We live in a world obsessed with growth. According to the National Bureau of Economic of Research (NBER), there have been only four recessions in the US since 1980. Between March 1991 and March 2001, the US experienced the longest economic expansion in its history. It comes, therefore, as no surprise that BoP experts seem to be concerned only with applying BoP lessons toward stimulating growth. In this post, I would like to suggest the possibility of using BoP knowledge as a palliative action in places that are experiencing extreme hardship and as a first step towards returning to normalcy.

One of the defining characteristics of BoP markets is the lack of connections with global markets. This lack of connections results in smaller markets with fewer competitors and higher prices. Furthermore, BoP markets suffer from a lack of infrastructure, efficient bureaucracy and the legal, political and economic certainties that are normally provided by public actors. Now, what happens in an area afflicted by disaster or violence where some or all of these variables are totally non-existent? Would BoP lessons be applicable in these cases?

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Mark Pickens is a Microfinance Analyst with the Consultative Group to Assist the Poor (CGAP), a global resource center for microfinance housed at the World Bank. We published the first part of the interview here on April 4th. CGAP are arguably the most authoritative source of information about branchless banking services and are currently in the forefront of research efforts to understand and develop this market.

Mark has co-authored a global review of regulation for mobile- and other forms of branchless banking, forming an evidence base from more than 500 interviews with central bankers and executives in mobile, banking and technology industries. His work has been quoted in The Economist, The Banker and CNN.com. Prior to joining CGAP, Mark consulted with the UN, US government, commercial banks and specialized microfinance lenders.

In the first part of the interview, Mark elaborated on the most important issues as the branchless banking market evolves in complexity and size, as well as explaining why mobile phone banking is currently one of the hottest issues in the financial services sector.

In this second and final part of the interview, Mark and I explore the possible evolution of the mobile phone banking industry as it grows out of payments and remittances and into other financial services.

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Mark Pickens is a Microfinance Analyst with the Consultative Group to Assist the Poor (CGAP), a global resource center for microfinance housed at the World Bank. We have quoted CGAP on NextBillion in several posts (see them here, here and here). They are arguably the most authoritative source of information about branchless banking services and are currently in the forefront of research efforts to understand and develop this market.

Mark has co-authored a global review of regulation for mobile and other forms of branchless banking, forming an evidence base from more than 500 interviews with central bankers and executives in the mobile, banking and technology industries. His work has been quoted in The Economist, The Banker and CNN.com. Prior to joining CGAP, Mark consulted with the United Nations, US government, commercial banks and specialized microfinance lenders.

Last Friday, I had the pleasure of interviewing Mark about branchless banking’s recent developments and the most important issues as this market evolves in complexity and size. Mark explains why mobile phone banking is currently one of the hottest sub-topics in the financial services in emerging economies sector.

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By all measures, this has been a pretty long post to finalize.

In January, Ana’s post about the mobile phone banking conference at Chemonics aroused a series of insightful comments. Al Hammond then weighed in with a post of his own (he also recently wrote about Biometric Security for Mobile Banking). In this context, I felt I could join in the debate with a post about business strategies in the mobile phone banking sector (or m-banking, as it is commonly known). Specifically, I set out to analyze what affects mobile phone banking business models, their most common critiques and their challenges for the future.

However, the post quickly got a bit out of hand, growing beyond what I had envisaged to more than 10 pages. With this in hand, I felt I could develop it from a blog post into a “proper” study. When I finished it, I decided to try my luck and get it published. Thanks to the support of Professor Juan Luis Martinez, I got it published as an Instituto de Empresa Teaching Note. Due to work commitments, I could not sign all the required papers until February the 27th, during the BoP Conference here in Madrid (which we recently covered).

I hope that this study helps to clarify many of the issues we have touched upon here at NextBillion, and that it helps stimulate yet more questions.

After doing some research on the issue (I am by no means an expert), there is one thing I can say with certainty: the very field of mobile phone financial services is opening in front of our eyes. It is very exciting indeed.

To download the study, please click here.
Comments are welcome!

As Robert Katz posted last week, a BoP Conference entitled “How to do Business at the BoP” was held on February the 27th in Madrid. The conference had pretty impressive speakers and visitors, since it was mainly directed at the corporate world.

