Credit for the Masses
This fascinating article from Saturday's NYT business section demonstrates two important trends: One, which has been famously documented in C.K. Pralahad's The Fortune at the Bottom of the Pyramid, is that smart international companies are figuring out how to serve the vast market of poor but aspiring consumers in developing countries. The other, which has been less noticed, is that information technology is making credit affordable even for tiny loans. That means retailers can now offer credit to people who need it to climb out of poverty, but who used to be too expensive to serve without exorbitant interest rates.
RIO DE JANEIRO, Nov. 11--Márcia Regina da Cruz, a 40-year-old janitor and mother of three, decided to splurge.
Ms. da Cruz, who lives in São Vicente, a coastal town an hour's bus ride from São Paulo, made a purchase in September equal to one-fifth of her monthly salary. She bought three irons--one for herself and two as gifts for her mother and sister - for 72 reais, or just over $32.
"It was a big purchase," she said. "I normally couldn't pay for it."
She could, though, because of a new policy at CompreBem, a supermarket chain owned by Grupo Pão de Açúcar, Brazil's biggest retailer. The plan allows her to pay for the purchase in 10 interest-free monthly installments of about $3.20 a month.
Big retailers in Brazil are lowering the bar for what they will sell on credit. Though the country's shops and department stores have long sold big-ticket items on installment plans, Brazilian and multinational retailers, like Wal-Mart Stores and Carrefour of France, have begun offering purchase plans with monthly payments that come to no more than one or two reais--about 45 to 90 cents.
The shift is an effort by retailers here to squeeze more spending from the big, but cash-short, bottom of the consumer base in Brazil, South America's biggest economy. Amid a tepid recovery that has yet to blossom into strong, sustained growth in retail demand, vendors are going to new lengths to help low-income Brazilians pay for everything from their weekly rice and beans to inexpensive items like clothes, radios, blenders and other goods. The installments are interest-free until a payment is missed, and then interest of at least 3 percent a month is charged....
Efficient information technology and credit screening make this trend possible, but they wouldn't work without sound monetary policy. Lenders have to be able to count on tolerable rates of inflation.
Slower inflation enabled stores to introduce payment plans for retail goods that many consumers once strained to finance--from tennis shoes and televisions, to refrigerators and home computers. So successful was retail credit, especially among the middle class, that price tags in many stores now highlight the cost of the monthly installment, with the total price in much smaller print below.
Yet a big portion of the consumer base still struggles with bare necessities. That is why vendors recently began applying their credit plans to low-cost items, too.
"You want to make it easy for even basic purchases," said João Carlos de Oliveira, president of the Brazilian Association of Supermarkets in São Paulo.
The approach was evident one recent Saturday evening at a Wal-Mart in southern Rio. Price tags offer telephones in 12 monthly installments of 3.57 reais. A plug-in electric grill sold for 12 monthly payments of 1.87 reais. Wines, domestic or imported, were offered for three interest-free monthly installments.
Wal-Mart and other big retailers use one central tool for such promotions: internal, or "private label," credit cards.
Because many low-income Brazilians do not have bank accounts, retailers offer their own cards to provide credit to customers unable to meet the conditions for traditional bank cards. With no annual fees and low salary requirements--stores compute card limits using monthly income stub--the cards offer many consumers their first experience with credit. They also give stores a platform to offer special card-only promotions, which foster user loyalty.
While items like irons and electric grills may seem like cheap consumer goods to Americans, they are actually household capital equipment--the sort of goods that represent accumulated wealth over time. This newly available credit thus enables not only short-term consumption but a higher standard of living over the long-term.