Summary of the Last lecture

• Alternative vs. Bank Financing• Remittances

MODELS ANDCORPORATE CHOICES

New Technology

• Even a bank with a vast network cannot duplicate the reach of small retail stores—or more, of cell phones—and that’s why technology is the big story in remittances today.

New Technology

• Debit and prepaid cards, which are easy to place in retail outlets, provide an alternative to cash-to-cash transfers. It’s estimated that by 2007, 30 to 50 percent of remittance recipients had debit or credit cards.

New Technology

• At the same time, only about 2 percent of the total outbound U.S. remittances use prepaid remittance cards, indicating an opportunity to increase the use of cards in remittances.

New Technology

• Kiosks are another way to complete the last mile. With remittance inflows to India totaling $25.7 billion in 2006, ICICI Bank developed a service called “Money2India,” which had over 670 agent locations.

New Technology

• To expand even further in rural areas, ICICI adopted a kiosk system with both an ATM and a human agent. The kiosks are independently owned and operated, paid for by user fees for other services.

New Technology

• The longest last mile occurs in rural areas with limited infrastructure, but mobile phones can reach right across this distance. G-Cash (electronic money) is a mobile money-transfer platform owned by Globe Telecommunications in the Philippines.

New Technology

• Through a partnership with Maxis Communications Berhad, the largest mobile service operator in Malaysia, Globe developed the first international mobile-to-mobile direct remittance service.

New Technology

• Maxis to Globe remittance transfers are sent without a bank or bank account and are enormously convenient, especially for rural populations. G-Cash received on the cell phone of the remittance recipient can be cashed out or used to pay bills, make loan payments, or purchase goods.

New Technology

• With as much as 10 percent of its total population working overseas, the Philippines is highly dependent on remittances. Flows from Malaysia alone amount to billions of dollars, so G-Cash’s profit potential is as impressive as its development impact.

New Technology

• For customers, G-Cash is cheaper than any other method of transferring cash, averaging about 1 percent of the transferred amount—and it is faster, too. Globe is expanding this service to other countries where there are Filipino workers, such as the United Arab Emirates.

CORPORATE CHOICES

• Before a company can enter the inclusive finance market, it must choose the right strategy. It must consider where it is best suited to get involved and how its own comparative advantages best address market needs.

CORPORATE CHOICES

• The next few lectures introduces three significant strategic choices companies may face, which we will then explore in greater depth in the chapters that follow. But first, who is likely to make these strategic choices?

CORPORATE CHOICES

• In many cases it will be a corporate champion with the vision and passion to persuade his or her company to consider the BOP market from a fresh perspective and the operational know-how to turn that perspective into action.

CORPORATE CHOICES

• Every business venture needs an entrepreneurial champion who builds a vision with business sense and emotional significance. This kind of vision will be critical in an inclusive finance venture, where champions may need to do more than the usual share of convincing.

Champions of Inclusive Finance

• One such champion is Robert Annibale of Citibank. In 2004, Annibale was an 18-year veteran at Citi, known and respected across the bank for his work in treasury and risk management. His experiences in Africa convinced him of the potential of microfinance.

Champions of Inclusive Finance

• Annibale did not start from a blank slate, of course. By the time he began thinking about getting involved, Citibank had supported microfinance for years, largely through its foundation, but it had not yet made a business commitment to the sector—nor had many other major international banks.

Champions of Inclusive Finance

• However, after years of foundation-led support, a number of leaders throughout the bank understood and cared about microfinance. Building on that base, Annibale and a small group of colleagues convinced Citi to create a business unit dedicated to microfinance, which Annibale was appointed to head.

Champions of Inclusive Finance

• The Citi microfinance unit has assisted MFIs from Bangladesh to Mexico to raise funds in capital markets and is conducting wide-ranging experiments in areas including remittances and electronic payments.

Champions of Inclusive Finance

• At about the same time, Nachiket Mor and Bindu Ananth played a similar role at ICICI Bank, and the microfinance sector in India has never been the same. A Ph.D. economist, Mor was, like Annibale, a veteran respected for his work in treasury and corporate finance when he was given the added charge of the bank’s inclusive finance work: a social initiatives team headed by Ananth, a young academic idealist.

