Financial Services for Brazilians in the C, D & E classes: Snapshot of recent CGAP research April 2, 2012

1. Financial Services for Brazilians in the C, D & E classes: Snapshot of recent CGAP research April 2, 2012

3. CGAP Technology and Business Model Innovation Program The Technology and Business Model Innovation Program at CGAP works with banks, microfinance institutions, mobile network operators and retail stores to deliver financial services through new technologies, such as mobile phone, magnetic stripe or chip cards, and biometric applications. We Build Knowledge on issues such as customerneeds, agent networks, and business models We Strengthen Markets so that promising branchless banking services can thrive We Promote Policies and Regulations that allowbranchless banking to expand and reach unbankedpopulations

4. Status of CGAP work in Brazil • Partnership and close ties with Brazilian Central Bank on financial inclusion • Partnership with major Brazilian banks • Support to innovative start-ups • Public good research: • Profitability and mechanics of agent channel • Qualitative research on low-income consumers

5. 1 What is special about Brazil? 2 What has CGAP learned from the CDE classes? 3 How can Brazilian banks serve these segments?

6. 1 What is special about Brazil? 2 What has CGAP learned from the CDE classes? 3 How can Brazilian banks serve these segments?

7. Between 1992 and 2009, 47 million individuals migrated from the D and E classes to the C class, doubling the size of the C class in relation to what it was in 1992.

8. The “pyramid” has become the “diamond”

9. Global view: Brazil leader in agent banking • All of Brazil’s municipalities have at least one correspondent • 3.1 billion transactions in 2010 through this channel

10. Global view: pioneering financial services link to government benefits

11. Key challenges and opportunities for financial inclusion High physical channel access…but low-cost models underutilized to target financially excluded Brazilian banks are product innovators…but there is product mismatch with low-income consumers’ needs Lots of public research on new emergent C class…but research has not increased foundational knowledge of C, D & E classes

12. What would you do if your income doubled? Leisure Own business Save or invest Save or invest Save or invest Travel Travel Travel Buy or renew Buy or renew Buy or renew Pay debts Pay debts Pay debts 13% AB 6% 4% 32% 15% 14% 3% 2% Own education Own education Private school Private school Private school Car Car Car Health Plan C 2% 4% 3% 43% 9% 8% 5% DE Food 48% 9% 6% 2% 4% 3% Health Plan Source: Plano CDE, 2010 Sample: Recife 609 – São Paulo 1006 (non relevant data) 2nd home 2nd home 2nd home

13. 1 What is special about Brazil? 2 What has CGAP learned from the CDE classes? 3 How can Brazilian banks serve these segments?

14. Background on CGAP research Research conducted between June 2011 and March 2012 in partnership with Brazilian banks Focus on qualitative research 75 interviews with C,D & E consumers (88% D&E) 5 areas: Rio de Janeiro, Sao Paulo, Recife, Porto Alegre and Maceio Conducted with Plano CDE and independent consultant Juliana Estrella

15. Overview of profiles “Self-Satisfied” 33 years old C2 segment “Lazy-optimists” 33-38 years old D1 segment “Seasonal-Jack” 51 years old D1 segment “Community Maven” 28 years old D2 segment “Orkuterati” 21 years old D2 segment “Cash Prince” 18 years old D2 segment “Savings Addict” 47 years old D2 segment “Tempted” 45 years old E segment “Budget Artist” 65 years old E segment “Just Welfare” 32 years old E segment

16. Customer Profiles: The New Comer • 33 years old • Lives in Rocinha • Monthly income: R$1900 • Is a sommelier at a restaurant and cleans motorcycles on weekends • Is evangelical / no lottery • Buys appliances in installments • Has internet at home • Has post-paid cell plan with Nextel • Finances • Owns his home • Current account at Bradesco, savings account at CAIXA and 3 credit cards (2 Itau, 1 Bradesco for Casas Bahia)

17. Customer Profile: The Lazy Optimists • 33 and 38-years old • Monthly incomes: R$800-1000 • Both sell arts & crafts outside of historic church in Olinda. • Buy their appliances in parcelas • Play lottery every week • What do you think? • Do they own their homes? • Do they have a savings and/or current account? • Do they have credit cards? • Do they have internet at home?

18. Customer Profile: The Seasonal Jack • He is 51 years old • Lives in Maceio, Alagoas • Has been a jangadeiroand fisherman for 34 years • 5 children, 7 grandchildren • Variable income: will do boat tours and fish during one half of the year and then needs to save for the ‘low-season’ • Finances: • Owns his own home • Prefers to save up and buy ‘a vista’ • Has a savings account at CAIXA and a hipercard credit card • His granddaughter has BF for her child (both live with him) • Has a cell phone and dislikes being in debt

19. Customer Profile: The Community Maven • 28-years old • Lives in Morro dos Macacosin RJ • Unemployed, with 2 kids • Husband’s monthly income: R$900 • Used to sell Açai • What do you think? • Does she own her home? • Does she have a savings and/or current account? • Does she have internet at home?

