W E L O O K A T T H I N G S D I F F E R E N T L Y Developing Financial Products 16 th September 2014 Isabelle Kidney & David Matthews Irish League of Credit Unions Irish League of Credit Unions, 2012
Contents Introductions Rationale for our product range Loans Savings Other financial products Market research Your views? Discussion
Strategy Rationale What are we trying to achieve in the medium to long term? What is our vision for the future? What is our mission in life? What are our values and how are they reflected in our strategy? Where do we want to be in five years time? How are we going to get there? Who should answer these questions?
Rationale The starting point:- What do our members want? What do our members need? How do we answer these questions? Ask them! Member Survey Verbal, written, online Member focus groups Representative group Age, gender, location Include some non-members
ILCU Survey Results - examples Lending Process 65% apply special conditions for first loan 40% use ratios, 60% don t 24% contact existing borrowers whose loan is nearly paid off Loan Approval 89% approved, 5% partial, 6% rejected Interest Rates 40% would definitely support a standard national rate, 5% would not, 55% don t know
ILCU Focus Group Results Members like their credit union and will not shop around for a better deal New members don t like having to save for three months before applying for a loan Service is excellent and members enjoy visiting their credit union Staff knowledge levels often not very good, overreliance on the manager Credit union interest rates are the highest in the market!
Why do we exist? Loans To provide a reasonably priced source of credit to our members Loan Interest is our primary source of income Our lending products must be designed in a way that suits our members needs Not all members have the same needs Loan purpose should determine how products are designed Loan term, repayment schedules, interest rates, etc.
Loan types in Ireland Loans Regular repayment, short-term personal loans (up to 5 years) For any personal purpose Needs and / or wants Education, cars, holidays, home improvements, medical expenses, occasions Lifestyle borrowing Very little business lending, but that will change Today, the focus is on RISK Difficult to undertake social lending
Loan types in Ireland Loans Regular repayment, short-term personal loans (up to 5 years) For any personal purpose Needs and / or wants Education, cars, holidays, home improvements, medical expenses, occasions Lifestyle borrowing Very little business lending, but that will change Today, the focus is on RISK Difficult to undertake social lending
Loans Loans in Ireland operational issues Maximum interest rate 12% per annum Average interest rate in 2014 is 10.25% Members can usually have more than one loan Ratios yes or no? Most credit unions offer a special low rate for loans that are less than the member s savings Credit unions cannot lend to members who are in arrears Credit unions cannot lend to members who have arrears with other financial institutions
Other Loan Types? Home Loans Budget Accounts Overdrafts Revolving Credit Business Loans Loans Different assessment skills Not all credit unions have these skills Could it be centralised?
Loans Business lending considerations The business cycle Buy Plant Harvest Sell Borrow Repay Repayment cycle regular or bullet? Risk business loans are more risky than personal loans Interest rate may have to be higher? Security Personal guarantees Co-guarantors
Shares Withdrawable Non-withdrawable Permanent Savings Deposits Term Deposits Children s savings accounts Save to borrow Promotion of thrift
What do you do? Financial Products
Other products & services Free to the member or member pay? Credit unions must cover their costs IT upgrades & processing costs Training Bank fees Staff time, etc. Credit unions cannot favour one class of members over another
Other products & services Loan Protection & Life Savings Insurance Premium paid by the credit union No direct cost to the member Highly valued product but cost is becoming an issue Death Benefit Insurance Pays a fixed amount on death of member Three premium payment methods 1) Credit union pays for everyone 2) Member pays 3) Deduct from dividend
Other products & services Member-pay insurance Repayment Protection Insurance Sold by the credit union Compliance requirements staff must be qualified Makes loan repayments if member is ill or loses job Up to five years repayments Member pays a premium (between 5% and 10% of loan balance) Premium is added to the loan amount Credit union receives commission
Other products & services Member-pay insurance Travel, Home & Motor insurance Referred by the credit union Member pays the premium Credit union sends premium to the insurance company Credit union receives a small commission
Payment services Other products & services EFT, standing orders, direct debits Bill Pay Drafts (Euro and foreign currency) Pre-paid cards Other services Bus and rail tickets Mobile phone credit Waste-collection tags Credit union is paid a small commission
Country Level Presentation On a flipchart outline an interesting and/or successful and/or innovative financial product from your country Present to the group. Irish League of Credit Unions, 2012
Market Research Increasing potential for optimal product use (impact) Address / negate competition Minimise risk Helps determine demand, profitability, scalability The greatest threat to a financial institution is default and arrears.
