Partnering with Retailers to Cap by ps94506

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									                                            BOG-FELABAN2008-20080812-01-01




CONFIDENCIAL


Partnering with Retailers
to Capture Growth
Opportunities in Latin
America


LUIS ANDRADE
Presentación para Felaban, Agosto 2008


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McKinsey & Company durante una presentación oral y no constituye un
informe completo de la discusión.
                                                           BOG-FELABAN2008-20080812-01-01


CONTENTS




           • Attractiveness of financial services
            through retail chains in Latin America

           • Key levers to develop financial services in
            the retail industry

           • Successful cases




                                                                                       1
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THE OFFER OF FINANCIAL SERVICE PRODUCTS IS AN ATTRACTIVE
OPPORTUNITY FOR RETAILERS BECAUSE OF THE HIGHER MARGINS
AND STRONG INDUSTRY GROWTH                        BRAZIL EXAMPLE


    Margin comparisons                                       Industry growth           Consumer credit
    2006, %                                                  Indexed, 2001 = 100       portfolio*
                                                                                       Retail sales

              10-14                 3 - 4x




                                                             280
                                                             260
                                                                              CAGR
                                                             240
                                                                               22%
                                                             220
                                                             200
                                     2-4
                                                             180
                                                             160
                                                             140                   CAGR
                                                                                     3%
                                                             120
                                                             100
        Financial industry          Retail                    80
                                                               2001 2002 2003 2004 2005


      * Based on a sample of finance companies
Source: IBGE, Banco Central; Annual reports; Team analysis                                                     2
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THERE IS A GLOBAL TREND FOR RETAILERS TO OFFER                                             EXAMPLE
DIFFERENT TYPES OF FINANCIAL PRODUCTS…
                                                                       Multiple products



                                                 Credit card schemes



                           Private label cards


International
examples




Examples in
Brazil




Source: McKinsey; Team analysis                                                                       3
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… BECAUSE FINANCIAL SERVICES CONTRIBUTE TO THE                                                                 Average

BOTTOM LINE, ESPECIALLY IN EMERGING MARKETS
                     Share of total profits coming from financial services, %
                          Brazil                        Chile                    UK
                          2006                          2005                     2005



                                                 71               40    40              7



                                            50                   6                   5



                                            50                   32                  4



                                       31                        26.0              5.3



                                      27


                                      45.8

Source: Infoinvest; Annual reports; Interviews; Press clippings; Team analysis                                          4
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IN COMPARISON TO RELEVANT INTERNATIONAL PLAYERS,                                                      Available
MANY RETAILERS HAVE EXPANDED THEIR FINANCIAL                                                          Announced
SERVICE OFFERINGS

                                            (UK)   (Chile)   (Brazil)      (Brazil)   (Brazil)      (Brazil)

                    • Store card
Consumer
                    • Reward card
finance
                    • Co-branded

Personal loan


Specialty           • Car loans
credit              • Mortgages

                    •   Personal accident                         *                        *              *
                    •   Travel
Insurance           •   Pet
                    •   Auto
                    •   Life

Transactional       • Bill payment
services            • Checking accounts

                    • Savings accounts                                **
Investments         • Time deposits
                    • Pension plans

      * Including “extended warranties”
     ** including “capitalization”
Source: Websites; Team analysis                                                                                   5
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BY OFFERING FINANCIAL SERVICES, RETAILERS CAN ALSO CAPTURE
IMPORTANT INDIRECT BENEFITS...                       ILLUSTRATIVE




 Key benefits                             Economic impact
                                          R$ million
 • Increase the average
   ticket of existing
   customers by offering
   more convenience (45%
   will buy more if they have
   a card*)
 • Increased frequency of
   store visits resulting
   from additional service
   offerings (e.g. loans)
 • Retain current customers
   by offering innovative
   products                               Business     Higher      Retention/Ne Impact
 • Attract new customers                  Financial    consumption w customers on total
   by offering attractive                                                       revenue
   financial services                                 Indirect impact resulting from
                                                        offering financial services

      * Survey conducted in Asia (2006)
Source: McKinsey; Team analysis                                                                          6
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CONTENTS




           • Attractiveness of financial services
            through retail chains in Latin America

           • Key levers to develop financial
            services in the retail industry

           • Successful cases




                                                                                 7
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THE SUCCESS OF A FINANCIAL SERVICES OPERATION IN THE RETAIL
INDUSTRY DEPENDS ON FOUR KEY LEVERS