20. Customer Profile: The Orkuterati • 21-years old • Lives in Santo Amaro, SP • Works as a copier • Monthly income: R$600 • Lives with her mom and nephew, mom’s income from ‘bico’ • What do you think? • Does she own her home? • Does she have a savings and/or current account? • Does she have internet at home?

21. Customer Profile: The Cash Prince • 18 years old • Moved to São Paulo from Paraiba • Is a helper at a store • Monthly income: R$700 • What do you think? • Does he own or rent? • Does he have a savings and/or current account? • Does he use his cell phone mainly for calls or for SMS?

22. Customer Profile: The Savings Addict • 47-years old • Monthly income: R$700 • Has a stall at fair in Olinda (sells coconut fiber tablecloths) • Buys everything ‘a vista’ • What do you think? • Does she own her own home? • Does she have a savings and/or current account? • What kind of cell phone plan does she have?

23. Customer Profile: The Tempted • 45 years old, has 5 kids & grandson • Lives in Restinga, Porto Alegre • ‘Faxineira’ • Makes R$300/month (if she gets extra jobs, add R$100) • Receives BolsaFamilia for 2 kids • Her sister helps her out with food • Finances: • Recently got a Minha Casa, Minha Vida apt (pays R$65/month) • She has a simplified account, but only uses it to withdraw BF • Uses ATMs and lottery to withdraw • Used to have a credit card at Itau (but couldn’t pay it off) • Tried buy insurance, but cancelled “I buy everything I get offered on the street– it’s so tempting!”

24. Customer Profile: The Budget Artist • She is 65 years old • From Penedo, Alagoas • Very recently widowed • 12 people live in her home, including four adopted grandchildren • Her income is variable: She is a ‘bordadeira’. She is part of an embroidery association and her salary is based on how many of her pieces sell (~R$100/month). • She gets R$192 BF/month and her husband’s pension of R$600. • Finances: • Owns her home • Has a savings account at CAIXA (no balance) • Receives pension in Bradesco account • Has a hipercard CC that she loves “People sometimes do things they can’t… the more [products] people have, the more they spend.”

25. Customer Profile: Just Welfare • 32-years old • Lives with her two sons • Lives in Sao Carlos, a favelain Rio • Has no job, lives from BF income • BolsaFamilia benefit: R$113 • She has a pre-paid cell phone account (spends R$7-12/month) • Both of her sons have a rare blood disease • Finances • Owns her home • Her mom, who receives disability welfare helps her out at home • Has bought appliances in installments with her mom’s CC

26. A view of financial services supply in the Brazilian Market PROCON: Federal consumer protection Government. Banks’ customer service. Fin Education program (limited to some areas) Common to receive salary in current a/c (Bradesco, CAIXA) but make payments in cash (via agents) or at ATMs Only program MinhaCasa MinhaVida. All banks offer mortgage programs for C+ (need to do more research here). C $1575 - $5250 50% of pop Formally employed automatically enrolled in INSS. Some might have private pension programs. Save in cash at home, some have savings account (esp with CAIXA). Some savings capabiity. Advisory Payments Insurance Long-term savings Housing Credit Short-term savings Pensions Credit cards (via banks), payroll-consigned loans, installment loans (via CasasBahia and private label cards). Credit for cars, motorcycles and household goods. Overdraught. Those with formal jobs get INSS automatically. Those independently employed pay into INSS. Retirement savings are rare. Everyone uses free public state/city clinics. Insurance industry still has no reach.

27. A view of financial services supply in the Brazilian Market PROCON: Federal consumer protection Government Fin Education program (limited to some areas) Common to receive salary in current a/c (Bradesco, CAIXA) but make payments in cash (via agents) or at ATMs Only program MinhaCasa Minha Vida and no micro mortgage market D $525 - $1575 30% of pop INSS available but D segment not paying into it or unaware Eligible for pension of 1 min salary. Save in cash at home, some people have a savings account (esp with CAIXA) but withdraw funds. Advisory Payments Insurance Long-term savings Housing Credit Short-term savings Pensions Credit cards (via banks), payroll-consigned loans, installment loans (via CasasBahia and private label cards), loans from MFIs. Few pay INSS, and few maintain a retirement-type account available via CAIXA and make sporadic payments into this a/c Microinsurance industry still too small. Everyone uses free public state/city clinics.

28. A view of financial services supply in the Brazilian Market If they have job, mainly receive in cash. Pay utilities in cash through lottery houses Any Bolsa beneficiary gets ContaFacilautomatically unless they refuse (and many don’t use it actively to save) Only program MinhaCasa Minha Vida and no micro mortgage market E <$525 10% of pop PROCON: Federal consumer protection Government Fin Education program (limited to some areas) Save in cash at home, if BF beneficiary, could save in ContaFacil. Mostly do not have enough to save. Safe storage Payments Insurance Long-term savings Housing Credit Short-term savings Advisory Mostly use family members credit cards to make purchases at retailers for home appliances No practice of long –term saving. Almost all used for immediate consumption. • Rely on family members for health emergencies • Free clinics for health or specific programs

29. Issues that impact financial decision-making Low, irregular, unpredictable income Financial shocks Consumption/ 'temptation shock’ Poor mental accounting Easy credit Psychological hurdle  big amount  Indebtedness  practical and psychological

30. Issue 1: Low, irregular & unpredictable income Many in the D Class are informally employed. Informal work leads to some months earning an income and other months not. Plus, to exacerbate the irregularity, it’s not certain when work will pick up Lumpy income and expenses including utilities create financial stress. It’s difficult for people to match the timing of income with that of expenses. Uneven cash flow and lack of ability to plan make saving in anything other than the mattress difficult.

