Azteca’s Use of Innovative Information Systems
Dr. Laxmi Mohan and Dr. Devendra Potnis
Three quarters of the world's poor earning less than USD2.00 a day do not have a bank account according to a study released in April 2012 by the World Bank, or, to put it simply, they are "unbanked" (Demirguc-Kunt and Klapper, 2012). A 2009 study by Consultative Group to Assist the Poor (CGAP), a donor consortium affiliated to the World Bank, found that the number of bank branches per 100,000 adults is only eight in developing countries compared to 24 in developed countries (CGAP 2009). The CGAP study also established a relationship between lack of access to basic financial services and low incomes. Of the 2.9 billion "unbanked" adults, 2.7 billion were concentrated in the developing countries with less than 30% of adults having bank accounts compared to over 80% in developed countries. Financial inclusion denotes the extent to which financial services are provided at an affordable cost to the weaker sections of society who are left out of the formal financial sector. Unfortunately, traditional financial institutions do not serve the poor, especially in remote locations in rural areas, because it is risky and expensive. The poor are often illiterate and find it difficult to complete the paperwork required for financial services. They cannot also furnish collateral for any loans. Neither do they have any credit histories. The tiny profits from a small loan, or a savings account with a small balance, make it unprofitable for banks to serve the poor (Khavul, 2010).
A major impediment of serving the unbanked poor at the bottom of the pyramid (BOP) is the high cost of a high-touch delivery model. For example, the process for distributing small loans and collecting repayments from barely literate borrowers in remote villages is people-intensive and requires frequent face-to-face interaction. IS applications are mission critical for the banking business since they are the means for processing banking transactions in real time. Banco Azteca, a bank headquartered in Mexico, stands out from its peers for its strategic perspective on IS as a tool not limited to the traditional applications for transaction processing. Our paper focuses on the state-of-the-art IS applications implemented by Azteca to serve low income people ignored by banks in Mexico and its subsequent expansion in Latin America. The next section provides background information for Banco Azteca. We then briefly describe the IS applications implemented by the bank. The following section evaluates their business value. The concluding sections present the significance of Azteca's IS applications for financial inclusion in Latin America, and their potential to serve the unbanked poor in developing nations.
2. Background Information
Banco Azteca recognized the value of IS from its inception as key to its success, investing USD60 million during 2009-2012. As of October 2013, the bank had over 4,000 branches, 20,000 employees, and 18 million customers with credit accounts and 16 million deposit accounts (Banco Azteca, 2013). Its international operations in Latin America included the major markets of Brazil and Argentina. Azteca implemented six IS applications which were instrumental in expanding its customer base. A custom-built innovative application, an automated decision support system, was developed by Azteca's in-house IT staff for use by the bank's field agents who visit low-income customers when they are unable to furnish proof of income for their credit application. The automated system makes the decision regarding the loan amount based on client data input by the agent on his handheld computer. The system's decision is communicated by the agent to the client, who can accept or refuse the offer. Another custom-built system, also developed in-house, was a mobile application for use by customers, whose functionality enables them to carry out a wide range of financial transactions. Aside from these two applications developed by Azteca's IT staff, four IS applications were acquired from international vendors: digital fingerprint readers, Intelligent Infrastructure Management Solution, smart cards, and IP Video Management System, a software solution for network video surveillance. Azteca's parent, Grupo Elektra, Latin America's largest electronic and home appliance chain, used IS applications as long ago as 40 years back to provide credit for purchases by low income clients. Azteca was able to piggyback on Elektra's systems for monitoring customer payments and, hence, did not face any challenges for system implementation.
3. Six IS Applications Implemented by Banco Azteca
3.1 Automated Decision Support System
Banco Azteca requires borrowers to complete a simple application for credit, which can be used for buying electronic goods or for their small businesses or for paying off other debts such as loans from moneylenders. The borrowers have to furnish only proof of address and proof of income to get the credit. If proof of income was not available, the bank's field agent made a home visit within 24 hours of the application to ascertain information for determining the borrower's eligibility for credit. The interactive rules-based engine of the automated decision support system residing in Azteca's corporate operations center in Mexico City prompts the agent to ask a series of questions. These questions include the specific assets owned by the borrower like stereo, DVD player, TV, and refrigerator, which serve as collateral for the loan. The answers to the questions are input by the agent into his handheld computer, which transmits the information to the corporate system. The system calculates the total resale value of the assets and determines the loan amount, which should be less than half the resale value, and the weekly repayment schedule. This information is transmitted to the mobile device of the agent who conveys it to the borrower. If the borrower accepts the offer, the agent asks the person to pick up the check at a local store. He also records on his handheld computer the serial numbers of the assets like the stereo, DVD player, etc. Borrowers, who slip behind on their payments, receive frequent visits from the bank's 3,000-plus motor-cycle-riding credit agents, who warn them that their possessions will be seized if they do not repay the loan. In case of default, Azteca takes the borrower's assets and sells them in a Grupo Elektra's used-goods store (Epstein and Smith, 2007). Azteca reports a low default rate of 1% compared to the default rate of 5.3% on consumer loans reported by banks serving more profitable customers, despite charging a high interest rate of 110% APR. The harsh collection practices of Azteca have helped to ensure a low default rate.
