The Gates Foundation is a private organization with vast ambitions; one of its goals is to reduce extreme poverty worldwide. In this case study, the foundation asked McKinsey to design a basic financial-services offering for inhabitants of remote communities in Mexico.
Description of situation
The majority of Mexico’s rural inhabitants are relatively poor, relying in part on government benefits for their livelihood. As they tend not to have bank accounts, they usually collect government benefits in cash from a limited number of state- bank branches. These branches are often a long way from where the recipients live, so it can take a lot of time and effort for them to collect their benefits. In addition, traveling to the branches can sometimes expose benefit recipients to crime along the way.
The Mexican government also owns and operates a chain of 22,000 stores, throughout Mexico, called Diconsa, which provide basic food, clothes, and other essential goods to the rural population. These stores are supplied via a network of central and regional warehouses and several thousand delivery trucks.
McKinsey has been asked to investigate and assess the possibility of using the Diconsa network to provide a basic set of financial services to supplement the limited number of state- bank branches. The offer would start with dispensing government-benefit payments and move progressively to include savings accounts, bill payment, insurance, credit, and other financial products.
- Write down important information.
- Feel free to ask the interviewer for an explanation of any point that is not clear to you.
- Remember that calculators are not allowed – you may write out your calculations on paper during the interviews.
PRACTICE CASE QUESTIONS
What should the team investigate to determine whether the Diconsa network could and should be leveraged to provide a range of basic financial services to Mexico’s rural population?
- Take time to organize your thoughts before answering. This will help show your interviewer that you have a logical approach and can think in an organized way, regardless of the “accuracy” of the outcome.
- Develop an overall approach before diving into details.
A good answer might include the following:
What are the benefits that might come from providing financial services via the Diconsa network?
For the Mexican rural population
- How much time, effort, and expense would the benefit recipient save through the Diconsa network (for example, through shorter travel time)?
- Beyond what was stated in the summary, what would be the benefits to the rural population of access to a broader range of financial services? (for example, better security for their money)?
- Would there be benefits for the government in terms of increased compliance/collection of benefits (for example lower administration costs)?
- Would these financial services result in better financial management among the rural population (for example, more business for Diconsa stores)?
- Would this alternative model reduce pressure and increase efficiency for the bank branches that are currently distributing benefit payments?
What are the risks that could occur from the venture? Some examples follow:
- Lack of capacity or ability of the Diconsa network to deal with financial payments and products
- Lack of capacity of state bank to operate financial services across a much greater network of outlets
- Greater risk of fraud of theft due to less centralized control of benefit payments
A very good answer might articulate some less obvious benefits or risks to be investigated, such as the following example:
- The possible benefit of less cash being transported within the Diconsa network because stores are now receiving cash and paying some of that cash out again, so cash balances may be lower and less cash needs to be transported to and from the warehouses. This may result in a lower cost as well as lower security risk for the Diconsa network.
- Benefits for the Gates Foundation of potentially providing a model that may be replicable in other countries
- Benefits to the government in proving a model for distribution of a broader range of services (for example, telecommunications or healthcare).
The team has estimated that it currently costs a family 50 pesos per month in transportation and food to make the journey to collect their benefit payments. The team also estimates that if benefits were available for collection at local Diconsa stores, the cost would be reduced by 30 percent.
Twenty percent of Mexico’s population is rural, and of this number half currently receive state benefits.
If all families could receive state benefits at their local Diconsa stores, how much in total per year would be saved across all Mexican rural families receiving state benefits?
Your interviewer can provide you with the following information if requested:
You can assume that Mexico has a population of 100 million.
You can also assume that families in Mexico have four members, on average, and that this does not differ by region.
- Don’t feel rushed into performing calculations. Take your time.
- Talk your interviewer through your steps so that you can demonstrate an organized approach.
A good answer to this question would involve the following steps:
- There are 5 million families in rural Mexico (20% x 100m ÷ 4 per family).
- There are 2.5 million families receiving benefits (50% x 5 million families).