                                      Partnership model

                        Product and service                Commercial
                             offering                     approach and
                                                            marketing




                                     Credit and
                                 collection process


Source: Team analysis                                                                                8
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IN BRAZIL, AS IN THE REST OF THE WORLD, THERE ARE NUMEROUS
RETAILERS USING PARTNERSHIP MODELS

                                         International examples                                                      Examples in Brazil
                    Third party




                                                                                                       Third party
                    JV/Alliance




                                                                                  Type of operation

                                                                                                       JV/Alliance
Type of operation

                    In-house operation




                                                                                                      operation
                                                                                                      In-house



                                            PL Cards     Credit card   Multiple                                        PL Cards      Credit card         Multiple
                                                                       products                                                                          products
                     Product offering                                                                                             Product offering
Source: McKinsey; Team analysis                                                                                                                                       9
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IN ORDER TO ENSURE SUCCESS, A KEY DIVISION OF
RESPONSIBILITIES ALONG THE VALUE CHAIN IS ESSENTIAL

                                                                                                                                Loss
 Customer acquisition                                  Operations                           Customer management                 management

 Value                                  Risk
                                                          Production
 proposition          Marketing &       financing                                             Portfolio          Customer
                                                          and                Processing                                            Collections
 and product          Sales             and                                                   management         service
                                                          distribution
 design                                 management


 • Identify       • Acquisition     • Collect and      • Issue cards/     • Application     • Credit line    • Incident         • Fraud detection
   opportunities/   campaign          validate           grant loans        processing        management         resolution     • Collection
   target           design            information      • Send cards       • Authorization   • Information    •   Customer         policies
   segments       • Optimize        • Risk               and PINs           and clearance     availability       retention      • Contact
 • Product          channel mix       analysis:        • Activate         • Payment         • Levers for     •   Customer         procedures
   development • Manage the           – Criteria         cards/ loans     • Account           increasing         satisfaction   • Collection
 • Pricing          network and       – Scoring                             statement:        use/cross-         management       measures
 • Market           other               models                              – Paper           selling        •   Customer
   validation       channels          – Behavioral                          – Online        • Measure            service
                    (mail, call         under-                                                results        •   Customer
                    centre etc.)        writing                                                                  information
                                    • Define initial                                                             system
                                      credit limits
                                                                    Main role of
                                                                     the bank
      Need for management                                                                                             Need for management
      agreements between                                                                                              agreements between
        retailer and bank                                                                                               retailer and bank




Source: McKinsey; Team analysis                                                                                                                     10
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… WHICH IS THE CASE IN A NUMBER OF SUCCESSFUL                                                                      ILLUSTRATIVE

PARTNERSHIPS BETWEEN RETAILERS AND BANKS

                                                                                           Customer                 Loss
                               Customer acquisition                   Operations
                                                                                           management               mgnt

                         Value                                Productio
                                     Marke-         Risk                                  Portfolio
                         proposition                          n and           Proces-                   Customer       Collec-
                                     ting &         financing                             manage-
                         and product                          distribu-       sing                      service        tions
                                     Sales          and mgnt                              ment
                         design                               tion

• RBS +                 • Shared     • Retailer   • Shared    • Bank       • Bank       • Bank        • Shared     • Retailer
  Tesco



• HBOS +                • Shared     • Shared * • Bank**      • Bank **    • Bank**     • Bank        • Bank       • Shared
  Sainsbury



• RBS +                 • Shared     • Retailer   • Bank      • Bank       • Bank       • Bank        • Shared     • Shared
  Virgin




      * Through mailing and stores
     ** Selling services to Sainsbury's Bank with a pre-defined fee
Source: McKinsey; Team analysis                                                                                                   11
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RETAILERS CAN OFFER A WIDE RANGE OF PRODUCTS,
DEPENDING ON CUSTOMER NEEDS
                                                            Potential
                       Customer financial needs             product/financial service    Rationale
                       • Means of payment/credit for        • Credit card with loyalty   • More convenient for the
                            supermarket purchases             program                      customer
                                                                                         • Higher average ticket
                                                                                         • Enhanced customer retention
                       • Financing for high ticket          • DECK                       • 20% of all store sales are in
                            items (e.g.                     • Credit card                  appliances/electronics
                            appliances/electronics)         • Extended warranties        • This is where retail
                                                                                           customers have the greatest
                                                                                           need for financing
                       • Credit for emergencies (e.g.       • Personal loans             • High frequency of store visits
                            bills, healthcare, education)                                  provides convenience for the
                                                                                           customer