3.2 Mobile Customer Application
Red Movil Azteca The "Red Movil Azteca" mobile application was designed for customers who own, and are able to operate, a smart phone. They can activate their mobile application through Azteca's website where they enter their username and password. Figure 1 shows the simple and easy-to-use user interface in Spanish, which allows the borrower to login from any location. The welcome screen of the application has four options: "Any Questions?," "Retrieve Forgotten Password," "Country of the Customer," and "Pay Azteca".
Fig.1 Fig.2 Fig. 3
Figure 1. Welcome Screen of Red Movil Azteca Upon login, the Main Menu (translated from Spanish) appears showing a variety of options for the user
Figure 2. Main Menu of Red Movil Azteca Each option takes the user to another screen for completing the transaction. For instance, the "Payments" option facilitates the customer to make a variety of payments (see Figure 3).
Figure 3. Options Available for Customers to Make Payments Azteca has tied up with telecom companies like TELMEX, utility companies like CFE, Jafra, a beauty product company, and others, which enable the customer to pay these companies directly from Azteca's loan account. The mobile application is valuable to customers since they can carry out a variety of transactions, which makes it a mobile wallet. Azteca also derives value from the mobile application since it tracks the specific uses of the loan amount by the customer.
3.3 Digital Fingerprint Reader
DigitalPersona, founded in 1996, is a 75-person company based in Redwood City, California, which makes the hardware for fingerprint reading and supporting software. The features of the DigitalPersona include standards compliance, anti-spoofing technology, user feedback LEDs, fingerprint readability, and flexible software development kits to enable a broad range of applications. The annual revenue of the company was $30 million in 2012 for collecting and managing over 18 million finger prints of customers.
3.4 MapIT G2 Intelligent Infrastructure Management Solution
This solution is provided by Siemon, an established company founded in 1903 based in Watertown, Connecticut. The solution enables tracking and reporting of the network-wide physical layer activities in real time. For the fiber channels in use today, Siemon offers 10Gbps speed required for XGLO trunking cable assemblies. This solution requires less space, which was a constraint in the case of Azteca since the cable assemblies had to be accommodated under the raised floor at its corporate operations center in Mexico City. The fiber trunk cables are pre-fabricated, pre-terminated, and tested, which reduces installation time by 75%. The Siemon solution manages the bank's data center which processes millions of customer transactions daily.
3.5 EMV Smart Cards
Banco Azteca selected Gemalto (formerly named Gemplus International) based in Amsterdam, the Netherlands, to supply EMV smart cards in 2005. EMV is a smart card payment standard created in 1996 by Europay, MasterCard and Visa (EMV), guaranteeing worldwide interoperability and security for payment. These cards store customers' photographs and biometric data, such as fingerprints for identification of the customer. Personalization of cards is done at Gemalto's Cuernavaca facility in Mexico. The smart card serves as an electronic purse for making payments like a credit card.
3.6 IP Video Management System
Azteca implemented in 2009 the Nextiva IP Video Management solution from Verint Systems Ltd., a company founded in 1994 based in Melville, New York. In 2013 Verint had over 10,000 business customers in 150 countries, served by a staff of 3,200 professionals. The Nextiva platform is integrated with DigitalPersona's biometric access control system. Nextiva is the only tool available with video analytics capability that provides information about video transactions to Azteca's executives for improving operational efficiency. The platform standardizes and consolidates security management across geographically distributed sites, and meets security and compliance requirements as they evolve. Specific noteworthy features include live and recorded video viewing, multisite connectivity, and virtual matrix switching.
4. Business Value of Azteca's IS Applications
The summary of the six IS applications implemented by Banco Azteca and highlights their business value are given below -
Table 1. Business Value of IS Applications Implemented by Banco Azteca Azteca was smart in using proven solutions from established international vendors for standard IS applications, which is more cost-effective than developing these applications in-house. The bank's IT staff was hence available for developing the two innovative custom-built systems that provided a competitive advantage to Azteca.