- Each family currently spends 600 pesos per year to receive their benefits (50 pesos per month x 12 months).
- In total 1.5 billion pesos per year is spent by families in receiving their benefits (600 pesos x 2.5 million families).
- 450 million pesos could be saved (30% x 1.5 billion pesos).
A very good response might note that these potential savings could be redirected to enhance the benefit system further, and that there may be other costs that could be saved also, such as the cost of lost working time in making the journey to collect benefits (that is, opportunity costs).
The team conducted a survey on a sample of the rural population in three different regions of Mexico. These populations were given a number of statements about the concept of collecting their benefits at the nearest Diconsa store and asked how much they agreed with each statement. The average response to some of the questions by region is shown below:
What are your observations about this information, and how would you explain these trends?
- Take some time to look at the information and note down any observations you have.
- Challenge yourself to identify trends that are not immediately obvious in the data.
A good answer might include the following:
- There are significant differences by region on how interested people are in collecting their benefits at their nearest Diconsa.
- All people have a security concern about collecting their benefits at a Diconsa, but this is particularly the case in Region B.
- People are not so concerned about whether they will receive their benefits, except in Region B.
- Not everyone is completely convinced that it will cost them less to collect benefits from their nearest Diconsa, despite the fact that they all agree it will save them time.
- Broadly speaking, security, trust and cost effectiveness all seem to influence whether someone is interested in collecting their benefits at a Diconsa. People’s perception of these seem to differ by region, with Region B being a particular issue.
A very good answer to this question might also suggest possible reasons for the observations above:
- One potential explanation for the results of Region B is that this region has significantly greater levels of crime and corruption, which means that people are less convinced that they will receive their benefits or that they can keep them secure once received.
- Security overall is the issue that is consistently lowest rated across the regions which may indicate that there is a relatively high degree of crime in all these areas.
- Even though everyone agrees that this idea would save them time, there is disagreement that it would save them money. This might indicate that certain stores are distrusted more than others. For example, store proprietors may not be happy to just dispense cash without the recipient making a purchase. This is supported by the fact that the responses on ‘trust’ and ‘cost’ are correlated. This might have implications for the compensation/incentive model of managers of the Diconsa.
In a meeting with representatives of the state bank, they express concern about how challenging it will be to offer basic financial products to the rural population.
One of the representatives mentions that these are regions where people are poorly educated and unfamiliar with banking products, and where there is a high degree of crime and fraud. He asks for the team’s thoughts about how the bank could sell these services effectively to this population given the challenges.
- Consider the issues raised in the question, and group your thoughts around them. This will ensure that you are giving the most relevant answers.
A good answer to this question might include:
If available, examples of how basic financial services have been successfully introduced into other poor populations, and how that learning could be leveraged in this case.
Suggestions for how to overcome the lack of education and familiarity with banking products, for example:
- Pilot some products in certain regions where the population might be more receptive, so that less receptive people can see that they are already being used by others in similar situations.
- Arrange in-store talks and demonstrations, focusing on educating people on what the products are and how they can be used, and dispelling common causes of distrust.
- Partner with brands or organizations that are already well known and trusted by the rural poor.
- Advertise using individuals who have benefited from similar products, for example, people who have made successful insurance claims, or who managed to save money for a specific need.
- Motivate Diconsa employees to encourage take-up of the products.
- Offer promotions to encourage initial take-up, for example, pay 50 pesos when the first savings deposit is made
Suggestions to overcome crime and fraud could include the following:
- Increase security in Diconsa stores.
- Impose daily or weekly limits on transactions.
- Introduce technology such as chip cards to reduce fraudulent activity and to discourage crime through less use of cash.
A very good answer may involve suggestions that can address all of the concerns together such as the following:
- Introduce compulsory secure chip cards for all benefit recipients to verify their identity when collecting benefits can help reduce fraud.
- These chip cards can be designed to handle financial-services transactions such as savings accounts or bill payment, and the fact that the population is already familiar with the technology can make them more open to the new services.