridging between worlds.

Financiers • The strong reputation and international connections of Credit Suisse were surely an important factor in the stunning success of the CompartamosBancoIPO in 2007.

Financiers • Shares of CompartamosBanco, a Mexican MFI previously little known to investors outside Latin America, was sold by Credit Suisse to American and European investors (among others) at the unprecedented share price for a microfinance institution of 13 times book value.

Financiers • Other high-profile deals included the Sequoia Capital India investment in SKS Microfinance and the Deutsche Bank’s Microcredit Development Fund.

Financiers • A decision to finance rather than deliver does not preclude later direct involvement. It may even pave the way. Annibale makes this point with respect to Citibank.

Financiers • His unit’s early steps involved investment banking—bond issues for CompartamosBanco in Mexico and Mibanco in Peru, and securitization for BRAC in Bangladesh.

Financiers • After several years of participation at the investment banking level, Citibank has begun to experiment with direct retail provision, for example, in remittances and payments.

Deliverers • If you really want to contribute to solving the problem of access to quality financial services, there is no substitute for direct engagement.

Deliverers • Potential champions contemplating direct delivery must combine cost structure, branding, market knowledge, and corporate culture to create a business success. Organizations well-positioned to do direct delivery have access to or ways to develop:

Deliverers • An extensive net of delivery outlets in low-income neighborhoods • A popular sector orientation where they see themselves, and customers see them, as friendly to the BOP market, or at least to “adjacent”marketsegments like small business or middle income consumers • Ability to process and manage millions of tiny transactions at low cost

Deliverers • If parts of this description sound more like a mass-market retailer than a commercial bank, it should come as no surprise that some of the most successful entrants into inclusive finance, like Banco Azteca in Mexico, come from retail sectors already known to customers.

Deliverers • Latin American banks and retailers are more likely than those in other regions to go into direct service provision, as in the case of BancoAzteca, BancoBradesco in Brazil, and Banco Pichincha in Ecuador.

Deliverers • Their motivations include stiff competition in mainstream markets (such as invasion of their markets by large international banks), demonstrated profitability of microfinance institutions, and the presence in some cases of underutilized branch infrastructure.

Deliverers • The outcomes of direct delivery strategies have varied widely from attempts that never reach many people and are abandoned after a short time, to major successes reaching millions of people—which points to a second set of important corporate choices.

In-House vs. Partnerships • For those bold enough to go into direct delivery, the next major choice becomes whether to go it alone or in partnership with other organizations.

In-House vs. Partnerships • Few companies have all the attributes needed for successful entry, so they must decide whether to build the new competencies themselves, acquire them, or partner with others.

In-House • Some organizations decide to build their own capacity, thus capturing the whole revenue stream from the operation and avoiding the difficulties inherent in partnering arrangements. Companies that follow this route generally already have most of the key attributes we mentioned above.

In-House • Even for the best suited organizations, entry into inclusive finance cannot be treated simply as new product development. It often requires the creation of new structures.

In-House • Grupo Elektra, which had an extensive retail structure, client connections, IT capability, and a history of financing consumer purchases, still needed to create Banco Azteca in order to take full advantage of the inclusive finance opportunity.

In-House • It created the bank in part for regulatory reasons, but also to ensure focus in the new operation. BancoPichincha of Ecuador created a new brand, Credifé, to market itself directly to BOP clients without affecting its main brand.

In-House • Sogebank in Haiti created distinct branch infrastructure to accommodate the flood of new clients microlendinggenerated.

In-House • Many companies find that the greatest obstacles to increasing involvement in inclusive finance are internal. Their traditional core business units simply have not considered low-income people worthy clients.

In-House • One solution to this problem is the service company model. Banco Pichincha, the largest Ecuadorian bank; Sogebank, the largest Haitian bank; and Banco Real, the Brazilian arm of an international bank, all opted to use a service company model developed together with ACCION International in which all loan sales, underwriting, and risk management are performed by a legally distinct subsidiary.

In-House • The service company allows banks to create a workforce with its own corporate values and incentive systems. Bank Rakyat Indonesia, one of the early giants of microfinance, also chose to work through a separate set of outlets, the unit desas, though it did not have to create a new legal body to do so.

In-House • In contrast to these companies, which provided space for microfinance operations to develop somewhat apart from the main lines of business, a few banks, such as BancoCaja Social of Colombia, pursue microfinance as part of the main structure of the bank. While BancoCaja Social has been successful, we are inclined to think that most institutions will find that greater separation allows for a more effective focus on the BOP clientele.

Partnerships • If an institution lacks a critical competence, a partnership may be the best solution. For example, partnerships can exploit synergies to lower costs, especially at the last mile.

Partnerships • All financial-services customers value convenience, but none more than BOP customers. A microentrepreneur whose banking transactions require a bus fare, a long wait, confusing procedures, and disrespectful treatment by bank staff may avoid the bank altogether.

Partnerships • In this market segment, transaction timing and location matters—a lot. But bricks and mortar are expensive, hence the search for cost-effective delivery channels.

Partnerships • Most of the partnerships we consider here cover the last mile by taking advantage of specialized delivery channels. There are also partnerships that involve outsourcing of functions such as IT.

Partnerships • Direct providers, such as Banco do Nordeste in Brazil, Bank Rakyat Indonesia, and Banco Pichincha, took advantage of physical branches constructed for other purposes—in the first two cases by government. The existence of these branches brought down fixed costs to a level that produced an attractive business model in each case, without reliance on external partners.

Partnerships • Where this is lacking, providers look around to identify existing networks they can ride on. In Brazil, this search led to the banking correspondent model, which is practicedbymany institutions and enshrined in Brazilian regulations. BancoBradescopartners with Correios do Brasil, the postal system, which has outletsinevery small town and village.

Partnerships • Post office employees handle payments transactions, accepting deposits and paying withdrawals on behalf of BancoBradesco, for a fee. The cost structure makes everyone happy, but success depends on well-structured agreements and careful training and monitoring of banking agents.

Partnerships • Corporations have found microfinance institutions to be especially important partners, because they know the clients so well and already have successful relationships with them. MFIs may also be more willing to experiment in the interests of their clients than are profit-oriented companies.

Partnerships • For example, when Vodafone developed its first mobile phone banking pilot in Kenya, it partnered with the MFI Faulu Kenya to work with Faulu’s client base. Faulu was prepared to enter into the M-Pesa pilot project even though immediate profitability was not assured.

Partnerships • American International Group (AIG), one of the first entrants into microinsurance, used MFIs as an entry strategy. It launched its first products through what it called the partner-agent model for life insurance in Uganda.

Partnerships • The partner-agent model allowed AIG to reach the whole client base of an MFI at once. MFIs entered such a partnership eagerly because they saw how financially devastating death in the family could be for clients in a country reeling from the AIDS crisis.

Partnerships • Other major insurers, such as Zurich, Swiss Re, and Munich Re, have established lines of microinsurance activities, working with a variety of partners.

Partnerships • Partnerships can involve an even broader range of institutions. In another example, ANZ Bank partners with the United Nations Development Program in Fiji. UNDP offers financial education programs that prepare client communities to use the banking services ANZ offers.

Partnerships • In structuring such partnerships, it is essential to ensure that solid business principles prevail and that no line of a company’s business will depend on an ongoing subsidy for its success, though start-up subsidies often help reduce the risk of experimentation.

Partnerships • Long-run subsidy dependence usually dooms projects to small scale—or ultimate failure. This issue is closely connected to the last element of corporate choice we consider here: social responsibility positioning.

Summary • In house vs. partnerships

Summary of the Last Lecture