NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Nicholas Roose, an associate at Bankable Frontier Associates, contributed to this article.

Poor clients prefer to keep their financial options open.

They typically do not find one or only a few providers to meet all of their needs. As a result, many poor clients maintain relationships with numerous formal and informal providers so they have access to emergency financing when they need it. For example, we spoke to one client in Mexico who maintained the smallest available loan with a local microfinance institution, despite a very high interest rate. This client took out the loan “just in case” she later needed an emergency source of funding.

From another perspective, we see that formal financial institutions often struggle to justify the business case for serving poor clients wanting to save. Acquisition costs are high and low balance savings are not sustainable. At the same time, providers recognize that only providing credit to clients may be profitable, but may not develop client trust and longer-term engagement that promote client retention.

In part due to this dynamic, cross-selling in recent years has become a popular strategy for financial service providers, including those trying to reach lower-income clients. Less costly than acquiring new clients, cross-selling pushes providers to focus on selling multiple products to current clients rather than pursuing new clients in order to grow. Cross-selling can help providers increase their profit per client, wallet share and client retention. By better understanding their clients through segmenting them by demographics, financial needs and behaviors, providers may effectively target different segments with multiple products in ways that are more cost effective for the providers and, ideally, more relevant for the clients.

But cross-selling has often proved elusive to providers, which, for Bankable Frontier Associates (BFA), raises questions about how clients, and especially low-income clients, may benefit from cross-selling. (Note, the authors are employed at BFA). To better understand the benefits of cross-selling for institutions and their low-income clients, BFA is partnering with MetLife Foundation, Rockefeller Philanthropy Advisors (RPA) and four institutions in four different markets. The aim is to support cross-selling initiatives with each of the institutions through Optimizing Performance Through Improved Cross(X)-Sell (OPTIX). OPTIX is a three-year initiative funded by the MetLife Foundation through a grant to RPA and managed by BFA. The institutions are Cooperativa Acreimex in Mexico, Banco WWB in Colombia, SAJIDA Foundation in Bangladesh and Capital Aid Fund for Employment of the Poor in Vietnam.

For OPTIX, we posit that both low-income clients and the formal providers that serve them can benefit from cross-selling. In OPTIX Focus Note #1, we outline some of the hypothesized benefits to clients. If clients engage further with one provider through cross-selling, they may take advantage of the convenience – through reduced time and cost – of dealing with fewer financial services professionals, whether formal or informal. Clients may benefit from better interest rates and higher value loans by engaging more with one provider.

But, as we mentioned at the start of this article, we are also aware that clients – and particularly low-income clients – require a broad array of financial tools to cover various short-term and long-term, expected and unexpected life events. In other work we have done, and particularly through our Financial Diaries work in markets in Africa and Asia, we see clients borrowing from not just multiple formal institutions, but also borrowing from – and lending to – multiple family members, friends and community members to keep their options open in case they need additional financial support for an emergency, a business investment or another need.

Aware that clients rely on an array of financial tools, we see that the challenge and opportunity of cross-selling lie in financial providers defining and promoting product combinations that meet the needs of their low-income clients. But the clients, like the providers, must recognize the value of such product combinations and the relevance to their lives. When that happens, customers are more likely to view multiple products with one provider as sufficient for keeping their financial options open to meet different needs. Indeed, cross-selling does not mean that clients are moving all their financial tools to one provider, but it does mean that they are moving more of their financial tools to one provider. And, with the right provider, clients may find a “one-stop shop” that meets more than one of their financial needs better than relying on multiple providers.

Using a combination of data analytics and client research, BFA is working with the OPTIX institutions to identify patterns in clients’ financial behaviors and decision-making to identify which client segments may benefit from cross-selling and which cross-selling strategies are appropriate for different client segments. At the same time, business case analysis will provide the institutions with insights into the financial benefits (or drawbacks) of different sustainable product combinations. In sum, these insights will help the institutions define cross-selling strategies that are appropriate for their clients, their institutional objectives and their markets.

Beginning with Focus Note #1, BFA will disseminate learnings throughout the project life cycle to highlight and share lessons in pursuit of developing an understanding of cross-selling benefits for both low-income clients and institutions.

Kristy Bohling is a Senior Associate at Bankable Frontier Associates

Daryl Collins is Managing Director of Bankable Frontier Associates.