Summary of the Last Lecture. THREE PRODUCTS: INSURANCE, HOUSING FINANCE, AND REMITTANCES. THREE PRODUCTS: INSURANCE, HOUSING FINANCE, AND REMITTANCES. CEMEX Patrimonio Hoy (Equity Today) Program.
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The results were heartening: sales of cement increased, housing improvements increased, and brand recognition was strengthened. While initially designed as a gesture of social responsibility, CEMEX gradually realized that helping the poor could be achieved while making a profit.
ARGOZ does not require a down payment, and insurance is provided. After a family purchases a plot, the company continues to supply financing for construction or emergencies. ARGOZ is a highly profitable company, and low-end housing is one of its solidly profitable lines of business.
Although it is somewhat ironic that CEMEX and ARGOZ stepped in to provide financing when no financial institutions would do so, we admit that banks may have good reasons for avoiding the low-income housing market.
Construction-industry players have hooks that banks lack. CEMEX and ARGOZ enjoy built-in risk control because the buyers rely on them for their access to housing, while banks need some other way to get a legal hold—such as a mortgage.
Players like CEMEX and ARGOZ are now well-positioned to capture the enormous informal-sector housing finance market, an example of the kind of disruptive entry that can force all players to reset the terms of an industry.
“If we changed our attitudes, unlearned our perceptions, and opened ourselves to learning how our customers lived and worked, we could build a whole new business model and carve out a market where it was thought there was no business for us,”
We turn now to another product in which both financial and nonfinancial players compete for the low-income market. In this case, banks have recently become more energetic in their attempts to capture market share.
As flows from the North to the South, remittances exceed official development assistance. In several countries they are greater than 10 percent of gross domestic product, and in a few extreme cases, such as El Salvador and Honduras, transfers approach and surpass 20 percent of GDP.
The upper tier of remittance senders often uses banks. The well-off send money from one bank account to another. As we move down the income pyramid, senders increasingly use money-transfer companies and informal mechanisms.
Although people often feel comfortable with informal senders who bring them news of the family back home, they might be surprised to learn that these are the most expensive and least secure ways to send money. A very sizable portion of the value sent informally is lost to fees, frauds, and mishaps.
The market opportunity related to remittances differs from that of insurance and housing because it is already a full-blown competitive arena. For insurance and housing, there is an opportunity to provide an entirely new service that clients cannot now obtain.
The opportunity in remittances is to woo customers from one channel to another by offering cheaper, faster, and more convenient service. For banks, the opportunity includes attracting a new customer segment using remittances as an entry product.
In this contest, money-transfer organizations (MTOs) have a strongly dominant position. The clear market leader, Western Union, is in fact one of the most successful examples of private-sector engagement with inclusive finance we know.
Money-transfer companies have made it a point to get close to customers, both physically and psychologically. They have made agents out of the proprietors of every corner grocery store in every immigrant neighborhood.
The shops that handle MTO transactions give immigrants a taste of home—a chance to converse with someone from the home country, to buy favorite foods, and to find out about local, immigrant community events.
Delgado Travel and others like it offer a lifeline to home. No wonder many customers prefer it to the anonymity of most bank branches. But the amounts of money involved in remittances are simply too large for Delgado Travel’s managers to relax if they wish to maintain their market position.
Commercial banks have begun to make bids for the remittance market, and at the same time MTOs are becoming more regional. Previously sleepy remittance corridors have been invaded by competitors, causing prices to fall dramatically over the past decade.
Banks have not yet made significant inroads, but the trend is sharply upward. The Inter-American Dialogue notes that the percentage of Mexican immigrants using banks to transfer remittances from the United States rose from 2 to 6 percent between 2004 and 2006. It’s still a low percentage, but one that tripled in only two years.
One of the main questions concerning banks is the relationship between remittance sending and bank accounts. The MTOs work on a cash-to-cash basis, which allows people with no bank accounts to send and receive money.
But the preference for cash among those sending remittances is persistent. Between the United States and Latin America, 70 to 80 percent of crossborder remittances were sent through money transfer intermediaries on a cashto- cash basis.
Even for immigrants with bank accounts, only 5 to 19 percent use their banks for sending money. Convenience factors, such as brand recognition, hours, locations, and speed of transfer, carry more weight.
Government policy makers also encourage remittances to move through banks, in the interests of “banking the unbanked,” but this admirable goal is made more difficult by the simultaneous emphasis on “know your customer,” fueled by fears of terrorism and illegal activity.
Undocumented workers avoid banks because of strict identification requirements. The U.S. Patriot Act actually made it easier for immigrants to open bank accounts by allowing identification issued by foreign consulates, but many immigrants still feel that it’s risky to give too much personal information to a bank.
A similar challenge occurs at the receiving end, where relatives back home may be unfamiliar with or distrustful of banks. With long histories of poor treatment behind them, customers may see banks as institutions for the rich. In Mexico only 33 percent of remittance recipients have bank accounts; in Central America only 22 percent.
Partnerships are especially critical in remittances: they link the sending and receiving institutions. Citibank has been active in establishing partnerships with recipient-side institutions, starting with BancoSolidario in Ecuador as a test case, and moving on to BRAC, in Bangladesh, among others.
Both these microfinance institutions have many branch outlets throughout their countries, making them attractive distributors of remittances. In the massive corridor between the United States and Mexico, Citibank customers can easily make account-to-account transfers with Banamex, Citi’s Mexican arm.