Robert was the first speaker of the day. He kicked off by explaining the reasons for BoP studies and briefly went through the three main penalties suffered by BoP customers: price, quality and access. After giving an overview of business strategies at the BoP, he presented “The Next 4 Billion” study and explained some of the most important conclusions that the study sheds light upon, such as the significant unmet needs in the ICT and Transport industries.

The second part of the conference introduced several BoP case studies from different industries, presented by members of the BoP companies themselves.

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Which banking models could be used to enable access to the BoP? A recent BCG publication, entitled "A Roadmap for Expanding Financial Inclusion in India," tries to answer just that question for the Indian market.

India has the second highest number of financially excluded households in the world with 135 million (China is first with a whooping 263 million). Rural households represent a big share of those financially excluded. BCG estimates that between 2007 and 2010, 17 million households will enter the financial markets thanks to income growth and 30 million more thanks to innovative banking business models. BCG further estimates that these 30 million people will represent Rs 10,000 crore (about $2.5 billion) for banks and Rs 20,000 crore ($5 billion) for insurance companies, or $83 and $166 per household.

They argue that the value chain should be deconstructed into six fundamental pieces that can highlight ways to serve this market: product development, customer acquisition, risk management, funding, administration and collection (although they just elaborate on the first two): In terms of product development, household needs can be divided into transactions, borrowing, saving and insurance. Although BoP demand is not homogeneous, there are several common characteristics for the products they are looking for, such as:

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In "The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid," the authors analyzed several markets. However, only one market - financial services - was not estimated in terms of exact size and scope.

Financial services can be a fiendishly hard thing to measure, but is at the same time a crucial tool to develop markets for BoP customers. In fact, financial markets often help other BoP markets flourish. Data measuring access and efficiency in financial markets are notoriously hard to come across in emerging countries, because most of these markets lie under the cover of informal economies.

A new publication by the World Bank, Finance for All? Policies and Pitfalls in Expanding Access, tries to give an overview of the most recent advances and conclusions about the improvement of access to financial services for the poor. It is a superb report. Superb, but very hard to read. For those who want to avoid the econometrics and statistical analysis, I would suggest reading only the Overview.

The study analyzes how financial access provides opportunities for the poor and for small to medium sized enterprises (SMEs). Since a defining characteristic of BoP markets is their non-integration with global markets and their subjection to higher prices (monetary or not) for most of their goods, building inclusive financial systems means equalizing opportunities between BoP and non-BoP markets.

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Julia Tran mentioned in a previous post some Boston Consulting Group (BCG) publications related with the “Next Billion”. Two more studies were published in November –“Decoding Next Billion Consumers” and “A Road Map to expanding Financial Inclusion in India” (this second one looks good and I am planning to read it soon).

Recently, NextBillion posted a news item published by The Economist related to the latest BCG publication about emerging markets called “The 2008 BCG 100 New Global Challengers”. This time, it referred to emerging countries’ multinationals and their international growth strategies as a means of becoming world leaders in their markets.

The rise of emerging market multinationals is of no surprise to anyone in the business world, especially in the case of large national firms based in Brazil, Russia, India and China –the BRIC economies.

The BCG Publication (this document is an executive report available on their webpage, I have ordered the full report, but have not received it yet) disappointed me in terms of their methodology and selection process for what they call the “Top 100 Global Challengers”. It does, however, give an interesting overview of these firms’ business models and their core strengths.

BCG selected their Top 100 from 14 countries. These 14 countries, or “Rapidly Developing Economies” (RDEs) as they call them, have been selected on the basis of their increasing share of global trade and their total GDP. However, the authors have given themselves ample space in selecting countries that are clearly not comparable to each other. Stating that Poland (member of the EU) and Hungary (to join the EU on 2008) are as “emerging” as Egypt (long time dictatorship and notorious human rights violator) or Indonesia (largest Muslim population in the world) seems a bit of a stretch. Likewise Chile has been included alongside Brazil and Argentina. I strongly doubt that companies from such different business environments can be compared and studied seamlessly.

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Last week, while checking out some regular blogs, I bumped into a short note about a magazine called "Upsides" in the CGAP Blog.

Upsides is an FMO (the Netherlands Finance Development Company) initiative, supported by other likeminded financial institutions such as Standard Bank, Plantersbank, Triodos Bank and ShoreBank.  As such, the core content of Upsides revolves around finance and development.

