71306 BRIEF A Structured Approach to Understanding the Financial Service Needs of the Poor in Mexico Financial service providers have traditionally focused more on the supply side of financial inclusion than on the demand side. Undoubtedly, it is easier to measure number of branches, total customers served, and aggregated portfolios rather than attempt to get into the messy business of poor and underserved customers’ lives, businesses, and needs. However, we are starting to recognize the fundamental importance of working directly with customers to understand their financial habits and needs, as well as the role of finance in their lives. This brings a new perspective on the problem of financial inclusion: a deeper understanding of demand could be key to designing a more meaningful and sustainable offering, particularly as we realize how little we actually know. Mexico is a middle-income country on the cusp of quantitative analysis with detailed qualitative research, a significant transformation in the ways low-income the combination of which helps paint a deeper picture and unbanked customers access and use formal of people’s preferences and behaviors—how they think financial services. Regulations now permit third-party and how they make choices. People are then grouped correspondents to process transactions on behalf into segments with common observed behavior. of banks, and a number of financial institutions and potential correspondent partners are looking for new Segmenting the Mass Market formulas that marry the right products and channels to the needs of customers. Data can be cut in many different ways. Finding out which dimensions might better explain certain However, reaching the poor with formal financial behaviors can be challenging. Segmentation is an products has proven to be a challenge. The mass- inductive process where one starts out with some set market segment comprises 22 million mid- to low- of hypotheses and subsequently use data to prove, income households,1 or roughly 85 percent of the disprove, or refine them. Our starting hypothesis was population. Although 52 percent of such households that livelihoods are the key driver for people’s financial have an active account with a financial institution, practices. Early in the study, with more granular data, 90 percent of them choose not to use it for savings. we expanded this with additional hypotheses. Financial institutions are increasingly interested in serving the base of the pyramid, but few have a • Livelihood—determines the amount, certainty, and textured understanding of how low-income people regularity of income use money and financial products now, and what sorts • Locality—the geographical location of people (urban, of products they may need or may want in the future. semiurban, or rural) determines the kinds of options To close this knowledge gap, CGAP commissioned available to them, e.g., formal or informal finance a study to explore the financial habits, needs, and • Level of income—determines the kind of “space� wants of low-income customers in Mexico. or bandwidth people have to make financial choices This study provides a detailed description of people’s • Lifecycle stage—where people are in their lives, e.g., challenges in managing their cashflows, how they obtaining an education, starting a family, starting a confront shortfalls, what choices they make in saving and livelihood, affects the priorities, needs, aspirations, borrowing money, and more generally, what strategies and concerns that influence how people make they use in their day-to-day financial lives. It combines choices May 2012 1 As measured by the national household survey on income and expenses (“Encuesta Nacional de Ingreso y Gasto de los Hogares, ENIGH�). 2 Figure 1: Segment Definitions (%) indicates % of population in segment Income Level C- D E 10,800 to 18,300 Ps/Mo 4,600 to 10,800 Ps/Mo < 4,600 Ps/Mo 1 2 Middle income Low income formal Formal salaried formal salaried salaried Urban and semi-urban (17%) (14%) 3 4 Middle income Low income Informal entrepreneur entrepreneur entrepreneur (4%) (10%) 5 Informal Informal salaried salaried workers (20%) 6 Rural Agriculture workers All occupations (8%) To explore the relationship among these variables and Although lifecycle stage seemed to be a strong factor, people’s financial behavior, we conducted a nationally we felt deeper research was needed to adequately representative survey with 426 households in income analyze this dimension. We therefore focused on the segments “C-� and below (income less than US$1,440/ other three variables (income structure, setting, and month, and at least one person economically active in level of income) for which we had significant data to 2 the household). This survey collected data around correlate with financial behavior. Figure 1 illustrates four areas: (1) income structure (income and expense our chosen segment definitions. cashflows), (2) aspirations, (3) concerns, and (4) Following the national survey, we conducted 32 in- money management strategies. Each interaction was depth interviews