Why undertake market research? Increasing potential for optimal product use (impact) Address / negate competition Minimise risk Helps determine demand, profitability, scalability The greatest threat to a financial institution is default and arrears.
What is Market Research? It is the process of responding to needs and opportunities by refining existing products and developing new products. It involves altering financial product offerings, delivery approaches, promotion, outreach and marketing. It entails data collection, analysis, presentation and decision making by management (and boards)
Percentages of New / Refined Products A new to the world product (10% of all new products introduced each year) A new product line (20% of all new products) An improvement or revision of existing products (26% of all new products) A repositioned product (7% of all new products) A lower-cost product (11% of all new products) Source: Kevin Stuart & Richard Stockton, College of New Jersey
Product Development Process
Steps in Market Research Define research objectives Define research methods Review secondary data Prepare for primary data collection Collect primary data Analyse all data Report
Product Design Phase - Based on market research propose product concept and (loan) product characteristics such as: Product Name Purpose and Focus (Loan use and client profile) Amount minimum / maximum Preconditions (collateral, savings, guarantees, membership) Pricing (interest rate, commission / fees, penalties) Disbursement (timing, waiting period) Repayment conditions (frequency, loan term, grace period) Undertake product concept and price sensitivity testing
Ten Steps in Pilot Testing 1. Composing the pilot test team 2. Developing the testing protocol 3. Defining objectives 4. Preparing all systems 5. Modelling financial projections 6. Documenting product definitions and procedures 7. Training relevant staff 8. Developing marketing materials / approaches 9. Commencing the pilot test 10. Evaluating the test
Roll-out Propose roll out plan and strategy including: Staffing, Resourcing & Scheduling Monitoring system (MIS) Marketing
Evaluation Up-take of new product (demand) Member satisfaction Financial viability (income, costs & delinquency associated with product) Impact (member well-being)
Practical Tools AIMS Client Satisfaction Tool & Exit Interviews AMK Market Research MircoSave MR4MF tools CGAP Product Development for Microfinance Institutions SPEED Market Analysis
AIMS: Client Satisfaction Survey Program Aspect Current Practice Ideal / Recommended Practice Why? Interest Rate Savings Service (amount and frequency) Access to savings Frequency of meetings Activities at meetings Loan officer supervision Individual assistance
AIMS: Client Satisfaction (opinion & why) Savanet 1 Purpose Benefits Loan size Interest Rate To help the poor women and to take them away from money lenders The client benefits from but unfortunately transport costs eats our profits Don t like it because it is too small and everythi ng is so expensiv e now we cannot buy anything with such a small loan. They don t give any advice They like it Frequency of Repayment Like it because they finish paying the money back quickly Loan Term The like it because they don t like that the money spends a lot of time in their hands because they can loose it. And it would be difficult to pay it back. Penalties Savings Meetings Time before Disbursement Like these because it makes clients make an effort Like because they can talk in the future to make business Like because they have to know what kind of organisati on they are dealing with. Like this Member Supervision Like this because they have to know someone from the institutio n to give them credit and keep their savings Group Training Like this because we have to put our heads together Credit to Groups Like this because one can encourag e another one
AIMS: Exit Interviews A. Problems with program policies or procedures: [ ] 1. The loan amount is too small. [ ] 2. The loan length is too short. [ ] 3. I do not like the repayment schedule. [ ] 4. The loan became too expensive (such as interest, fees). [ ] 5. The disbursement of the loans is not efficient. [ ] 6. I was unwilling to borrow because of other conditions, (such as obligatory savings, obligatory training). [ ] 7. I did not like the treatment by the staff or had personal conflicts with staff. Who? [ ] 8. I found a service with better terms. Which one? Why is it better? D. Personal reasons: [ ] 21. I cannot continue because I spent the money on a crisis (such as illness, death) or a celebration (such as marriage) in my family. [ ] 22. My spouse (or other adult income earner) left me so I do not have the ability to continue the business. [ ] 23. I am pregnant or now have another person to care for (lack of time or ability to continue the business at the same level). [ ] 24. I am moving out of the area. [ ] 25. A family member told me to stop borrowing [ ] 12. I was unhappy about group leadership. [ ] 13. I was unable or unwilling to attend all the group meetings (such as take too much time; have schedule conflicts) [ ] 14. I did not like the rules and/or the pressure established by group. E. Community and economic reasons: [ ] 26. My business was ruined by a disaster (such as robbery; fire; flood; hurricane). [ ] 27. A major new competitor moved into the area and many of my customers now buy from the competition. [ ] 28. Poor economic conditions have left my customers with less money with which to buy my goods or services.
