Article

Banking takes on light retail approach

With Brazilian banks reaching saturation point in terms of serving affluent and middle-class customers, some innovative financial institutions are looking to open up a vast untapped market: lower-income households.

著者：Rodolfo Spielmann and Bernardo Diament

First published on 10月 06, 2009
min read


With Brazilian banks reaching saturation point in terms of serving affluent and middle-class customers, some innovative financial institutions are looking to open up a vast untapped market: lower-income households that until recently relied solely on personal credit shops. History shows why: before the 1990s, high inflation rates and monetary instability steadily eroded the capacity of this segment of the population to save and increased the likelihood of their defaulting on credit agreements. This prompted Brazilian banks to direct their commercial efforts mainly to customers at the top of the income pyramid. Over the past decade, however, more stable prices and exchange rates have lowered the risk in serving those further down the income slope. Moreover, the rising and more stable income of these groups is increasing demand for financial products and services. This new market requires a wholly new banking model—one that begins with a deep understanding of these clients' behavior and product needs and building the right channels to serve them. For instance, though traditional banks offer lower interest rates than personal credit shops, less sophisticated customers find their vast array of product choices confusing and the branch environment unwelcoming. Lower-income people are discouraged by minimum deposits needed to open accounts and strict documentation and long processing times required to qualify for loans. Enter the "light retail" approach. It provides entry-level banking services and a simplified set of products in a friendly, easy-to-navigate store environment. Located in convenient high-traffic areas, a typical "store" includes inviting waiting areas, ATMs, interactive product displays and sales desks. As in a retail environment, the objectives are to sell new products to current clients and acquire new customers. The compact retail format is cost-effective: each outlet costs about one-third less to open and less than half as much to operate as a conventional branch. The potential payoff is enormous. By 2008, lower-income customers already accounted for more than 36% of the total revenue pool for financial services—with more than 80% of this opportunity coming from loan products. Despite the massive potential, however, penetration remains low. For instance, direct-deposit accounts (DDA) with checking services—among the most effective ways of creating an ongoing relationship with banking customers—are at less than 30% penetration rates among lower-income groups. By comparison, affluent and middle-class populations accounted for 27% and 37%, respectively, of the total revenue pool, and are at nearly 100% DDA penetration rates. The idea of opening light branches sounds easy, but it can be challenging to execute. So far, three scenarios are playing out. The most direct way is for banks to simply acquire personal credit shops with an established client base. Some other banks are partnering with alternative channels, such as retail chains, lottery resellers and post offices. Coming from the opposite direction, several retail chains are offering simplified banking services, posing new competition in the lower-income financial services market. As an example of the first trend, a major retail bank is using a credit-shop subsidiary to launch a low-cost set of demand-deposit accounts. Critical to success is a simplified set of "hook products" for each sub-segment of customers. These are good deals for both the bank and its new clients. For example, the credit shop charges less than 4 reais (just over US$2) monthly for a simple DDA, bundled with a savings account with unlimited deposits and withdrawals—but with a debit card and no overdraft or checks. Alternatively, banks have begun partnering with financial houses. Lemon Bank, for instance, entered northeastern Brazil by offering simple products from existing personal credit shops to customers with minimum income. Later, Lemon started to offer insurance and DDAs through an agreement with Banco Icatu and a partnership with Banco 24h, an ATM service provider. (Banco do Brasil recently took over Lemon Bank's network of 6,500 banking stores). Similarly, Caixa Econômica Federal, a state-owned bank, has been working with a network that includes lottery resellers and ATM providers, among others. This business model simplifies "branch" deployment and reaches new groups of potential customers while providing new points of access to current clients. Since its inception, the program, called Caixa Aqui, has attracted more than 5 million accountholders and has made loans totaling some 600mn reais to more than 300,000 new clients. Meanwhile, retailers like Mexico's Grupo Elektra are moving in. In 2008, its Banco Azteca entered the Brazilian northeast and, operating under the Elektra brand, now offers DDAs and access to credit through a very low-cost product. Called "Guardadito," this savings account requires no minimum balance, has no maintenance fee, can be opened with a deposit of about US$25 and provides a Visa debit card. In Mexico, Banco Azteca used this model to grow to more than 1,600 branches, serving some 7.4mn clients with credit products and more than 6 million with savings and current accounts. Whichever path organizations pursue, our analysis shows that successful deployment of the light retail approach integrates seven essential ingredients. They are: Focus the retail outlets on attracting new customers and cross-selling strategies, instead of routine transaction processing; Create an original customer experience that encourages clients to communicate their needs, learn about offers, experiment to find the products and services that best suit them, and close deals in a simple and direct way; Direct after-sales customer service to ATMs, call centers and other low-cost channels; Minimize cash-handling in the stores, reducing processing and security costs, while transferring transactions to self-service and electronic channels; Optimize back-office operations using off-site hubs in order to contain costs; Adapt marketing efforts to simpler, clearer language and concentrate on boosting traffic in each store, while making the in-store experience more like retailing and banking; Choose store location carefully, since traffic generation is an important success factor. In Brazil, banks are beginning to put these elements together. They have already discovered that their new customers value low prices, simple-to-understand products and speed when applying for credit. Like shopkeepers everywhere, they are aiming to give their customers exactly what they want. Rodolfo Spielmann is a Bain & Company partner and leader of the financial services practices for the Americas, and Bernardo Diament is a Bain manager. Both are based in the firm's São Paulo office.

