At first glance, Finestrella's model appears exceedingly simple: provide post-paid mobile plans to people who don't have credit cards, bank accounts, or credit history.
The Poverty Penalty in Mobile
Today most poor consumers in Mexico are stuck paying high upfront fees to purchase handsets followed by fees up to 20 cents per minute for pre-paid plans at local convenience stores sometimes as often as two or three times per week. Pre-paid customers currently compose 86 percent of the mobile phone market in Mexico accounting for 100 million users. For the vast majority of prepaid plan users, the economics are not favorable: In most cases a Mexican consumer can increase the number of minutes they use monthly from 80 to 300 without any additional increase in per month cost by switching from a prepaid to a post-paid plan, according to Finestrella.
The move to postpaid plans seems like a win-win situation. Mobile providers benefit from the reliable monthly income generated by post-paid customers. Consumers get more bang for their buck with lower per minute rates from monthly plans.
So why can't poorer customers simply purchase the more economical post-paid plans? Without a credit card, bank account, or official employment history mobile providers are unwilling to take the gamble on providing the post-paid monthly plan option to Mexico's poor. The percentage of Mexicans with postpaid plans is nearly identical to the percentage with credit cards - if you have a credit card, you buy a post-paid plan. Yet credit card penetration in the country is low and about 75 percent of Mexicans don't have a bank account. This is starting to sound a lot like a situation encountered in the finance industry around access to loans for the poor.
Bridging the Gap
This is where things get interesting and where Gabriel Manjarrez and Pedro Zayas, co-Founders of Finestrella, saw an opportunity. Their straightforward approach led to the founding of a company in 2010 that has made over $3 million in revenue as well as raised more U.S. venture capital in Mexico than any other company in history (%7E$20 million to date), according to Omidyar Network. It also led me to a conversation with Gabriel (now CEO) to dive into the details.
As Gabriel and Pedro saw it, the main roadblock to post-paid plan access for the poor results from the unwillingness of the three large mobile operators in Mexico to take on credit risk for customers that they know nothing about. The Finestrella founders borrowed an idea or two from the microfinance industry to address this impediment by developing a set of algorithms to assess the credit worthiness of people without bank accounts, credit histories, or documented employment records. The company uses this framework to assess potential mobile customers and essentially resells the mobile plan provided by mobile operators in Mexico. The configuration is similar to a mobile virtual network operator or MVNO such as Virgin Mobile in the U.S. Finestrella assumes the risk for the plans it sells, which are provided by other mobile operators who maintain mobile infrastructure and own spectrum. And as Gabriel explains, the risk of providing these plans is really not that risky. Whenever a customer fails to pay a monthly bill, Finestrella still owns the asset: the company can provide their number to someone else immediately, at most losing one month's revenue on that particular customer.
Finestrella provides integrated support for their customers, acting as the single point of contact for sales and servicing. To distribute physical handsets, the company builds on a competitive advantage in Mexico - cheap labor - to serve 30 percent of the population through 10 small outlets with a team of sales and delivery workers on motorcycles. The company delivers phones directly to customers' houses, sometimes as many as 4,000 phones a month.
As Gabriel described in our recent interview: "Finestrella takes the best practices from MFIs (microfinance institutions) and tacks them on to an MVNO to address a market failure."
Finestrella's role in alleviating the poverty penalty paid by poor Mexicans for cellphone coverage is clear. But other impacts, while harder to quantify, are substantial as well. On average 85 percent of the company's customers report that they have begun talking more as a result of their contract with Finestrella. Just think how your business, family, and relationships would change if your available talk time went from 80 to 300 minutes per month, then spread that impact across 100 million Mexican citizens.
The Value of a Subscription Relationship
But perhaps the most impressive impact from Finestrella's work has less to do with increased talk time and more to do with the opportunities arising from the creation of millions of subscription payment relationships.
Almost 100 percent of Finestrella's customers lack insurance. Insurance companies rely on credit cards as a cost-effective channel for collecting ongoing payments for policies. But Gabriel's team presents another option. Finestrella's customers have established ongoing subscription relationships, without the use of credit cards. In the process, they've built a robust transaction channel through which to efficiently collect and process small payments. And the development of these channels is essentially a fixed cost. Utilizing them to collect other payments doesn't add an additional cost.
The company recently started offering $4,000 life insurance policies to subscribers through a global Swiss insurer for $1.80 per month. Uptake has been over 85 percent amongst their customers. And the even better news? The company saw a subsequent uptick in sales.
Gabriel's team expects the benefits from establishing subscription relationships with poor customers to be wide-reaching in ways we have yet to even understand today.
Today Mexican mobile, tomorrow...
A recent $13.75 million investment from Omidyar Network, IGNIA and others will support Finestrella in growing its current offerings while investing substantially in data plans and smart phones. Broadband coverage reaches only about 30 percent of the Mexican population. With Nokia, Samsung, and their competitors now battling to provide smartphones for under $40, not only will the company provide fair prices for voice access, they'll soon be the gateway to the internet for Mexico's poor.
Amy Klement, vice president at Omidyar Network and recent addition to Finestrella's Board of Directors, shared the potential that the investor sees in the company. "Finestrella has developed a high-growth, innovative model to provide telecommunications services to the base of the pyramid," said Klement. "The company is poised to deliver massive social benefits to its customers in Mexico and beyond."
Last month, Finestrella sales represented 10 percent of the post-paid plans sold by Telefonica in Mexico. Their subscriber base has grown at double digits for the last few months. With 15,000 current subscribers, the company's goal is to reach 800,000 by 2015.
Gabriel's team has aggressive expansion goals as one might imagine - in Mexico, Latin America, and far beyond. We'll plan to keep NextBillion readers up to date on their progress as we move forward.