5. Impact of Azteca's IS Applications on Financial Inclusion in Mexico
Banco Azteca was the first bank to target the 70 million people not served by banks in Mexico. In a country where 52% of people live on less than USD80 a month, the bank serves low-income clients, who previously had to depend on friends and family or moneylenders and pawnshops for getting loans. Azteca's high interest rate of 110% APR is in line with interest rates in Mexico where credit is expensive for everyone, rich and poor alike. Moneylenders and pawnshops, who have exploited generations of Mexicans, charge rates of 300 percent and above. The success of Banco Azteca led the mainstream banks such as Banorte and HSBC to serve the low-income market in Mexico. Retailers saw the market opportunity as well. Wal-Mart, Mexico's largest retailer, received a banking license in 2006 and began offering credit through 16 of its 997 Mexican stores. Azteca increased the proportion of working age adults who own informal businesses by 7.6 percent (Bruhn and Love, 2012). Its clientele included a higher proportion of women working as wage earners in municipalities where Azteca opened branches. Labor market opportunities also expanded for women from housekeeping to staff jobs leading to a 9 percent rise in their income compared to 5 percent for men.
6. Potential of IS Applications for Financial Inclusion
IS applications fall into two categories: one, Operational Systems, which are mission critical for running a business like the transaction processing system of a bank; and, two, Analytical Systems that provide a competitive advantage to a business like Azteca's automated decision support system. We present two other case examples, SKS Microfinance and Equitas Microfinance, which used analytical systems to expand their customer bases in India akin to what Azteca did in Mexico (Mohan et al., 2013). SKS and Equitas are microfinance institutions (MFIs) which provide small loans without any collateral to poor people for starting a small business and generating income. The loan is repaid in weekly or fortnightly installments to the loan officers of the MFIs, who visit the poor clients in the villages. The unmet need of the poor for financial services spawned over 7,000 MFIs by 2010, but nearly 90% are small enterprises serving fewer than 10,000 customers (Reed, 2011). A major obstacle faced by MFIs for scaling to serve a large number of customers is the high cost of a high-touch delivery model, which is the same deterrent for banks to serve the poor. Both SKS and Equitas recognized the power of IS from their inception for scaling. SKS grew from just 10 customers in 1998 to nearly 6.8 million by September 2010, becoming the largest MFI in India. Equitas expanded its customer service in less than five years from its launch in December 2007 to 1.3 million by September 2010.
The Analytical Systems implemented by SKS and Equitas were instrumental for achieving their rapid scaling. An overview of these systems is given below to illustrate the avenues available for analytical systems to expand the number of customers reached by the institutions serving the unbanked poor. SKS developed a portfolio tracking system which alerted management to potential problems in its portfolio quality. For example, the system would flag a spike of 80% loans in some branches for buffalo purchases, which could run the risk of huge defaults in repayments in the event of an epidemic that killed buffalos. Management could then diversify the portfolio by finding borrowers whose businesses are in other areas like tea shops or brick-making. Equitas implemented a real-time performance dashboard for controlling the cost of the large field force of loan officers who contacted clients for collecting repayments. The loan officers sent SMS messages on their mobile phones to the system in corporate headquarters providing information on collection of repayments and other metrics. This information was presented in the dashboard within 15 minutes after the close of each meeting showing any shortfalls in the productivity of loan officers. Corrective action could then be taken without any delay by corporate and branch management to make up these shortfalls in the meetings scheduled for the rest of the day for the concerned loan officers. In summary, Azteca, SKS, and Equitas demonstrate the potential for innovative Analytical Systems to enable financial inclusion.
Richard Heeks pointed out the latent market opportunity for IT innovations to serve the unbanked poor in developing nations. As he put it, these markets "are high-growth….and they have lower competition. BOP markets represent the next frontier for IT" (Heeks, 2012, p. 24). But, as he noted in an earlier article: "We in the global north…tend to exclude the bottom-billion countries from our informatics work. We tend to assume that IT has little or no role in these countries. In fact, it does already…The bottom-billion citizens (are)… increasingly active users … (and are) looking for ideas and support from global partners like us" (Heeks, 2009, p. 24). This viewpoint is also echoed in a call to IT professionals to develop applications for serving the BOP (Murugesan, 2012). An ancillary benefit of serving the BOP market is the potential for doing well and doing good. Innovative IS applications can be effective in achieving financial inclusion as demonstrated by Azteca, SKS, and Equitas. There is an exciting and lucrative market opportunity for IS professionals to serve the unbanked poor in developing nations.
Azteca, October 2013; http://www.bancoazteca.com.mx/
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