                       • Cheap credit products              • INSS consigned loans       • Inexpensive, very low risk
                                                            • Civil servant consigned      credit; explosive market
                                                              loans                        growth


                       • Security/savings                   • Insurance                  • Products that are easy to
                                                            • Capitalization               cross sell and that are
                                                                                           normally sold as stand-alone
                                                                                           products
                       • Convenient services                • Bill payment and cash      • Leverage chain capillarity
                                                              withdrawals at store
                                                              checkouts

Source: McKinsey analysis                                                                                                   12
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THE BUSINESS MODEL OF A BANK THAT WANTS TO DEVELOP
ITS CONSUMER FINANCE BUSINESS WITH A RETAILER MUST,                                                                Opportunity
IN INITIAL STAGES, BE BASED ON A SIMPLE PRODUCT OFFER                                                              for short-term
                                                                                                                   development




                                                                           Long term


                                          Medium term
                                                                           • Liabilities products
                                                                               – Savings accounts
        Short term
                                                                               – Investment funds
                                          • Personal loans (without need       – Pension funds
                                           to buy at the retailer)             – Shares
        • Consumer credit at the point    • Simple insurance               •   Complex insurance
          of sale                          –   Travel                          – Car
          – Installment credit             –   Home                            – Life
          – Private label card (charge/    –   Car assistance              •   Bank correspondent (transactions at
            revolving)                     –   Accidents                       the retailer)
        • Co-branded credit card           –   Unemployment                •   Current accounts
        • Loyalty programs                                                 •   Complex loans
                                                                               – Mortgages
                                                                               – Car

                                                   Product offer phases

Source: McKinsey analysis                                                                                                      13
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REGARDLESS OF THE MODEL CHOSEN, IT IS ESSENTIAL TO
HAVE A CLEAR VISION OF THE CURRENT AND EXPECTED
STRATEGIC POSITION

Scope
               • Financing for retailer sales       • Expanded Credit                   • Add investment and
                 – Shorter payment terms,             – Short term (revolving working     transactional products
                   transferring savings to prices        credit, installment credit,      – Checking account
               • Agreements with the                     forfaiting payment slips)        – Payables and receivables
Business         commercial area                      – Long term (BNDES, leasing)        – Insurance
(legal         • Vendors that supply the retailer   • A platform for remote branches      – Private pensions
entities)        only                                 and channels                      • A platform for remote branches
                                                    • Potential expansion to non          and channels
                                                      retailer vendors                  • Potential expansion to non
                                                                                          retailer vendors




               • Credit for retail purchases        • Broader offer of credit           • Add investment and
                 – Private label cards                products                            transactional products
                 – Installment credit                 – Co-branded                        – Funds
                                                      – Personal loans                    – Capitalization
Individuals    • The store is the channel           • Insurance and basic                 – Checking account
                                                      transactional products            • Expand to multi-channel
               • Retailer customers only              – Insurance                         – ATM
                                                      – Bill payment                      – Telemarketing
                                                    • Possibly expand the channel to    • Expand to non retailer vendors
                                                      own branches
                                                    • Possibly expand to non retailer
                                                      customers
                                                                                                                             Value
                                                                                                                             proposition
                  Financing for retailer sales              Finance company                  Supermarket banking




Source: McKinsey analysis                                                                                                            14
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BEST PRACTICE ENTRANCES BY RETAILERS INTO FINANCIAL
SERVICES HAVE PURSUED UNIQUE MARKET OPPORTUNITIES

   Potential action         Rationale                           Example

    Profitably serve        • Underbanked consumers may         • TCF Bank focused on middle-
    underserved              be a sizeable market                and lower-income consumers
    consumers                                                    offering cheap and simple
                                                                 products

                            • Incumbent players may be          • Tesco and Sainsbury’s offered
    Provide a uniquely       unwilling to compete (e.g.,         highly competitive deposit and
    priced offer that is     incumbents may not match            loan rates when entering the
    difficult for            more favorable rates as it would    banking market
    incumbents to imitate    require repricing for the entire
                             consumer base)


    Leverage preferred
                            • Capitalize on consumer            • Marks & Spencer prevented the
    access to a unique       relationships to launch new         use of other credit cards to
    consumer base            products                            ensure its store card a captive
                                                                 consumer base


