If you connect with Claro Partners on a regular basis, you might be already aware of the project that kept us very busy the last months: the Always in Beta consortium. For all of you who might not be aware, this was a multi-client consortium project that Claro led, alongside Anthemis, for six global players from the financial services industry.
We started this project because we saw an urgent need to rethink the banking industry: according to Accenture, 35% of banking revenues will be at risk in the next five years, and this is mainly happening because of the increasing access to financial services by Digital Natives. Digital Natives, the next generation of consumer, exhibit new attitudes to loyalty, trust and planning, and no longer think of banks as the centre of their financial world. As a result, they’re turning towards an abundance of new offers emerging outside of the traditional banking system.
To understand how to succeed in this disruptive landscape, we explored the lifestyles, financial choices and habits of Digital Natives across four continents. This research provided the basis for our toolset, which we used with our clients to assess existing offers and to create meaningful new ones for Digital Natives.
I went out to Mexico City to understand how Mexican Digital Natives think about their finances. After some very intense days of fieldwork in Mexico, we were exhausted, but loaded with deep insights and inspirational ideas, as we met many interesting people out there. Here’s a bit of a flavour of the Digital Natives we interviewed:
A co-working space owner who is becoming extremely successful with a model based on sharing but also on prestige.
A 17-year-old who started taking care of himself when he was 12 with an events-production company that had become so successful that it granted him a profit of at least double the investment per event and wasn’t even aware of the fact he was using incredibly technical language and complex financial concepts, as it was just “what he did”.
A pair of 7 and 10-years-old that stated they couldn’t live without digital technology but ten minutes later stated they loved cash and distrusted digital money.
Two self-taught entrepreneurs that have built from scratch - and based on their very own needs only - an incredibly profitable business model based on collaborative public spaces and reaffirmed us the need of people to see logical, causal relationships with money in all the aspects of the financial experience.
Our "cash-loving" Digital Natives
Through the conversations we had with these people and others, we uncovered many interesting insights, and I will share here with you some of the ones that we found the most distinctive.
Mexico and its (financial) innovation culture
Mexico is a very conservative country when it comes to innovation adoption. People there are driven with a strong sense of pragmatism - a national motto seems to be “if ain’t broke it, don’t fix it". Mexico poses many challenges when it comes to making new financial propositions attractive to consumers. According to Gabriela Zapata, a financial consultant with extensive expertise in financial inclusion, Mexican culture is very sceptical when it comes to finances and innovation: its population has a very particular way to relate to money, and financial innovations have to be solidly rooted in a deep understanding of these ways to achieve mass adoption by consumers.
Moreover, the financial system in Mexico is one of the most well-established and extensive amongst developing economies, a fact that can sometimes prevent innovation from spreading. For instance, the fact that mobile banking had a massive success in Kenya was made possible because there was practically no previous banking landscape – no similar situation could have happened in Mexico where the banking system is already present and extensive.
Another particular feature of the Mexican financial culture, which I found fascinating, is its social aspect. Mexico is a Latin culture and therefore highly social, peer-based systems prove to be very successful. Social saving systems, for instance, are significantly more common than in Western countries. The “tandas” – informal saving groups – are based on the concept of utilising peer-pressure to achieve higher performance when it comes to saving and higher return rates when offering credit. Those “tandas” are often organised between groups of friends and relatives, they deliver when needed and tend to have a common goal. They are so popular that banks have started to offer them among their saving and credit services.
Besides its social aspect, there is also a strong feeling amongst Mexicans of the concept of fairness. Innovations that fail to present their features, requirements and benefits in a logical and clear way will either not be adopted; or if they are, will not achieve high levels of loyalty. Consumers there react very strongly to what they perceive as unfair. For instance, our fieldwork for the Always in Beta project revealed that maintenance fees in saving accounts provoke strong reactions from consumers: it seems illogical to many for savings account to have procedures that actually diminish the money saved there instead of growing it. It was frustrating and illogical for people that a bank would charge you for just keeping your money without any specific service delivered attached to the fee.
Informal savings are highly popular in Mexico – this is just one of the ways.
Mexico as a financial market
Best-case practices in the financial industry seems to come from what they call retailer banks. Retailer banks are department stores that started offering in-store credit for their customers and, after a license issued by the government, eventually took over more financial services like cash deposits and transfers. They are very secretive when it comes to their business models, but what is clear is retail banks excel at understanding the behaviour of their consumer base. It is very fascinating to learn about their financial propositions, which are very sales-driven and speak directly to people and their core values. They are so successful that Wal-Mart funded Banco Wal-mart to take a piece of the market pie.
