El Otro Lado 4: The US-Mexico Cross Border Opportunity

27 Jan 2006|Added Value

When Mexican treasury officials released the numbers on how much money passed through the US to Mexico in the form of remittance in 2004, companies began to pay attention to the cross-border opportunity. The $16.6 Billion figure was enough to draw people’s attention, second to Mexico’s oil income and accounting for 2% of Mexico’s GDP. But what was even more astounding was the 33% increase compared with the previous year. The question several companies have asked us is obvious: how can we get a piece of that income? The leading companies in financial services have quickly understood that money transfers will become commoditized as price competition increases, and as senders learn that they can simply send an ATM card to receivers in Mexico. Some banks, led by Bank of America, have tried to entice customers by offering free remittance if they open a checking or savings account with the rational that they will be able to cross-sell higher margin products later. Still, for the most part, financial service firms are finding it difficult to cross-sell. In fact, wire transfers make up 70% of the mechanism for sending money. Other financial service companies, such as HSBC, are starting pilots with Mexican mortgage providers to offer peso denominated mortgages for homes in Mexico. Looking at the numbers alone, companies tend to assume that there must be a large opportunity if they move fast. But when pilots take along time to show results, or when revenue expectations are not met, companies are stifled about how to address the cross border opportunity. The question changes into a more interesting one: What is the next generation of offerings for cross-border offerings that offer a significant opportunity for companies?

Our experience with the Hispanic market in the U.S. and Mexico shows that the opportunity can only be adequately measured if the offering is well articulated as one that will truly add value beyond transactional value. Offerings that add value are those that set lower income consumers on a productive path to wealth building rather than simply accelerate the use of money (credit only) or offer convenience.

From Status Elevation to Wealth Building: The Importance of A Productivity Enhancing Progam

Several large scale survey, including those from the Thomas Rivera Policy Center, have correctly reported that the majority of the money received is spent on basic household items, such as food and electricity. Very little of the funds is said to go to productive means, such as repairing one’s home, building a home, or building a road for the community. In fact, only about 5% is reported to go to home repairs or building. (CEMEX’s Construmex program managers report a higher figure, but I will not debate this issue here). Whatever the figures maybe, what is clear is that people lack the skills for wealth building, and therefore, most funds received will get quickly spent before they can be saved and turned into a productivity enhancing capital expenditure. In my experience with CEMEX’s Patrimonio Hoy launch, we learned that a large percentage of the funds people were spending on the program came from relatives in the U.S.. We also learned that most of the funds would have been spent on “emergencies”, and emergencies could be anything from a spontaneous celebration with lots of Coke and chips, a dress for a Baptism, to a serious health need. Once in a system that asked for about $10/week, the amount of money being spent on extra stuff, people found that their houses were getting built at a faster.

I have heard people say time and time again the units sent to family members, somewhere between one hundred to two hundred dollars, are too small to really deviate to productivity enhancing means, especially since a good percentage of those funds will need to be used for basic family needs, such as food and bills. The assumption here is that if people received larger units of cash, then this problem would not occur. This assumption is wrong. The one to two hundred figure is simply an average. There are folks that recieve larger funds. Yet these funds don’t necessarily get committed to wealth building investments or entrepreneurial efforts.

As I have mentioned in earlier blogs, status in one’s community is a prime motivator for many of the choices made by those in the Hispanic market. In Mexico, status in a community is actually almost as good, and some times more effective than, financial capital. Being in the good graces of others by being generous helps one attain such status. As modern material possessions from the U.S. start to pervade lower income communities, these become symbols of status in the community as well. Displaying and sharing these items becomes a common practice. When people are suddenly receiving money from members in the U.S., it is often the case that these funds are spent rapidly.

The patron –client and fate like cultural orientation leads people to view money for the purpose of accumulation of material goods, especially those that elevate status, rather than wealth increase. Items that call for large capital expenditures require that people learn how to accumulate and become more productive. The challenge is particularly great with the Spanish dominant lower income Mexican consumers, who are mistrustful of large institutions and who have a different world view for dealing with money. Companies must learn to develop culturally appropiate systems that get people on the path to savings, budgeting, and committing expenses for improving family life. There is no magic bullet for doing this. Companies must introduce small scale pilots, set learning expectations, set appropiate metrics for learning, review, and redesign. Not only will companies be able to get a share of the remmittance pie, they will also play an integral role in developing their future market.

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