These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.
In our previous two posts we introduced the two basic approaches that are currently being touted in helping incoming firms rapidly gain scale in BoP markets: the sectorial approach (see Al Hammond's post); and the platform approach, which is the one currently being developed by the Opportunities for the Majority Office in the Interamerican Development Bank and which was introduced by Francisco Mejia's guest post. Platforms may be useful to incoming firms to help to gain scale thanks to their accessibility and information. However, depending on the type of platform these characteristics and their contribution to incoming firms may change. Moreover, their products may have different degrees of complementarity and the balance of power between different platform stakeholders may also vary.
In our second post, we went into detail about 3 platform types: conditional cash transfer programs, utilities and mobile phones. In this third and final post we will explain the platforms from mass consumer goods, construction firms and microfinance organizations and conclude these series of posts.
4. Mass consumer goods:
Mass consumer good industries such as cosmetics, garments or perishables create platforms over which they tend to have limited control. This happens because these networks often outsource a big portion of the final distribution or marketing stages to local agents which are usually in charge of offering the product to the final customer and collecting payments. As a result their capillarity strongly increases at the cost of the compromising the full control over their product. In the scaling up and effectiveness of these platforms, women, both as customers and sellers, play an essential role. As customers they represent the entry gate to the household for many products. As sellers (or "consultants" or "promoters" as they are often called) they benefit from extensive informal knowledge about the purchasing power and reliability of the target market. The trust that the community has in "one of their own" also allows these saleswomen to educate potential customers on the appropriate use of the product as well as the benefits derived from its consumption. Furthermore, they may provide useful suggestions in the process of improving the product or offering additional products and services to existing customers. In addition, the women that participate as promoters and sales people, themselves provide a largely untapped market for added value and services.
In spite of their reach and capillarity, the information collected tends to be relatively weak, because of the difficulties involved in collecting and tabulating it. This is not to say that the existing platform does not receive information about the payment or of the product, but, since these transactions tend to be much less frequent than in utility firms, they provide a far less detailed picture of the customer. On the upside, despite being difficult to collect, the "soft" information owned by the saleswomen can be potentially very valuable since it may include fundamental insights about the needs, reliability and constraints of possible customers.
Some mass consumer firms have included in their offerings the option to buy in installments, thus effectively offering microloans to their customers. Such an option offers the chance for many platforms to develop a payment history for every household and thus develop a better idea of the reliability of the customer. In this second case, the quality and detail of the information is much better, although still patchy compared with that generated in the previous platforms. In general, the best fitting firms in these cases will be able to provide expert financial services to help to overcome the financial constraints of majority markets. Alternatively, incoming firms may offer products that are complementary to the ones that are already being sold or that are geared towards the same group of people. For example, if the platform already sells female beauty products an interesting addition may be products related with basic health care. This platform is also ideal for educational purposes since it is based on face-to-face contact and depends on the mutual trust between seller and buyer.
5. Construction:
It is estimated that majority markets spend approximately US$ 330 billion per year on housing (Source: "The Next 4 Billion"). Such spending, however, is not done on new housing all at once. Instead, housing expenditures are done one a piece-meal basis with houses being in a state of permanent improvement. For example, once enough money has been collected a family may decide to use it in erecting a new bedroom or building permanent roofing. This investment behavior is a consequence of the absence of legal land ownership and the lack financing options available to low-income individuals. Therefore, what is usually called incremental housing is a pervasive phenomenon in majority markets. In this line, cement is the most important material for low-income customers thanks to it being easy to store and to buy in relatively small amounts.
In response to these unmet needs many construction firms have in the last decade developed platforms through which they may be able to access majority markets and finance construction for low-income families (Patrimonio Hoy being an oft-mentioned example). First, they have developed basic microfinance offerings thanks to which these firms attempt to smooth the cash flow of their clients. Second, these platforms try to empower women in their role of household heads. Furthermore, many construction firms have also developed their own educational programs to teach low-income customers how to make the best use of the products they purchase. Safety procedures and basic management and accounting are normally included in the syllabus. These programs may be offered for an additional surcharge or for free and it can be a very important channel to increase customer loyalty.