with people across all segments designed as a 90-minute interview to ensure a proper and three additional focus groups to validate and relationship was established and people were open to refine our hypotheses. talking about their finances. This also helped capture information on the sidelines that was later useful to Table 1 shows a characterization of segments in terms orient our hypotheses. of type of livelihood, behavior patterns, financial management strategies, and resulting financial needs Data from the survey indicated that most people had (only lower income segments are shown). The results very similar concerns and aspirations: help us to understand the kind of products that each group of people would find more useful than others.3 • Most people are concerned about meeting We can observe a strong connection between people’s education expenses for their children, and meeting money management strategies and the “income medical expenses if someone in the family gets ill. structure� (the amount, variability, and regularity of • Most people also aspire to have better housing. the income). The frequency and the size of mismatches Investing in a business, getting a better job, and between income and expenses create a need for achieving financial stability were also frequently flexibility to move money in time. Consequently, mentioned across all segments. At the extreme lower people use savings and credit in different ways to income segments, people want to ensure they are deal with foreseeable expenses, unplanned events, able to meet basic needs (food, clothing, and shelter). and shortfalls. Therefore, people will perceive these 2 This comprises 22 million households with incomes below 18,300 pesos per month (US$1,450). This excludes 3.04 million households where the head is noneconomically active. 3 The full report is available at http://www.cgap.org/gm/document-1.9.55527/Mexico_BoP_Segmentation.pdf 3 Table 1: Characterization of Lower Income Segments Type of Seasonal / Livelihood Formal Salaried Informal Salaried1 Entrepreneurs Agriculture Average household US$12/day US$15/day US$10/day US$4–10/day3 income2 Income Fixed income at fixed Variable amount Variable amount—daily Variable amount structure periods of time— at fixed periods of Income depends mostly at irregular periods fortnight or weekly time—weekly on daily transactions, of time Income perceived which vary day-to-day. Income from farming consistently but (agriculture and amount paid varies animal farming) is low depending of hours and uncertain. worked or sales. Example of • Store clerk C • ook at informal • Taxi driver • Smallholder farmer livelihood • Plant employee food stand • Merchant • Dairy products • Janitor • Wage worker • Street vendor • Animal farming • Construction worker Attitude/ Prefer certainty; actively Accustomed to Business minded; seek Low-skilled, limited behavior set and manage goals; uncertainty. Constant opportunities to make abilities to build focused in planning worry of meeting basic money; risk taker; multiple financial assets; ahead; weary of credit. needs. Less rational financial relationships focused on getting by. Natural savers. choices. open at a time Financial Saving and Planning Managing Cash to Actively Managing Managing Costs with management to Fulfill Aspirations Meet Expenses Financial Assets Limited Options strategy Routinely save for Focus on planning Jointly manage Households have planned expenses and cashflows to meet household and business very limited options to achieve goals. They expenses. They use finances. They rely on a (family and friends have a relatively higher short-term savings mix of savings and credit are also poor). degree of education for planned expenses to confront shortfalls. Stretch themselves and have longer but often borrow to They save to meet and family to reduce planning cycles. They make ends meet. Seem planned expenses, but consumption habits use credit mostly for to be a transitional routinely opt for credit to (including food) to unexpected expenses occupation, as people meet unplanned needs make expenses meet (e.g., emergencies). tend to eventually and to capture business available resources. Saving is their key adopt other more opportunities. They often Most households money-management stable livelihoods. “save� by investing in supplement income strategy. Often other members their business (limiting through other sources. of household adopt liquidity). They often Non-ag income salaried work that keep multiple concurrent brings additional provides a steady relationships (several US$10–15/day in large source of income. open loans, savings) to households. ease maneuvering. Saving profile Savings as multiple 4.1 3.1 3.4 0.5 of monthly income Credit profile Credit as multiple 0.7 0.7 1.3 0.4 of monthly income Financial Broad portfolio of Simple savings plans, Short-term credit for Saving with credit services that savings options (varying ideally with small/ liquidity management; for emergencies; would be terms, interest rates); short-term credit convenient transactional insurance plans; most valuable commitment savings; options instruments; simple microsaving; financial long-term savings savings plans planning tools 1 Informal salaried workers includes people with middle incomes. 