31. Issue 2: Financial Shocks Bill shock: though recurring, utility bills are not always fixed; they are usually unpredictable in their amount. Health shock: public health services force people to lose days when dealing with family illness. The expense of medicines can be shocking. Other unpredictable expenditures can throw a family’s economy for a loop.

32. Issue 3: Consumption & Temptation Some cannot resist a culture of consumption. General consumption: What do people do when there’s extra income left? People seem to buy superfluous or more expensive food, purchase clothing or footwear and electronics. Temptation shock: Lack of self-control observed in sudden urges to consume and helplessness to refuse children’s requests for expenditure. “When my daughter asks for money, I can’t say no.”

33. The appeal to satisfy current desires is much greater than that of planning for the future. Access to consumer goods now Planning for the future Savings Consumption Credit Savings Versus Savings = consumption deprivation today Comfort, status, immediate gratification

34. Issue 4: Mental Accounting For some, poor mental accounting is a barrier. “Bills and budgets are done in the head. This leads to mental under-spending.” People expect to have more money by the end of the month because of miscalculations.

35. Issue 5: Easy Credit Loans of many kinds, despite blacklisting, are available. Store credit and split purchases, credit cards, and pastinhas. People also use overdraft facilities and get advances from family. “Even when indebted, they are still contacted by institutions offering them credit.”

36. Issue 6: Psychological Hurdle- ‘Big Savings’ • People, for the most part, believe that savings are “a big deal.” • “Bit by bit” is not the current mindset. People believe that small incremental amounts will not amount to much. • People’s perception is that in order to save successfully, one has to make a substantial effort and put in substantial savings.

37. Issue 7: Indebtedness, practical and psychological • Temptation in the midst of a consuming culture leads to indebtedness. • Being burdened by paying off debt prevents people from saving. This creates vicious cycle. • Potential users are overwhelmed by the amount of debt they have, thus creating psychological and practical barriers to saving and managing money.

38. Issue 7: Indebtedness, practical and psychological Having difficulties cleaning your name has something to do with people your social class? Source: PlanoCDE, 2010 Sample: Recife 609 – São Paulo 1006 (dados nãoponderados)

39. 1 What is special about Brazil? 2 What has CGAP learned from the CDE classes? 3 How can Brazilian banks serve these segments?

40. Few financial institutions are organized to use consumer insights Enabling environment • Restrictions on types of channels, products and prices • Ability to strike partnerships • Managers feel alone in tyring unproven products or reaching new segments • Inflexibility in the process • No ability to trial and iterate View and process of product development Cost of delivery • Low margins on services to low income consumers mean dramatically cheap delivery channels • Focus on channel slows down product development Basic understanding of poor • Assumptions about the poor often constrain product thinking • Poor consumers are treated as one segment Why few financial institutions are organized for consumer insights to lead to products consumers want

41. How financial institutions are developing products and innovating Collect ideas from consumers • Citibank’s Innovation Labs, Japan/NYC • Bankinter Labs Collect ideas from Experts / Employees • Standard Chartered and Singapore Management University • BBVA Plant 29, Spain Partnerships with start-up providers • EasySave, Kenya Test ideas, incubate • Standard Chartered China Innovation Lab • Uganda AppLab Global view of how financial intitutions develop products and innovate

42. From client observations to innovative products

43. Challenges and Opportunities: Foundational Research • There are not enough efforts around the wrold to carry out this kind of research. • One of the best known examples is Finscope: nationally representative research of consumers’ perceptions on financial services and issues. • At CGAP we are considering foundational research in various select markets: Mexico, Ghana and Brasil

44. Example: Foundational Research in Mexico • Mixed research methodology: qualitative and quantitative (carried out with McKinsey) • Quantitative survey (426 interviews, nationally representative); linked to household statistics (ENIGH) • 31 interviews in more depth (2 hs) • 3 focus groups to validate conclusions • Market research based on four dimensions: (1) structure of income and expenditure flows, (2) preoccupations, (3) aspirations and (4) strategies in money management. • Segmentation analysis of the base of the pyramid with qualitative insights by segment. • Idea: to understand the financial needs and perceptions of the lower income segments in Mexico • Mexicano context: Banks are increasing their capilarity, but they are still not reaching the poorest • Existing studies are only demographic and offer information that is too general

45. (1) Foundational insights for product development

46. (2) Commonunderstanding of financialinclusion 52% Families at the BOP that have an active relationship with a formal financial institution 10% 50% Only 50% of credit is formal Only 10% use formal savings mechanisms* * In the broadest sense, including temporary storage

47. (3) Common understanding of impact of financial inclusion on GDP