Financial Landscape Baseline: Service Innovations of Pro Mujer Peru
The Assessing the Impact of Innovation Grants in Financial Services project, undertaken by the IRIS Center at the University of Maryland and its partner Microfinance Opportunities (MFO), is assessing the impact of grants provided by the Bill and Melinda Gates Foundation (BMGF) to microfinance organizations for the development of innovations in financial services. The present phase of study is known as the Financial Landscape. The purpose of the Financial Landscape research is to understand access to financial institutions and services in areas to be covered by the grantee's service innovations—in this case, those of Pro Mujer Peru (PMP). It draws on data from both clients and financial service providers, though the emphasis is squarely on client perspectives.
PMP was founded in 1999. Headquartered in Puno and mainly serving districts in southern Peru, PMP is a credit-led organization that offers a range of loan products to its traditional client base of resource-poor women. Historically PMP's loans have adhered to a conventional village-banking model. PMP was founded as and remains a microfinance NGO, as opposed to other types of regulated financial institutions in Peru, which can offer a wider range of financial services and enjoy tax advantages.
This study focused on two innovations in PMP's microfinance programs funded by BMGF: 1) The Premium Product is the largest credit product ever offered by PMP, with an average size of 2,600 soles ($867), and its delivery will involve new market segmentation for PMP. The major qualifying guideline is that Premium clients must have been a client of PMP for a minimum of three years or eight loan cycles. Clients will be relatively successful urban female microentrepreneurs. And 2) The Feria Product targets petty traders at traditional markets in rural hinterlands and provincial towns. This relatively low-income rural target population will be new for PMP, which historically has focused on urban areas. The product will begin small, in the range of $30-$100.
Research took place in the cities of Puno and Tacna (sites for the launch of the Premium product) and in the town and surrounding areas of Desaguadero, near the Bolivian border (site for the piloting of the Feria product). Research consisted of 24 Participatory Rapid Appraisals (a kind of focus group) and 26 individual interviews. The approach was qualitative and focused on the client's perspective, bringing both unique insights and subjectivity to the findings.
Supply-side research found exceptionally crowded microfinance markets in the cities of Puno and Tacna (Premium markets). Puno revealed six banks, three Cajas, one EDPYME, and five NGOs comprising PMP's competition. Tacna revealed seven banks, two Cajas, one EDPYME, three NGOs, and three other financial institutions as PMP's competition. Though seemingly a more pristine market, the Feria zones around Desaguadero had a presence of at least 12 competing institutions. In all three areas, the formal and semi-formal options are complemented by a wide range of informal credit options. All three areas showed a vast intensification in the number of competitors over the last five years. In side-by-side comparisons to directly competing products, the Premium and Feria products seem to offer no value over existing alternatives in obvious areas like size of loan or interest rate.
Demand-side research revealed a diverse and competitive credit environment. In the city of Puno, PMP was cited as a leader in providing credit to the city's lower and middle social classes, but with minimal penetration among the upper class. In Tacna, PMP was seen to serve all classes, but its position as preferred provider rose as one proceeded down the socio-economic scale. Lack of credit experience among respondents in Desaguadero made preferred providers difficult to tease out.
In terms of favored credit features, PMP clients in Puno showed more interest in the features of group loans (e.g. less required documentation), while non-clients tended to rank highly the features maximized by individual loans (e.g. lower interest rates). This pattern did not hold true in Tacna or Desaguadero, where bottom-line concerns like low interest rates were top-ranked across the board. The transaction cost analysis suggested tremendous variation in individual experiences. On the whole, there was a certain disconnect evident in these findings, as the lowest transactions costs and top-ranked features did not correlate consistently with the preferred credit providers, like PMP. The findings showed that individual, stated, highly-valued features may not be drivers of the market; instead, complex interactions of loan attributes and landscape conditions are what likely compel client toward one product or another.
Moving toward the value propositions of the innovations: with the Premium, the scaling up of loan size for a relatively successful segment of microentrepreneurs represents a limited innovation in the context of the markets of Puno and Tacna. The Premium has no apparent advantage over competing products vis-a-vis most highly-valued loan features. However, the core value of the Premium product is its relation to client retention. The Premium product presumably will keep some PMP clients from "graduating" from that institution and seeking larger loans with other institutions. As experienced clients cost less to serve, and larger loans generally offer greater profits, the product may bear positively on the organization's finances. At the same time, the product creates the opportunity for PMP to reward its more loyal clients with a product commensurate with their needs.
A second area of opportunity with the Premium loan is its potential to serve a particular segment of the market: those who favor group loans (group vs. individual loans being an oft-debated issue in these regions). But within that market, the product is even more specialized: it is nearly the only group loan of its size, targeting relatively successful microentrepreneurs. Virtually all other loans of this scale are individual products. Hence the Premium product offers a new path to large-scale credit for relatively successful clients.
With the Feria, these rural markets are new to PMP, but they are not new to credit. Moreover, as in the case of the Premium, the Feria product does not at present offer significantly better value than the competition vis-a-vis most highly-valued loan features, like size and interest rate. However, the manner in which PMP has chosen to deliver the product presents a relatively unique opportunity for market penetration and for serving this inexperienced client base.
The typical service model, followed by the majority of financial service provider (FSPs) with a presence in these areas, involves infrequent visits by a loan officer to a particular community. PMP's service model requires recurring visits to the weekly markets, meaning a high level of direct presence in the communities matched by almost no other institution. As such, there will be long-term opportunities to pitch PMP's products while demonstrating the advantages of using financial services.
A second area of opportunity is found in transaction costs. Among the service providers currently operating in the feria markets, we saw a variety of service models, all of which have different implications for transaction costs. In this area PMP's service model offers some fairly unique advantages to clients and a distinct edge over most competition, related to its ongoing presence in the communities on market days. Essentially, it will be cheaper to access PMP's loans than nearly all competing products.
Broader lessons gleaned for the industry from the Financial Landscape baseline include:
- The Whole as Greater than the Sum of the Parts—PMP enjoys a status among borrowers that is irreducible to constituent parts such as product attributes. It points to the need to consider the intangibles in market research&mash;difficult-to-grasp holistic characteristics and collective opinions that may be mostly unstated.
- Is Credit Always the Answer? The socioeconomic landscape of the Feria zones raises a real question of whether that population will respond in large numbers to any offering of credit. It is a quandary that demonstrates the potential pitfalls of a credit-led and credit-dependent approach to microfinance.
- Transaction Costs Can Be More Significant than Price - The Feria transaction cost analysis shows that PMP outperforms most of its competition. This can be a window of competitive opportunity for a provider that has difficulty matching the price features of competitors.
This study presents the results of the Financial Landscape baseline. Around September 2010, approximately three years after this research was conducted, researchers will return to these same sites to carry out a similar investigation that will constitute the endline. The intent is to document changes in access and in the makeup of the financial landscape—developments that may correlate with the introduction of the PMP innovations. In this way, the Financial Landscape study will help provide a direct window on the outcomes of service innovation.
