Credit and Savings / Big chains like Wal-Mart are getting ready to provide financial services in Mexico / Retailers jump into banking
Eliza Barclay, Houston Chronicle Foreign Service, December 21, 2007

MEXICO CITY - One day, Alejandro Garcia Aguilar would like to be able to buy a car and house for his wife and their toddler. The 20-year-old does not have a bank account, but when his employer, Wal-Mart de Mexico, launches banking services next year, he'll be one of the first to open a savings account.

"Other banks make problems for you, but Wal-Mart supports you and helps you out," said Aguilar, who works at a Wal-Mart Supercenter in Mexico City. He was interviewed while he was shopping for children's clothes on his day off.

Wal-Mart's move into banking is the big headline at a time when many of the big retail chains in Mexico are about to jump into the field.

Eduardo Solorzano, president of Wal-Mart de Mexico, said during a conference call in late November that the retailer hopes the new banking services will help it to better connect with its customers because "a large part of our clients do not have access to banking services."

Beginning in the second half of 2007, Wal-Mart will begin opening accounts in its stores. Other retailers who have won permission to do so include Coppel, Grupo Comercial Chedraui, and Grupo Famsa.

Each of these will be competing with Banco Azteca - the bank arm of the Elektra retail chain that dominates this business that it helped pioneer - but economic studies suggest there's a big potential audience out there. According to a 2005 World Bank study, less than 25 percent of Mexico's urban population, and as little as 6 percent of the rural population, has any kind of account in a financial institution.

'Immense opportunity'

"The level of consumer credit in Mexico is incredibly low, lower than Chile and Brazil," said Joaquin Ley, a financial analyst with Santander Serfin in Mexico City. "There is an immense opportunity here, and an immense population ready for credit and savings."

Banking services inside retail stores are aimed at those low- and middle-income consumers without bank accounts.

Multinational banks like HSBC, Citigroup, and Scotiabank control 87 percent of Mexico's banking assets, but they have traditionally served business clients and more affluent consumers.

The minimum amounts needed to start an account at these banks, and credit card interest rates that often hover around 30 percent, keep them out of reach for many Mexicans.

When its banks open in the second half of 2007, Wal-Mart de Mexico's bank, called Adelante, which means forward, plans to offer a variety of loans, vendor financing, extended warranties, insurance and auto financing. In five years, WalMart may offer mortgage loans.

The bank is expected to add 20 percent to Wal-Mart's earnings in Mexico by its fifth year, according to a report by Merrill Lynch. The report predicted Wal-Mart will succeed in the banking sector because of its high number of stores - 502 supermarkets and hypermarkets - and its large customer base, with sales in Mexico expected to reach $18 billion this year.

The pioneer

In Mexico, Banco Azteca has paved the way for companies like Wal-Mart by wrestling with regulatory authorities and proving it can be profitable.

According to Luis Nio, vice president of Banco Azteca, the bank's parent company, Grupo Salinas, has long believed that profits could be reaped from those in the lowest part of the economic pyramid. Since 2002, Banco Azteca has offered banking services inside Salinas-owned Elektra stores, which sell appliances and furniture. With huge growth in the last four years, Azteca now counts on 16 million Mexican families as customers, or 70 percent of the Mexican population.

Azteca clients can open savings accounts at one of its 1,500 branches with as little as 50 pesos, about $5, and get loans starting at 5000 pesos, or $500.

"No one believed that low income families would save money," Nio said. "But we now have $3 billion on deposit, and a lot of that was money that was previously under mattresses."

'Room for growth'

In addition to giving Mexico's working class more financial options, Wal-Mart's entrance into the market will benefit consumers by driving interest rates down, some financial experts say.

"In the long-term, eventually Wal-Mart is going to put pressure on interest rates," Ley said.

This is likely to be a plus for Mexico's consumers.

"It's time for the market to address the low penetration in Mexico, and if there are more options for the poor, the consumer ultimately wins," said Monica Brand, vice president of marketing and product development for ACCION International, an international nonprofit microlending organization. "There are a lot of inefficient microfinance institutions out there receiving subsidies that distort the playing field. High interest rates can cover up those inefficiences, and efficiency is important for the poor."

Banco Azteca

But while many are optimistic about WalMart's entrance into the market, some question if it will be able to successfully emulate Banco Azteca, which has 6.6 million savings accounts with $3 billion under deposit, and makes 25,000 loans a day.

Because Banco Azteca will be one of Wal-Mart's direct competitors, Wal-Mart will try to win over some of those clients.

Julita Padilla Sanchez, 42, has a Guardadito savings account with Banco Azteca. Because she has been able to save and earn with the account, she said she wasn't sure whether she would close that account and move to Wal-Mart when its services become available.

"It will be hard for Wal-mart to replicate the consumer knowledge and insight of Azteca," said Brand.

"They really know the market, and they know that the poor don't just act on price."

Part of Azteca's success at penetrating the middle- and lower-middle class market is the development of a highly personalized collection system.

Managers on scooters

Because many of its clients do not have credit and work in the informal sector, Azteca sends account managers on scooters out to the homes of potential clients to assess their assets.

There they find out if the clients' lifestyles show that they earn what they say they earn when they request a loan, according to Nio.

If customers can't make loan payments, Azteca account managers will repossess home appliances or other items.

"The key to this business of working with lower-income people is to find a way to get your money back," said Nio.

"Developing that kind of experience is time-consuming and costly and you also have to have the right product for them. We don't know if Wal-Mart will really be dedicated to those people."