Champions of Inclusive Finance

• The internal conditions were fertile for ICICI to support their work, because of Indian government priority sector lending targets and the bank’s overall strategy to become India’s leading bank in most if not all market segments.

Champions of Inclusive Finance

• Through pilot experiments (not all successful, but all providing valuable learning), and dialogue with microfinance industry players, Ananth and Mor created new ways of working with MFIs, which allowed ICICI to migrate its support to microfinance beyond a small CSR-type unit and put several hundred million dollars into the sector during the next few years.

Champions of Inclusive Finance

• Innovations coming out of this effort included the ICICI partnership financing model, the Centre for Microfinance at the Institute for Financial Management Research, and FINO (a technology company serving MFIs), among other initiatives.

Champions of Inclusive Finance

• Annibale and Mor had earned trust and political capital in successful mainstream operations, and they knew how to work the cultural and political systems in their organizations in order to win sponsorship and resources for their projects.

Strategic Questions

• Before they set out to rally internal support, would-be corporate champions need good answers to some of the many questions their colleagues are likely to raise. In addition to questions about the market opportunity, which we treated in earlier lectures,

Strategic Questions

• colleagues need to be convinced of the company’s own relevant capabilities, and they need to see the outlines of a successful strategy. Among the questions a corporate champion may have to answer are these:

Strategic Questions

• 1. Do we possess unique knowledge or infrastructure in the market that will give us a competitive advantage?

• 2. Do we have the infrastructure and technology to reach clients directly? If not, would we build it or would we use someone else’s?

• 3. Is reaching the BOP market compatible with our branding and image?

Strategic Questions

• 4. Can the BOP market become part of our long-run client base?

• 5. Does our internal corporate culture facilitate working with BOP clients?

• 6. Can our cost structure support working with BOP clients and their small transactions?

Strategic Questions

• 7. What will the regulatory environment allow us to do? What will it require us to do?

• 8. How should we position this work with respect to corporate social responsibility? Will we do this for profit or citizenship or other reasons?

Strategic Questions

• 9. Where will the income streams come from? Fee income? Any crossselling opportunities or increased customer traffic?

• 10. Will this be profitable or financially sustainable?

• 11. What are the risks? What are the unknowns?

Strategic Questions

• In short, what are we uniquely positioned to offer and how could we make this a business success?

• Mor, Ananth, Annibale, and leaders in each of the 16 businesses profiled in the cases answered these questions and made effective choices, though not without a certain amount of trial and error.

Strategic Questions

• Although there are many strategic decisions to be made, we focus the rest of these lectures on three critical choices that set the direction companies will take: whether to engage the BOP sector as a service deliverer or as a financier, whether and how to employ partnerships, and how to position financial inclusion on the corporate social responsibility spectrum.

Strategic Questions

• Service Delivery vs. Financing• In-House vs. Partnerships• Social Responsibility Positioning

Financiers

• For organizations that lack any other direct contact with low-income clients, and who do not have a deep understanding of the market, becoming a financier may be the easiest—or only—choice.

Financiers

• Financing microfinance requires little in the way of new capacities for large commercial and investment banks.

• They simply do what they already know how to do: finance successful businesses, in this case MFIs. Their main task will be to learn enough about MFIs to conduct due diligence with confidence.

Financiers

• Many large and especially international banks take this path. At ICICI, for example, Mor recognized that his bank’s high-end and middle-class branch infrastructure and product suite did not equip it to serve low-income clients. Instead he got to know MFIs across India that operated at the grassroots and needed a financial backer.

Financiers

• Mor and Ananth developed the ICICI partnership model, which tweaked the standard strategy of private banks toward microfinance— lending to leading microfinance institutions

Financiers

• —but still kept ICICI out of direct service delivery. Under the partnership model, the official lender to the client was ICICI, and MFIs were their service agents. Through this model, ICICI profitably financed inclusion at an unprecedented scale, allowing the leading MFIs in India to grow rapidly.

Financiers

• The partnership model had tremendous influence on inclusive finance in India. It orchestrated new terms under which banks and MFIs interacted, until ICICI suspended the model over regulatory issues.

In the Next Lecture

• Service Delivery vs. Financing• In-House vs. Partnerships• Social Responsibility Positioning

Summary

New Technology

Corporate Choices