Using Platforms to Gain Scale in BoP Markets (Part 2 of 3) – By Francisco Mej?a and Manuel Bueno
These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.
In our previous post we introduced the two basic approaches that are currently being touted in helping incoming firms rapidly gain scale in BoP markets: the sectorial approach which was explained in detail by Al Hammond’s post some time ago; and the platform approach, which is the one currently being developed by the Opportunities for the Majority Office in the Interamerican Development Bank and which was introduced some time ago in by Francisco Mejia’s guest post. Platforms have two characteristics that can be very useful in stimulating scale in BoP businesses: accessibility and information. However, depending on the type of platform these characteristics and their contribution to incoming firms may change. Moreover, their products may have different degrees of complementarity and the balance of power between different platform stakeholders may also vary.
In this post we would like to talk in more detail about different platforms and explain in more detail how their distinctive characteristics can be leveraged. Based on the variables mentioned above and its usefulness in stimulating capillarity we classify the most important platforms in 6 groups, 3 of which will be explained in this post and 3 in the next one:
1. Conditional Cash Transfer (CCT) Programs:
CCT programs are a powerful public policy weapon against poverty. They transfer money (in cash or in kind) to families in exchange for them to comply with certain conditions. These conditions normally revolve around children’s education and health, such as school attendance or regular vaccinations. In Latin America, the region where these programs are most popular, it is estimated that they have benefited more than 15 million poor families and over 60 million low-income people.
As a result of their activities, most of the information that these types of platforms generate are related with descriptive poverty statistics. They also have an extremely wide reach, particularly in countries like Brazil, Mexico or Colombia, where they are especially well developed. Their capillarity is also quite high, since by definition they try to be within reach of all those low-income people who may be eligible to receive aid. On the other hand the control over the platform that incoming firms may have is often low or very low, due to the public sector’s dominance, so the margin for experimenting with different products may be restricted by the stance of existing stakeholders.
The best fitting industries are in this case providers of financial services that may help recipients to better manage their subsidies or smoothen their cash flows with microinsurance, small consumer loans and saving accounts. In order to lower the transaction costs for program beneficiaries, mobile phone offerings are also likely to provide excellent synergies. Furthermore, products or services related with education, health or nutrition could also be well accommodated in these platforms.
We consider utilities as those companies offering electricity, gas and water services to BoP markets. These services are quasi- ubiquitous in many urban areas in the developing world and their adjunct platforms have massive consumer bases. On the other hand, their capillarity and reach is much more limited in rural areas, especially those with lower population densities or further away from the cities, because of higher servicing costs.
Traditionally, utility companies have perceived their core competencies to be strictly related with deploying their strategic assets in offering energy or water services at the lowest operational cost and reducing to a minimum technical and non-technical losses. However, some utility firms have discovered that the information about individual payment histories can be a very valuable asset. Subsequently many of these companies have chosen to leverage their information with their billing and collection capabilities to start offering financial services either directly or through external economic agents.
The most common financial product so far has been small consumer loans which are approved to purchase electric appliances, furniture or kitchenware, even though inroads have recently been done in microinsurance products as well. Codensa, for example, is a renowned case in this line (for more details, Manuel wrote some time ago a small case study about it).
In this case, as in the previous one, the platform falls squarely under the control of the utility company. Hence, incoming firms have traditionally been strongly dependent on the support of the platform owner to be able to roll out new or modified versions of previous products. As a result much of the goodwill generated by these new services has been appropriated by the utility firm. This in turn has resulted in lower default rates both in bill payment and financial products and thus generating a significant source of consumer loyalty and income for the utilities and has dramatically improved the lives of the poor while offering an entry point to an otherwise inaccessible financial system.
As the volume of provided financial services has grown so has the appetite for an increasing range of goods. Therefore the outside firms who may benefit from allying with utility platforms is by no means constrained to finance providers and may include many mass consumer goods such as household products of all kinds, health, education, nutrition and /or IT products. It therefore represents potentially one of the most flexible platforms currently available in low-income markets.
3. Mobile phones:
Currently, mobile networks cover more than 80% of the world’s population and more than 4 billion people are estimated to have a mobile phone. In 2007 and 2008, it is estimated that around 1.15 to 1.2 billion mobile phones were sold worldwide, the brunt of which was eagerly taken in by developing countries and especially relatively young consumers. More importantly, thanks to the particularly flexible product architecture and the increasing computing power of the microprocessors attached, mobile phones are capable of bundling with many seemingly unrelated services related with the transmission of not only voice, but also data and services. As a result, different people have given different uses to mobile phones (for more details about mobile phone platforms we eagerly recommend David Lehr’s study published in Acumen Fund’s website). The bundled added service that has attracted most attention is, by far and away, mobile phone banking. In low-income communities mobile phones often offer major improvements in security, convenience and range of services to previously unbanked customers. In South Africa, for example, it is estimated that half of the bank accounts will be managed through mobile phones by 2010.
Mobile phone platforms exhibit very high degrees of capillarity. The geographical reach of these platforms depend very much on the operator, although the drive towards reaching economies of scale is spurring a move to consolidate between mobile phone companies in the search for ever-decreasing operational costs. Obviously the information generated by this growing network can be hugely valuable, especially as mobile phone standards converge and sharing of data is enabled between different serves. Depending on the variety of services offered through mobile phone networks, the accumulated information may be more or less detailed, but on the other hand the scope for a partnership may be wider. Finally, mobile phones platforms not only collect information about individual customers, but may also offer a detailed view into the social networks of their users thus giving the chance to incoming firms of catering to groups rather than to individuals.