Latin Finance - July 2008 - (Page 43)

investment banking Opportunities for Financial Institutions in Low-Income Retail Banking By Alberto Jimenez, Global Business Advisor – Financial Services Sector, IBM Global Business Services ith the number of “unbanked” in Latin America exceeding 350 million and with a friendlier regulatory environment in most of the region, the retail banking industry has a unique and massive opportunity to increase banking penetration in the region. The portion of households in the Latin American and Caribbean region without access to formal financial services was 65% in 2007, which means that about 358 million don’t have access to basic banking products. Nations as diverse as Spain and Singapore have reached penetration levels above 95%, proving that these are attainable goals. According to our estimation, and depending on how it is measured, this regional opportunity ranks second globally after China. W Households with at least one bank account 2007 low-value, high-volume section of the market. Specifically, traditional financial institutions can play two roles: one is to directly serve the underbanked and the second is to provide funding, and sometimes products, for other AFIs that in turn deal directly with the end-client. In the first case, the direct service, financial institutions have encountered that their traditional distribution channels and risk management techniques are not appropriate. Sometimes, because the transaction values are so small, the cost of providing them exceeds the benefit; but in some other cases, because the tools are just not applicable to the market. For example, quantitative-based credit risk assessment is not useful for individuals outside the financial system with no credit-history in any database. Historically, banks have served their higher-income clients with a more personalized service, and their lower income ones with a low-touch approach. However, given the geographic localization of the target population, outside the branch network, and other segment particularities, AFIs have demonstrated that low-income clients require a personalized, high-touch relationship with their financial institution. 80% Use of Information Management Systems by Region 80% Source: Demirguc-Kunt, Beck and Honohan, 2007, Policy Research Report on Access to Finance, World Bank 70% 60% For the most part, legislators across the region have taken steps towards improving the attractiveness of the segment for regulated (and non-regulated) financial institutions. Although there is a long way to go, the current regulatory environment is substantially more supportive than 10 or 15 years ago. 50% 40% 30% 20% Serving the Underbanked Traditional and alternative financial institutions (AFIs) have encountered that structuring profitable, and sustainable, business models to serve the low-income segment is not a simple task. Traditional banking practices are not always applicable for this segment and significant transformation is required to succeed in this 10% 0% E. Europe/ C. Asia (26) Latin America (25) SE Asia (43) Sub-Saharan Africa (44) All Respondents (138) The AFIs, which include microfinance institutions, NGOs and cooperatives, among others, have their own obstacles. 2008 LATINFINANCE 43 guide

Table of Contents Feed for the Digital Edition of Latin Finance - July 2008

Latin Finance - July 2008 Contents Investment Banking Outlook Compensation Survey Colombia Investment Banking Borrowers vs. Investors Banorte Profile Braskem Financing Strategy Brazil Hydro Finance Peru Port Privatization Panama Money Flows Argentina Local Markets Guide to Banking Technology Who Said That?

Latin Finance - July 2008

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