2 Total reported income in household per month divided by 30. Most households reported average spending of US$10/day on food. 3 None of the households interviewed in this segment had a purely seasonal income. All of them had alternate informal activities (wage workers, entrepreneurial) to complement income. The average household income (full with non-ag) was an average of US$19/day. 4 May 2012 All CGAP publications products differently, depending on how they help from family and friends, bears little or no interest, and are available on the CGAP Web site at address specific money management challenges. has flexible terms of repayment. Friends and family www.cgap.org. constitute a financial network that strengthens the Although savings and credit are common across all social fabric (family bonds, business ties). People save CGAP groups of people, the ability to save and adequately in groups as it unites them in solidarity for a common 1818 H Street, NW serve debt is constrained by efficient liquidity MSN P3-300 purpose (usually a friend needing extra money). Washington, DC management. Ideally, financial products should 20433 USA help people cope with financial challenges both for liquidity management as well as for increasing their Key Lessons Tel: 202-473-9594 financial assets: Fax: 202-522-3744 Every person is likely to use some form of credit and savings and is likely to find value in insurance and Email: • Formal salaried workers with stable and predictable payments products. However, different segments cgap@worldbank.org income ordinarily save to meet goals. They would face distinct challenges to manage their finances and value a portfolio of savings products that give them © CGAP, 2012 will value more particular products: options to save with different kinds of return and liquidity options. They would also value easy access • Liquidity management and consumption smoothing to credit to meet emergency needs. emerge as the top needs of most households. Poor • Informal salaried (wage) workers struggle to households need short-term credit and savings to manage fluctuations in income to meet expenses. manage their liquidity as much as or even more so Regularity in income facilitates planning, but would than for “asset building� (as in starting a new business value simple savings products that help them plan or saving to increase assets). for foreseen expenses and commitment savings to • Regular income is an important driver of savings achieve longer term goals. Savings history can serve patterns. Even though everyone routinely saves, as a basis to assess ability to serve debt. Short-term households with regular income are more likely to credit would be valuable to smooth out shortfalls. save for the mid- to long-term future. • Entrepreneurs who earn a variable income, usually • Informal financial and social networks are an on a day-to-day basis, would value a portfolio of important source of finance for low-income credit options that provide liquidity to respond to people. Formal providers need to understand their business opportunities, and smooth out expenses added value compared with informal options. across business cycles. They would also benefit from transactional and payments products that By turning away from a “mass� approach to addressing they can use to put away money temporarily as a individual segments’ needs, institutions can be more means to manage cashflows and save. effective at tailoring products that link more directly to • Seasonal/agriculture workers have the most people’s lives, and ultimately increase the likelihood irregular income, usually insufficient in itself. of designing commercially sustainable products. The These households usually adopt other livelihoods traditional vision of “lowering the transaction cost� as to supplement income and group in extended the means to achieve that does not go far enough— families to pool income and expenses. They would institutions need to design meaningful products, value microsavings products, insurance, and small- understand how they create value for customers, and value credit for emergencies. This group seems to adopt more adequate forms of pricing. be the most vulnerable, and would benefit most We’re hopeful that segmenting the market along from broader financial planning and literacy. the lines of this study can become a more common The study also helped us understand the value of element of business model and product design, and informal options used today. Saving at home is easy, low ultimately improve the range and quality of financial cost,4 and convenient. Informal credit is easily accessible services available to the mass market in Mexico. 4 Customers perceive this as low or no cost, though as we all know, saving in cash risks theft and loss and sacrifices possible interest or returns, thus representing a less obvious form of “cost.� AUTHORS: Xavier Faz and Paul Breloff