DEVELOPMENT-LATAM:
Banks Belatedly Chase Migrant Dollars
Ulysses de la Torre*

MEXICO CITY, (IPS) - Latin American banks, having long ignored the region's lower-income citizens, have inadvertently created a situation in which marketplace opportunities in remittances and microfinance are rapidly expanding.

And perhaps the biggest challenge facing the microfinance industry in filling this gap has to do with self-image. The microfinance movement first began with a not-for-profit model, since the need to provide financial services to the poor outweighed the motive to make money.

But as banks take an increasing interest in this sector and microfinance providers balance a desire to accommodate both greater scale and longer-term sustainability, there is a growing consensus that profitability is not only inevitable, but preferable.

"If we're not profitable, we are not able to serve them," said Juan Buchenau, executive vice president of Washington-based Microfinance International Corporation. "If we are profitable, we will be able to mobilise funds and to reach out to a large number of low-income customers, we will be able to gain efficiencies of scale. I think that one goes with the other very well."

The profitability in Mexican and Salvadoran microfinance does not lie in remittances sent back home from workers abroad. The more common approach is that remittances are merely the beginning of a client relationship that otherwise would probably not happen.

Starting clients with one type of financial service and then appealing to their taste for other services -- known in the industry as "cross-selling" -- is seen as the principal way to include more recipients of remittances in the formal financial system.



Profitability comes farther down the road, presumably when clients who entered the system by sending remittances seek other financial services. Whether such clients should be brought in via the savings or the lending side of financial services, or from the sending or receiving side of remittances, are two ongoing debates in the microfinance community.

One popular cross-selling method is linking remittance history to more favourable lending terms for a client looking to apply for microcredit, or small loans -- the product that offers microfinance institutions the largest profit margins. Such methods are no guarantee that the solvency provided by remittances will continue at the same level in the future, but at the very least it diminishes credit risk. However, many acknowledge that from a business standpoint this is a less than perfect situation.

"Too many optimists out there think that the cross-selling part goes on the loan side," said Stefan Queck, Banco Procredit's country manager for El Salvador. "Our sense is that if there is cross-selling between remittances and us as a bank, it starts on the saving side, it doesn't start on the lending side for the reason that from a lending perspective the unknown factor of the sender is just too high."

Behind this aspect of the remittances-microfinance convergence is a shifting perception of how money should move across borders. One of the reasons that money transfer operators (MTOs) such as Western Union and Moneygram have prospered in this market is they do not require migrants to hold bank accounts in order to send money internationally.

The infrastructure banks bring allows greater capacity for scale and better ability to advertise to the decision maker, who is usually on the sending side of the transaction. It also potentially threatens to undermine this cash-to-cash business model by converting remittances into a money transfer that moves from account to account, a move regulators and policy-makers favour because it provides greater transparency.

Moving the transfers into accounts is a task easier said than done, however. Client preferences so far seem to tilt the playing field toward the MTOs due to convenience. A microfinance or bank client who wants to withdraw remittance money from an account is constrained by the number of accessible branch outlets. Since the MTO outlets can potentially be not just banks, but also gas stations, pharmacies and other stores, the MTO model is much more flexible.

"That part makes it difficult to establish permanent client relationships on the savings side," said Banco Procredit's Mr. Queck. "Because the client will walk into the branch, look at how long the queue is and if it's too long they'll just walk into the next service provider. They don't need to come to us. In a lot of places they can literally cross the street and do it somewhere else."

While the flexibility of the MTO model may take financial democracy one step forward, there are other roadblocks. Some MTOs -- Western Union being the most notable -- impose exclusivity contracts on their paying agents, stifling consumer choice.

On the banking side, commercial banks have made headlines in recent years by closing MTO accounts and denying them access to payment networks under the guise of compliance with anti-money laundering regulations. Some allege this is just a distraction from the fact that maintaining the status quo -- both in terms of how MTOs engage the market and in terms of keeping remittances as a cash to cash transaction -- is the most profitable option for banks.

"Banks have a systemic bias against working with MTOs because it is not in banks' competitive interest," said Paul Dwyer, CEO of Viamericas, an MTO serving Latin America and Spain. "As long as this is not addressed, the gap between MTOs and payment networks will never be bridged."

Further pressure on MTOs has been brought to bear as some banks and microfinance institutions are combining convenience, price, and product tie-ins to offer migrants the possibility of sending money home at zero cost. The task for MTOs is how to sustain their market share and at the same time cooperate with an industry shift that threatens their very existence.

As precarious as the situation may be appear for MTOs, migrant workers and their families are not exactly flocking to financial services in droves. The proportion of remittance recipients who then sign up for other microfinance products -- savings accounts, loans, or otherwise -- struggles to surpass 20 percent.

Some microfinance professionals, such as César Izurieta of Caja Libertad of Mexico, see this as a sign to wait and concentrate on building credibility by offering steady and dependable money transfer service for the time being.

Queck of Banco Procredit thinks none of this matters as long as people on the sending side of remittances do not have bank accounts. Wilson Salmerón, general manager of the Cooperative Society of Savings and Credit in El Salvador, says this is not a reason to stop trying to attract more migrant workers and their families into the formal financial system.

"If we're talking about 20 percent of the 2.8 billion dollars in remittances that El Salvador received last year, then that's 560 million dollars that could be channeled," he said. "If we're talking about 20 percent of the 1.5 million Salvadorans who received remittances last year, that's 300,000 people. It's still a lot."

*Ulysses de la Torre is a journalism fellow at the Instituto Tecnológico Autónomo de México in Mexico City. This article is the last of a five-day series that examines the ripple effects of remittances and microfinance from social, economic, development and marketplace perspectives.