How an iPad in a corner store can spell success in Mexico
Banking and bill-paying services are offered in booths in small shops across Mexico. The business is backed by a new sort of venture capital that focuses on both financial and social returns.
Mexico City — On the outskirts of Mexico City, just past the dusty plateau of a defunct landfill, the cinder block houses of Chimalhuacán crowd a hillside. It’s a city beyond a city, made up of nearly 1 million residents including surrounding areas, yet it lacks many of services and stores one might expect of a city – like banks.
Just two bank branches serve this densely populated suburb in Mexico state. The only national chain convenience store opened just a year ago. One mass merchandiser, a low-end brand called Bodega Aurrera owned by Wal-Mart, competes with the hundreds of small mom-and-pop pharmacies and tienditas, or corner stores.
Without easily accessible banks or ATMs, many residents lack access to basic financial services and have trouble paying their monthly bills due to the inconvenience of long lines and the cost of transportation to and from the few locations available. Mexico has a history of "unbanked" classes due to the size of the informal economy, low incomes, and the high concentration of assets among relatively few banking institutions. While recent legislation aims to encourage banks to expand both their reach and lending, more than half of Mexican municipalities still lack even one bank branch, according to the World Bank. In the interim, innovative programs like Barared have stepped in to fill the gap.
Barared offers banking and bill-paying services in booths set up in small corner stores. The company is simultaneously taking on the issue of access to money and bill management for residents, while building small stores’ capacity to compete with the big box stores that sooner or later will move in to the community. It’s a business backed by a new sort of venture capital known as “impact investment,” funding with an eye on both financial and social returns.
With so few banks serving the Chimalhuacán area, there is "absolutely no way you will achieve financial inclusion," says Alvaro Rodriguez Arregui, founder of the six-year-old IGNIA impact investment fund in Monterrey, Mexico. IGNIA has supported Barared with injections of about $6.1 million since 2010.
A system like Barared can help make inroads in marginal areas while also giving "additional sources of income to the tiendita, which is the largest employer in the country," he says. "You bring them into the formal economy."
Drawing in customers
Gregoria Angeles Reyes runs a pharmacy called Fradoni Berriosabel on a corner in Chimahualcán. She’s been there for a decade and knows most of her customers well. Still, Ms. Reyes faces stiff competition from a pharmacy next door and two others within a couple of blocks. The Barared service gives her a competitive edge, she says.
“There is a lot of need here,” Reyes says. “The most important thing for me is the service I can give to my clients and that more people come to the pharmacy.”
Barared looks like a telephone booth. A sign outside advertises the ease with which customers can pay light and gas bills: “Don’t let them cut it!”
Inside, an iPad console offers a range of services such as account deposits in two participating banks, bill payments, and, soon, remittances. The console issues a receipt, which customers bring to the shop clerk to complete the transaction.
Clara Maria Vazquez arrived at the pharmacy window with a payment toward a $2,000 microloan she used to open a hair salon in the neighborhood. Ms. Vazquez says she has to make a payment every eight days.
“Here they charge us a little but it’s much closer to me,” she says.
Commissions vary on services but they amount to the equivalent of a few dimes on the dollar – a fraction of what people pay in transportation costs to the two bank branches or telephone company. The other plus, users say, is the convenience: Banks close at 4 p.m. in Mexico, while tienditas stay open late.
Investing for impact
“Impact investing” is a buzzword for financing directed to projects that promise to address social ills. While funds boasting socially responsible investments have been around for more than two decades, early efforts more often focused on investing in companies that didn't do harm, such as not damaging the environment or not employing sweatshop labor. But these companies didn't necessarily have a mission to do good, either. Today’s impact investment funds – including two in Mexico, one in Colombia, and at least one in Brazil – take that premise a step further, targeting companies that propose solutions to intractable problems, especially in the developing world.
In Chimalhuacán, Barared targets a poor population that full-service banks and mass merchandisers largely ignore: what’s known to economists as the “base of the pyramid.” More than 40 percent of the suburb’s residents 15 years and older never finished basic education, according to the national statistics agency INEGI; 40 percent don’t own a washer; nearly 30 percent live without a refrigerator.
The impact investment industry makes “investments in relatively earlier stage companies that have as their sole or primary purpose providing help: a double or triple bottom line,” says Rahul Desai, investment officer at the Inter-American Development Bank’s Opportunities for the Majority department, referring to the marriage of profit with a tangible social or environmental impact.
It’s profit-minded venture capitalism with a philanthropic heart. Investments in regular startups can take four or five years to generate a return, Mr. Desai notes. But because the companies that these funds target want to serve marginalized markets or resolve long-standing problems, impact investments often take longer to show profit, between seven and 10 years.
Profitable, self-perpetuating businesses – not just nonprofit organizations – should play an important role in resolving social ills, says Mr. Rodriguez Arregui. (The Inter-American Development Bank, in addition to supporting startups directly, is an IGNIA partner.)
“When you operate in emerging markets and especially when you operate in the base of the pyramid, a lot of the infrastructure doesn’t exist,” both literally and figuratively, he says. “We dedicate a lot of our resources to developing that ecosystem, which helps create industries.”
“This is a huge endeavor. Single firms are not going to be able to tackle the challenge,” Mr. Rodriguez Arregui says.
A solid return
Without the backing of IGNIA’s impact investment funding, “we couldn’t have even launched” Barared, says spokesman Carlos Ferrara. “It’s cost-intensive.”
Each Barared booth costs about $2,800, including the equipment and installation; the company has installed 130 so far and aims to reach 1,400 this year across Mexico state. The shop owner contributes about 10 percent of the upfront cost, or about $280. It’s a nominal fee to ensure the shop owner is committed, Mr. Ferrara says. In turn, the shop owners can expect to earn between $250 and $450 monthly in commissions on transactions.
The model has its drawbacks. One Barared manager says shop owners – often located in tough neighborhoods where robbery and extortion are concerns – worry about security given that they'll be handling more cash. There have been no robberies yet, Ferrara says.
For pharmacy and gift shop owner Virginia Rueda Gomez, the investment has paid off. The big box stores will be “powerful competitors,” she says. She knows this because her husband had to close his own tiendita when the Bodega Aurrera opened. Barared has helped strengthen her business, Ms. Rueda Gomez says.i
“As a microbusiness entrepreneur, they encourage you to get involved and propose ideas,” she says. “They give you motivation.”