    Leverage preferred      • Higher density will allow for     • Charter One carefully selects
    access to a unique       faster acquisition time             locations to ensure higher
    consumer base                                                deposit totals and faster
                                                                 customer acquisition


Source: McKinsey analysis                                                                                   15
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DEVELOPING A DISTINCTIVE VALUE PROPOSITION REQUIRES
DIFFERENTIATING BEYOND PRODUCT AND PRICE

    The Offer (functional benefits)                                   The Perception (intangible benefits)
    • Product benefits (e.g., offering suited to different            • Brand (i.e., brand identity)
      segments)                                                         – Authority (e.g., customers’ trust in personnel’s
    • Performance attributes (e.g., breadth of available                  qualifications)
      services)                                                       • Customer impressions
    • Price/value benefits (e.g., minimum balance,                      – Reliability
      account maintenance and transaction fees)                         – Association with others who enhance credibility
                                                                          (e.g., coffee by Starbucks)
                                                                        – Emotional relevance (e.g., security)
                                                                        – Image (e.g., energetic staff)



                                                              The value
                                                             proposition


    The Delivery (service and convenience benefits)                   The Relationship (differentiated benefits)
    • Service benefits                                                • Tailoring
      – Proactive advice                                                – Differentiated product offering (e.g., bundles)
      – Quality of customer service                                     – Differentiated response time and service levels
      – Interactions around key customer ‘moments of                  • Benefits and rewards
        truth’                                                          – Differentiated benefits based on tenure/loyalty
    • Convenience benefits                                                (e.g., easier access to cash based on tenure)
      – Accessible and convenient branch network                        – Differentiated rewards for usage (e.g., affinity
      – Channel options (e.g., large ATM presence)                        programs)
      – Integrated channels/features
      – Other experience benefits (e.g., atmosphere)


Source: McKinsey analysis                                                                                                         16
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TESCO HAS USED AN AGGRESSIVE PROMOTION IN THE DIFFERENT
POINTS OF THE STORE AS COMMERCIAL APPROACH…           EXAMPLE
EXAMPLE Tesco Personal Finance
                                             Car insurance promoted in the milk aisle:
    Personal loans promoted in food aisles   “We won’t milk you”




    Credit card promotion at the POS         Financial service handouts at the checkout




Source: McKinsey                                                                                   17
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IN CHILE, RIPLEY AND PARIS PROMOTE CREDIT IN A “FRIENDLY”
MANNER…




Source: Homepage                                                             18
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… WITH AN AGGRESSIVE PRICE POSITIONING (RIPLEY AND
FALABELLA)




Source: Homepage                                                           19
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CONTENTS




           • Attractiveness of financial services
            through retail chains in Latin America

           • Key levers to develop financial services
            in the retail industry

           • Successful cases




                                                                                   20
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CASE EXAMPLE – BANCO FALABELLA

 • Founded in 1998 when the
   department store chain Falabella                         • Young clients mainly from the retail
   acquired ING's Chilean subsidiary                          stores businesses and C1, C2 and C3
                                              Clients
                                                              income classes
 • 13th ranked Chilean bank in terms of                     • Small businesses
   total assets and currently has 303
   FTEs                                                     •   Consumer loans ("crédito imbatible"),
 • Offers simple products, with rapid                       •   Credit Cards (Visa)
   approval, to satisfy client needs (e.g.,   Products
                                                            •   Housing Mortgage
   small loan amounts since US$230
                                                            •   Checking and saving accounts
   for up to 60 months)
                                                            •   Term deposits, mutual funds
                                                            •   Others

   Key indicators                                           • 72 branches
   2006                                       Channels      • Call center
   •   Total loans         US$ 831 million
                                                            • Website
   •   Revenues            US$ 114 million
   •   Efficiency ratio    39%                              • Strong brand
   •   Operating profit    US$ 39 million                   • Rapid growth by leveraging the retail
   •   Net income          US$ 34 million     Key success       stores large client base
   •   ROE                 35%                factors       •   Offer of convenience and agility for the
                                                                customer
                                                            •   Low operational costs



Source: Press clippings, website, SBIF                                                                       21
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CMR FALABELLA IS A GOOD EXAMPLE OF A RETAILER CREDIT
CARD