Every Upsides issue has, on average, three detailed articles that develop a particular aspect of development finance. These articles are peppered with several case studies that help add flesh to the bone and reflect stories from different perspectives.  Additionally there is a section called 20:20 featuring interviews with important actors in the arena.

Initially, I thought that I would read the four already published issues and give an overview here, but soon it became apparent to me that the magazine is just too good to do it the disservice of a mediocre summary. Plus the contents are well thought out and they develop several important well-connected points. Clearly, the authors are experts and they have put much time into their articles.

Instead, I have chosen to give some mouthwatering tidbits of the fourth issue with the hope of stimulating readership from NextBillion visitors. There were three main topics: remittances, the brain drain in emerging economies and branchless banking.

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Codensa is a very successful utility company that serves 2.2 million customers in Colombia. It is controlled by Endesa, the largest electric utility company in Spain, which in 1997 took control of Codensa and Emgesa (this second company accounts for 21% of the generated electric capacity in Colombia).

Its return over equity (that is, the rate of return over shareholders’ investments) has grown from 4% in 2003 to nearly 12% in 2006. This is a measure of the current company's profitability.

Furthermore, last July, Codensa’s debt offer was oversubscribed three times, despite being in Colombian pesos rather than a more stable international currency and despite the jittery markets at the time (they still are). This was a bet the market made in favor of Codensa’s future stability and profitability.

Codensa caters to the Colombian BOP. According to their 2006 Annual Report (in Spanish), more than 88% of their customers were households of which more than 80% belong to the socioeconomic population strata 1, 2 and 3. In value terms, households represent nearly 60% of total sales out of which 74% belong to the above mentioned strata. In both these cases, strata 2 and 3 represent the lion’s share in volume and value terms.

Customer growth has averaged around 3% since 2000 with the increase in the value of energy sales rising from 1% in 2003 to 5.77% percent in 2006.

How does Codensa do it?

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This post is the continuation of my previous one last Monday. Just as it was posted, Robert Katz sent me an email with the following question:

"That BOP firms, to be competitive, don't have to be innovative in the same way that Western firms do makes sense. But what about Western firms looking to enter BOP markets? Do they need to invest in R&D to create the sorts of incremental "piggybacking" innovations you describe? Or do they need to invest more in the anthropology/observation to unearth the "obvious" innovations?”

As I was writing my reply I noticed that I could have been more specific and less fuzzy about some concepts in the previous post. I also noticed that there was plenty of scope for further analysis – and further questions.

The mentioned tradeoff between growth and innovation at the BOP was with local big firms in mind and elaborated on innovation in broad terms as an "unusual combination of technologies and other components that generates value for the consumer." By doing that, I lumped together two basic types of innovations: product level innovations and operational innovations.

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Businesspeople tend to prefer predictable business environments to work in. However, in developing countries, business environments tend to be more unstable than in Western markets because of various unpredictable social, economic and political changes.

Since business plans depend on predictions about the future and the certainty of that prediction, the financial equation by which BOP firms decide where and how to invest will change fundamentally with respect to OECD markets. In this post I want to explore the dichotomy between market growth and innovation in relatively large BOP firms.

Thanks to scalable business models, pursuing market growth strategies is a short- term decision (1-3 years approximately).  On the other hand, devoting resources to innovation efforts or research and development, is a more long term decision (3-5 years depending on the industry).  Additionally, most BOP firms are especially constrained in capital due to illiquid capital markets.  Inefficient and corrupt bureaucracies and unpredictable law regimes do not help either.  How do they make a decision when assigning resources to innovation and growth strategies?

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It is often the case that business models touch but rarely elaborate on the aspirational value of many products offered for the first time at the BOP level and the subconscious consequences they have on BOP consumers. I recently read, with a touch of sadness, a short article published in the Sunday Times on September 30th called: "Book now for the flight to nowhere."

In this article the author talks about an old airplane, an Airbus 300, in Delhi. This airplane never actually takes off. But it offers the service of helping passengers imagine how it would be to take a flight. The plane only has one wing and is missing part of its tail. Meals are served with a trolley cart, and a generator powers the air-conditioning.

The plane simulates its flight every Saturday. Irrespective of the veracity of this story, it points to an acute unmet need at the BOP: the need for consumers to believe there is something more out there worth aspiring for and worth fighting for.(Click "Read More" to continue reading this post)