The economic agents belonging to these platforms are usually comprised of local hardware stores and a local sales network. Both of these agents are relatively free to offer the additional products they see fit in order to remain profitable. As a result, the construction company has less power over the platform to accept or reject certain products. Oftentimes hardware stores even offer an assortment of products from competing companies to the customer - each of which includes their own financing options and benefits.
Such a decentralized platform has its benefits since it enables the platform to have a very big reach and relatively high capillarity as well. On the other hand, the problem with decentralized platforms is that the information it may provide can be quite disorganized and hard to analyze. This weakness can be fixed if construction firms also offer financing options, because information derived from microfinance operations can be quite valuable in deciding whether the client is a good bet for future small loans, additional products or further housing improvement. Moreover, construction platforms may experience strong synergies with furniture offerings and smaller household goods, such as electrical appliances.
6. Microfinance:
The microfinance business model is sustained by three basic tenets: high volume operations, services adapted to the socioeconomic needs of majority markets, and risk management systems customized to the informal nature of the clients. As such, microfinance is often described as a hybrid between small business and retail banking, where loan appraisal techniques must be inferred from a variety of resources. Moreover, to maximize its social impact it mainly targets women as possible borrowers, since, apart from having lower default rates, their investments tend to have stronger impacts on their children. Operationally this requires efficient, decentralized and standardized operations for profitability and well-honed risk management. Microfinance institutions usually have loan officers responsible for the full loan cycle from new business promotion to analysis, monitoring and collection, since their performance bonus depends on a mix of portfolio growth and low default rates. This structure incentivizes loan officers to promote high-quality loans and enforce timely repayments. Loan officers are also normally in charge of conducting on-site visits to develop a strong relationship with the client and get a better understanding of the investment she wants to make.
Microfinance institutions have experienced a huge growth in the last years. It is estimated that they reach around 150 million clients, 100 million of which are considered to be poor. However, this growth has arrived more thanks to the number of institutions, rather than a growing reach. Microfinance as a platform is probably not as extensive as those belonging to utilities but it certainly has distinctive advantages. First, it typically reaches poorer areas where utility grids do not exist and so these and the platforms mentioned above may be complementary. Second, the platform is extremely flexible and evolves on the basis of the changing production and distribution of products. Third, it lends the support and legitimacy of a tried and tested business model that serves the poor while being financially sustainable.
The information generated in microfinance platforms is usually of good quality and includes at least payment histories, although it may also present other types of financial information depending on the financial services offered. However, these platforms tend to be quite zealous in their defense of the information they own, since it basically represents its source of competitive advantage. As a result, incoming firms who may want to associate with the platform often find it very difficult to have any control over the platform itself.
Microfinance organizations, due to the nature of their client base, are prone to developing agricultural and business services to help their borrowers invest and manage the assets they buy in the most efficient manner. Moreover, they are excellent partners to stimulate access to basic goods and services such as health and nutrition products that may benefit their customers, which are often women, or their families. Furthermore, some microfinance companies have already associated themselves with household retailers to try to offer also products at preferential prices. Those organizations that are more advanced in offering these additional services have been termed "second generation" microfinance institutions.
To conclude these series of posts, in the coming years we anticipate a growing number of incoming firms to associate themselves with existing platforms. As a result, as platforms allow more products and services to be sold through their networks and they become increasingly legitimate, we expect platforms to offer a growing share of products and services to majority markets. In effect, platforms may well end up being the key-holders for some products types in some specific regions. Finally, we would like to highlight that our platform list is not exhaustive. Although we believe we have chosen the most useful platforms for incoming businesses to gain scale, every firm has its own particular needs. Therefore, incoming firms should not restrict their choice of platforms to the ones we have taken here, but instead seek the platform that better fits their requirements. In conducting this search, management is advised to pay attention to the variables that have been examined here, namely, accessibility and type of information allowed by accessing the platform, the balance of power between platform stakeholders, and synergies between the products sharing the platform itself. By engaging in this exercise incoming firms will maximize their chances of successfully gaining scale, reaping profits and having a positive impact in as many low-income communities as possible.