History shows why: before the 1990s, high inflation rates and monetary instability steadily eroded the capacity of this segment of the population to save and increased the likelihood of their defaulting on credit agreements. This prompted Brazilian banks to direct their commercial efforts mainly to customers at the top of the income pyramid. Over the past decade, however, more stable prices and exchange rates have lowered the risk in serving those further down the income slope. Moreover, the rising and more stable income of these groups is increasing demand for financial products and services.

This new market requires a wholly new banking model—one that begins with a deep understanding of these clients' behavior and product needs and building the right channels to serve them. For instance, though traditional banks offer lower interest rates than personal credit shops, less sophisticated customers find their vast array of product choices confusing and the branch environment unwelcoming. Lower-income people are discouraged by minimum deposits needed to open accounts and strict documentation and long processing times required to qualify for loans.

Enter the "light retail" approach. It provides entry-level banking services and a simplified set of products in a friendly, easy-to-navigate store environment. Located in convenient high-traffic areas, a typical "store" includes inviting waiting areas, ATMs, interactive product displays and sales desks. As in a retail environment, the objectives are to sell new products to current clients and acquire new customers. The compact retail format is cost-effective: each outlet costs about one-third less to open and less than half as much to operate as a conventional branch.

The potential payoff is enormous. By 2008, lower-income customers already accounted for more than 36% of the total revenue pool for financial services—with more than 80% of this opportunity coming from loan products. Despite the massive potential, however, penetration remains low. For instance, direct-deposit accounts (DDA) with checking services—among the most effective ways of creating an ongoing relationship with banking customers—are at less than 30% penetration rates among lower-income groups. By comparison, affluent and middle-class populations accounted for 27% and 37%, respectively, of the total revenue pool, and are at nearly 100% DDA penetration rates.

The idea of opening light branches sounds easy, but it can be challenging to execute. So far, three scenarios are playing out. The most direct way is for banks to simply acquire personal credit shops with an established client base. Some other banks are partnering with alternative channels, such as retail chains, lottery resellers and post offices. Coming from the opposite direction, several retail chains are offering simplified banking services, posing new competition in the lower-income financial services market.

As an example of the first trend, a major retail bank is using a credit-shop subsidiary to launch a low-cost set of demand-deposit accounts. Critical to success is a simplified set of "hook products" for each sub-segment of customers. These are good deals for both the bank and its new clients. For example, the credit shop charges less than 4 reais (just over US$2) monthly for a simple DDA, bundled with a savings account with unlimited deposits and withdrawals—but with a debit card and no overdraft or checks.

Alternatively, banks have begun partnering with financial houses. Lemon Bank, for instance, entered northeastern Brazil by offering simple products from existing personal credit shops to customers with minimum income. Later, Lemon started to offer insurance and DDAs through an agreement with Banco Icatu and a partnership with Banco 24h, an ATM service provider. (Banco do Brasil recently took over Lemon Bank's network of 6,500 banking stores). Similarly, Caixa Econômica Federal, a state-owned bank, has been working with a network that includes lottery resellers and ATM providers, among others. This business model simplifies "branch" deployment and reaches new groups of potential customers while providing new points of access to current clients.

Since its inception, the program, called Caixa Aqui, has attracted more than 5 million accountholders and has made loans totaling some 600mn reais to more than 300,000 new clients.

Meanwhile, retailers like Mexico's Grupo Elektra are moving in. In 2008, its Banco Azteca entered the Brazilian northeast and, operating under the Elektra brand, now offers DDAs and access to credit through a very low-cost product. Called "Guardadito," this savings account requires no minimum balance, has no maintenance fee, can be opened with a deposit of about US$25 and provides a Visa debit card. In Mexico, Banco Azteca used this model to grow to more than 1,600 branches, serving some 7.4mn clients with credit products and more than 6 million with savings and current accounts.

Whichever path organizations pursue, our analysis shows that successful deployment of the light retail approach integrates seven essential ingredients. They are:

Focus the retail outlets on attracting new customers and cross-selling strategies, instead of routine transaction processing;
Create an original customer experience that encourages clients to communicate their needs, learn about offers, experiment to find the products and services that best suit them, and close deals in a simple and direct way;
Direct after-sales customer service to ATMs, call centers and other low-cost channels;
Minimize cash-handling in the stores, reducing processing and security costs, while transferring transactions to self-service and electronic channels;
Optimize back-office operations using off-site hubs in order to contain costs;
Adapt marketing efforts to simpler, clearer language and concentrate on boosting traffic in each store, while making the in-store experience more like retailing and banking;
Choose store location carefully, since traffic generation is an important success factor. In Brazil, banks are beginning to put these elements together. They have already discovered that their new customers value low prices, simple-to-understand products and speed when applying for credit. Like shopkeepers everywhere, they are aiming to give their customers exactly what they want.

Rodolfo Spielmann is a Bain & Company partner and leader of the financial services practices for the Americas, and Bernardo Diament is a Bain manager. Both are based in the firm's São Paulo office.