                                   • Promotora CMR is a subsidiary of Falabella and is the
                                     company that issues and manages the credit cards of
                                     Falabella´s group, called CMR card
      Concept
                                   • The main idea is to offer credit to the clients of the group* in
                                     order to charge interest rates and commissions and
                                     generate captive clients

                                   • Same market of its parent department stores company, i. e.,
                                     the segments ABC1, C2 and C3
      Target Market
                                   • In dec.2004. Falabella had issued approximately 3.2 millions
                                     of credit cards in Chile, from which 2.3 millions are actives**

                                   • Promotora CMR started as a private label credit card in
      Evolution of                   1980, just to be used in Falabella´ stores
      the coverage                 • However, in the last years it has been evolving to an open
                                     card due to the alliances that has been creating


      * Includes the department stores, home improvement business (Home Center – Sodimac), its supermarkets (San
        Francisco) and other businesses with whom Falabella has made strategic alliances (see appendix for a detailed
        list of the companies in this case)
     ** i. e., maintain positive balance
Source: Clippings, Feller Rate Analyst Report, McKinsey Analysis, Publimark magazine                                          22
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THE MARKETING STRATEGY HAS BEEN VERY SUCCESFUL,
IMPACTING RESULTS

 The growth in total loans outstanding                         …with low costs, achieving an efficiency
 has been high                                                 ratio of 39% in December 2006…
 US$ million                                                   %
                   CAGR
                    21%
                                    802                               41       44         43
                         658                                                                              39
              511
    369



    Dec 03        Dec 04        Dec 05        Dec 06                Dec 03    Dec 04    Dec 05        Dec 06

                                 …which has lead to a high ROE…
                                 %
                                         33                                      35
                                                       28              29




                                      Dec 03        Dec 04           Dec 05    Dec 06

Source: Revista de Información Financiera SBIF, McKinsey analysis                                                    23
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ADVANTAGES OF HAVING PROMOTORA CMR CREATE THE
FALABELA BANK

                                   • Promotora CMR Falabella shares its database with Falabella
                                     Bank*, which allows to target very specific segments of clients
    Shared                         • The fact that a client has CMR´s credit card** help Falabella´s
    Database                         Bank to measure better the risk profile of the potential clients***
                                     and to select better to which type of clients direct its promotion and
                                     products

                                   • Falabella Bank uses the same facilities/location and brand of the
                                     department store business to target its market, branches of the
    Same facilities/                 Bank are located next to or inside Falabella´s department stores
    location                       • One of the elements of the value proposition of the Bank is the
                                     “value of time”, i. e., the client can have banking service in
                                     department store schedule (7 days a week)


    Promotion´s
                                   • Falabella´s bank uses the same direct mailing that its parent
                                     company uses for the distribution of special offers and products
    channels
                                     (clothes, furniture, credit cards, travels, insurance, etc)

      * Falabella´s bank targets the segment C1. C2 and C3
     ** There´s no benefit for a CMR´s client to open an account in Falabella´s Bank
    *** Taking into account the behavior of payment with the credit card. This can help or harm the person that is
        applying to a product of the Bank
Source: Feller Rate report of Falabella Bank, Falabella´s call center                                                            24
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PROMOTORA CMR CAN BE USED BY SEVERAL
OTHER COMPANIES
Strategic Alliances by type of company
 Related cos        Telecom        Gas   Entertaining   Health   Food   Charity           Security




Source: CMR Falabella´s web page                                                                   25
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CASE EXAMPLE – BANCO AZTECA

• Banco Azteca, founded in 2002,
 absorbed all banking-related activities    Clients       • Clients mainly from low income segments
 of its controller Elektra Group, Latin
 America largest specialty retail group
 (800 stores in Mexico)                                   • Deposits
• First Mexican bank to focus on serving                  • Savings accounts ("guardadito")
 the low-income, is the leading consu-                    • Many types of loans (mainly consumer
 mer finance company of the country                           credit and loans in cash)
                                            Products      •   Credit cards
• BA's branches are located in frequently                 •   Mortgages (alliance with the National
 visited stores by the low income such                        Working Housing Fund)
 as Elektra's home appliance outlets,                     •   Insurance
 Almacenes Garcia (a leading Mexican                      •   Pension funds ("Afore Azteca")
 grocer) and Home Mart (a home
 improvement store)                                       • No external branches
                                                          • Stores are located inside big retailers and
                                            Channels
                                                              work in non-traditional banking hours,
 Key indicators                                               typically from 9:00 am to 9:00 pm
 2006
                                                          • Its location (inside retailers) and the
 • Total loans          US$ 1.7 billion                       expertise (from Elektra group) makes it
 • Revenues             US$ 877 million     Key success       strong in consumer finance within the
 • ROE                  ~35%                factors           profitable low income segment
                                                          •   Low cost channels (no branches and the
                                                              stores located inside retailers)