Client Profile AMK Product Development Wellbeing / Poverty Score Satisfaction Loan Use
MicroSave: Product Dev. Tools Market research microfinance toolkit helps staff gain skills needed to understand their clients' perceptions, needs and opportunities Costing and pricing financial services toolkit enables to develop profitable products and credible financial projections Planning, implementing and monitoring pilot tests toolkit assists to plan and establish a pilot test for the product Product marketing strategy toolkit helps to define product benefits to customers and in communicating the product to staff Product rollout toolkit for expanding a tested product throughout the market provides practical tips and checklists to assist with all the aspects of the rollout process.
MicroSave: Market Research PRA Tools
CGAP Product Development for MFIs 1. What is Product Development? 2. Product Development An Overview 3. Market Research 4. Product Concept and Design 5. Costing 6. Pricing 7. Pilot Testing and Rollout 8. Action Plan, Evaluation, and Closure
SPEED: Comprehensive Guide to Ag. Loans Financial theory underpinning lending operations Demand analysis Selecting bankable enterprises Analysis of capacity to supply a loan Initial planning of product cashflow Risk mitigation and affiliated variable costs Loan procedures and costs Product costing and interest rate determination Product re-evaluation
SPEED: Comparison of Modalities for Financing Attribute Maize Rice Sunflower Analysis Score Analysis Score Analysis Score IRR (annual) 36% 3 107% 10 42% 5 Market stability Very Good 4 Very Good 4 Excellent 10 Tenure (months) 8 2 8 2 4 5 Regularity of cash flows At harvest 6-12 months 3 At harvest 6-12 months 3 At harvest < 6 months 7 Volume of business Very Good 7 Good 5 Very Good 7 Access to resources Very Good 7 Fair 1 Poor 0 Access to external support Good 3 Very Good 6 Very Good 6 Total Score (Max 70) 29 31 40
What new interesting products are out there? Product Description Easy Savings Account Emergency Loans Target Clients Savers who need flexibility of Individual or group clients in good deposition and withdrawal targets standing who have completed at rural clients least 6 months with AMK Minimum balance Not required Not applicable Maximum loan size Not applicable USD $100 Transaction process time Several minutes or less 4 hours from time of request Term Not applicable 10 months Interest (per annum) 3% - 5% 2.5% monthly Modality Savings Agent (e.g. in local shop) using mobile phone, agents get small commission, branches and sub-branches - Cash in / Cash out - Cash transfer Apply at local branch or village bank Comment Clients can save more frequently Reduces dependence on money
How to fail if you want to Don t bother to analyse the market Rush to the market with a good idea proposed over a coffee or at a workshop (like this one) Let your own agenda (or your donors) prevail Don t worry about timing or seasonality Ignore the competition Spend loads on market research, but none on marketing Believe reaching a small market is better than reaching none
Thank you!