Some of those banks take cues from particular Mexican financial behaviours to improve their propositions. For instance, Banco Azteca, associated with the powerful banking and retailer group Grupo Elektra, offer their saving services as “El guardadito”, as Mexicans utilise the word “guardar” (to keep) instead of “ahorrar” (to save).
Grupo Elektra and Banco Azteca, a “retailer” bank.
Building upon some of the insights I’ve already mentioned it’s clear that Mexicans hold a big distrust in their banking system. The result is that the majority of the unbanked are actually “de-banked”: they have left the banking system voluntarily as they prefer informal financial options that they believe are more in line with their behaviours, sensibilities and values.
The Mexican “de-banked”, as Gabriela Zapata explained, have left the banking system as a result of a rational decision, not caused by the lack of money or access to traditional financial system. Rather, their choice is informed by a lack of trust and feeling of misaligned interests between banks and themselves. Informal financial behaviours include keeping money in boxes, under mattresses, through peer-to-peer lending and in-store transfers. The GCAP – a consultative group to help include the poor in the banking system – has held several studies in the past to investigate the particular behaviours of these de-banked people.
Mexican Digital Natives
In Mexico people at the bottom and top of the pyramid are very aware of their financial situation and are active when it comes to managing their money. On the contrary, those at the centre of the pyramid, the middle class, have a much more detached relationship with money. This distant relationship has partially led to a situation in which, despite growing levels of financial literacy for the middle class, actual financial knowledge is still at a very low threshold –70% of Mexican youngsters say they need help taking financial decisions.
As Daniel Rojas, the CEO of the fintech startup Rocket.la told us, studies held in Latin America suggest that the more financial education Millennials have, the worse their financial decisions actually become. Financial education does indeed raise awareness and knowledge of the individual’s options for money management, but in populated markets the complexity of the offer often leads to confusion and choice paralysis. Digital Natives do not know which financial service will suit them most and therefore they remain passive without taking the initiative to manage their money in the best way possible.
A Digital Native participating in the interviews.
Mexico’s younger population will struggle in the future with pension plans. Mexico possesses one of the lowest rates of passive pension contribution in the world. For a country with an enormous demographic of young people it is crucial that active contributions to pension plans are made simpler, and also more attractive to the short-term-planners that Digital Natives are.
It turns out that the financial stress suffered by the individuals, although in a major way affected by large macroeconomic factors like the recent economic crisis, is often worsened by people's own poor management. It is yet another sign of the importance of educating Digital Natives not only of general financial knowledge and awareness, but also to offer customised financial services suited to their individual needs.
A final distressing insight
The final insight that emerged from our study that stuck with me on my return was the enormous human cost of not dealing with the increasing number of financially troubled people.
Financial stress is one of the key factors, if not the most important, that determines people’s ill-being: for instance, in the United States "nearly 80% of the divorces cited financial problems as the leading cause of the marital demise.” But what is worse, financial stress is becoming the leading cause of suicide around the world.
When mental health disorders are removed, financial stress comes up as the top cause for suicide globally. Specifically, and as this study shows, “financial problems led to more suicide attempts than nearly all of the psychological conditions, except depression”. For instance, in China suicide rates in rural areas outnumbers the urban ones, as people there are more prone to suffer financial difficulties (no wonder psychologists work with the fact that it’s the extremes of either poverty or wealth that are associated with higher suicide rates). With such facts it should not come as a shock that financial stress is predicted to become the leading cause for suicides in the near future. And we should not permit that.
In light of those facts, I believe we need more actors to think seriously about the evolution of the financial system. Similarly to what the global obesity threat did to public and private health propositions, there should be an imperative for financial players to play a role into improving consumers’ wellbeing. Just as health policies recently adopted to fight obesity, financial services would need to put improvement of their consumer’s financial stress as a key objective, beyond the purely functional role they’ve had until now. In the purpose economy, it will be imperative to offer propositions that also contribute to the greater good, and this will apply to finances too.
In today’s world consumers are increasingly asking for companies to add value to their services, often through adding an ethical component. Claro's consortium showed that Digital Natives demand companies to design services with an ethical component and choose the ones that are aligned with their own values. I will continue to leverage my knowledge of their profiles, lifestyle and mindset to help our clients create new financial propositions that resonate with them.
I did originally post this article in the Disruptive Shifts blog from Claro Partners.