Source: website, McKinsey analysis                                                                           26
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BANCO AZTECA DISTRIBUTES VIA IN-STORE BRANCHES
INSIDE SOME OF THE MOST IMPORTANT MEXICAN
RETAILERS
                                     • Latin America largest specialty retailer
                                     • 800 stores in Mexico
                                     • Focus on segment C and D


                   Almanecenes
                                     • Leading Mexican grocer
                                     • 67 stores
                      Garcia         • 2.300 employees
                                     • Second largest Mexican home improvement retailer
                                     • 39 stores
                                     • 69.000 square feet stores
                                     • Acquired by Home Depot in 2004
                                     • Operates retail distribution services through its chain on furniture
                                         stores, department warehouses and exhibitions centers
                                     •   96 branches
                                     •   Focus on segments C and C+

                                     • Store specialized in sales for old items
                                     • 93 stores (in 2002)
                                     • Focus on segments D and D+

Source: website, McKinsey analysis                                                                             27
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ELEKTRA HAS MIGRATED INTO BANKING OVER TIME AND
HAS NOW A SUCCESSFUL FRANCHISE
                                                                              Phase 4 (2002*)
                                                        Phase 3               Banco Azteca
                                Phase 2                 Start the services
                                Focus shift to          business
                                mass market                                   • Creation of Banco
  Phase 1                                                                       Azteca,
                                                         • Launch loyalty       incorporating
  Start of operations
                                                          services:             Credimax and
                                  • Change of focus                             Guardadito
                                                          – Fund transfer
                                    from B class to C                         • New product lines
                                    and D classes          – Warranty
   • Radio and TV                                                               launch:
                                  • Store expansion      • Launch financial
     manufacture with                                                           – Personal loans
                                                           services:
     door to door sales           • IPO in Mexico                              – Auto loans
                                                           – Guardadito –
   • Start retail                                            low value         – Afore Azteca
     operations                                                                  (pension fund)
                                                             savings
                                                           – CrediMax – In-    – Azteca (higher
                                                             store finance       value savings)


      * Banco Azteca was created in October 2002
Source: Mckinsey analysis                                                                                  28
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A NUMBER OF PRODUCTS CATERING TO SPECIFIC
CUSTOMER NEEDS HAVE BEEN LAUNCHED



• In-store finance                         • Created in 2003. offering
 –   2 million active clients               pension funds to Mexican
 –   Weekly payments                        citizens
 –   Active collection model                – Focus of mid-income
 –   Self funding                              classes
                                            – Low administrative fees




• Low volume savings                        • Deposit product with
• Interest paid for balances                  minimum balance of
  above U$ 5                                  U$ 450
• 1 million accounts                        • Better return to customers
• U$ 75 million in deposits                 • During first 6 months
• Partnership with Serfin                     achieved U$ 135 million in
                                              deposits
Source: Annual report, McKinsey analysis                                       29
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CASE EXAMPLE – TESCO/ ROYAL BANK OF SCOTLAND

                                                                    •   > 5 million transactional accounts
                                                                    •   1.8 million credit cards
• Tesco is one of the world’s leading                 Clients
                                                                    •   1.4 million policies
 retailers, with ~1,900 stores in the UK                            •   Focus on A/B customer segments
 (2,300 worldwide), over £ 37 billion in
 revenue and £ 2 billion in profits                                 •   Private label cards ("club card")
                                                                    •   Credit cards
• Financial services launched in 1995,                Products      •   Personal loans
 pioneered by private label/loyalty card                            •   Mortgages
                                                                    •   Travel money
• JV to broaden product offering                                    •   Insurance (life, home, car, pet, travel)
 established in 1997 with The Royal                                 •   Investments/pensions
 Bank of Scotland (RBS) (50/50                                      •   Savings accounts/ISAs
 ownership)
                                                                    •   Direct channels (e.g., call centers)
                                                                    •   Checkouts of all Tesco stores
                                                      Channels
                                                                    •   1,000 in-store ATMs
                                                                    •   12 in-store financial centers of Tesco
                                                                        Personal Finance
                                                                    • Partnership model with each side
                                                      Key success       focusing on its areas of expertise
 Key indicators* (2005)                               factors       •   Frequent new product launches, at par
 •   Total loans         £ 3.408 millones                               with bank offerings
 •   Revenues            £ 460 millones                             •   Strong loyalty program on the retail side
 •   Operating profit    £ 139 millones                                 of the business
 •   C/I                 34%                                        •   Lean marketing approach with substantial
                                                                        use of store signage/leaflets
Source: Annual reports, McKinsey Financial Institutions Practice                                                        30
                                                                                      BOG-FELABAN2008-20080812-01-01


TESCO'S DISTRIBUTION RELIES STRONGLY ON ITS
CALL CENTERS AND LEVERAGES CUSTOMER TRAFFIC
AT THE STORES TO CROSS-SELL FINANCIAL SERVICES




Call center                        In-store financial centers            Tesco stores
• 24 hour call center in Glasgow   • "Bank branch within the store",     • Ubiquitous leaflets and store
                                    branded Tesco Personal Finance        signs in every store
• Performs direct sales
                                   • 12 centers in key stores            • Payments, deposits and
• Serves customers in telephone                                           withdrawals can be made at the
 banking (preferred channel by     • Functionalities include deposits,    checkouts
 majority of customers)             statements, financial advice
                                                                         • Checkouts as a key source of
                                   • Most transactions ATM-based          sales, with clerks referring
                                                                          customers to products
                                   • Support staff available for
                                    questions, more technical
                                    assistance obtained with free
                                    phone with link to the call center

Source: Press clippings                                                                                          31
                                                                                               BOG-FELABAN2008-20080812-01-01


TESCO PF HAS DEVELOPED A DISTINCTIVE STRATEGY
TO ATTRACT CUSTOMERS
                           Description

                           • Aggressive pricing of personal loans and credit cards (~100-200 bp below
                               major bank competitors) to capture mass market customers*
     Pricing               •   Attractive rates on deposits (100-200 bp over the market), which entice
                               younger, more affluent customers but also increase churn by attracting a lot of
                               “hot money”)

                           • Extensive marketing of personal loans, savings, and motor insurance
     Promotion                 products throughout 700 stores, in aisles, POS, and online computer
                               terminals, and via store employees


                           • Low overhead costs for Tesco (~100 people)
     Cost base             • RBS provides a fixed operating cost per account, which is significantly
                               cheaper than large banks like Lloyds and Barclays

                           • In-store visibility through strong signage and leaflets
     Demand                • Temporary offers/discounts (e.g., 5% or points on loyalty program) for bundle
     stimulation               offering, web application, or through targeted programs (e.g., “baby club” for
                               pregnant women)
                           •   Instant quotes available on web 7/24, by phone 6/7; extended validity (3-12
                               months) with reminder service

       * Uses standard risk scoring from RBS
Sources: Annual reports; Press releases; Industry reports; team analysis                                                  32
                                                                                           BOG-FELABAN2008-20080812-01-01


TESCO PERSONAL FINANCE’S KEY SUCCESS FACTORS
                                     • Joint venture set up with clear
                                      responsibility, value sharing,
                                      and foundations for cost and
                                      profit sharing

                                                 Appropriate                           • Highly competitive
                                                 partnership                               deposit and loan rates
• Aggressive                                                                           •   Focus on “shopped-
   marketing focused                              structure
                                                                                           for,” direct friendly
   on building critical                                                  Distinctive       products (Cards, Motor
                             Aggressive
   mass of                                                               strategy to       Finance)
                              marketing
   awareness (via TV                                                       attract     •   Aggressive promotion
                             investment
   ad spend),                                                            customers         in-store
   leveraging strong                                                                   •   Low-cost production
   retailer brand                                                                          (in partnership with
                                                                                           RBS)

                                    Gradual                   Utilises custo-
    • Test and learn roll out     approach in               mer information to
       of product suite,          new product                create additional
       focusing investment on     introduction                     value
       successful pilots
       (cards, motor finance)
                                                               • Uses “Clubcard” and
                                                                 customer purchase data to
       and de-prioritizing less
                                                                 better understand its
       profitable initiatives
                                                                 customers and create
       (Savings, Life
                                                                 appropriate segments with
       Insurance)
                                                                 customized promotion
Source: Press clippings                                                                                               33

								
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