The History of Credit

How has Crédito Real evolved since it was established 20 years ago?

It all started as an idea to establish a consumer finance company to facilitate the sale of MABE household products to consumers. When we considered the mechanics involved, we decided it would be best to establish a company separate from MABE and finance both the products of MABE and its competitors. We knew that the market was greatly undersupplied, which meant there was a considerable growth opportunity. Some 20 years later, and the market remains underserviced. The business climate has changed notably, however. When we started out in the finance business only 15% of people had a credit history, whereas today the number is closer to 60%. Most of our market’s relationship with the banking system is limited to payroll via debit card. This involves a social group that does not earn enough to be able to save; they withdraw 100% of their wages.

What makes your company a leader in this sector?

We have always had competitors, but our direct competitors are not commercial banks, but traditional entities. Our key difference is that we’ve been able to fund ourselves, both in the national and international markets. With this funding we’ve been able to outgrow the competition, and are able to offer a bigger and better range of products to our customers at their best convenience.

What was the significance of listing on the Mexico Stock Exchange in 2012?

It was a major accomplishment after 20 years in the market to be able to take the company public, as there are few such companies in Mexico. The sector in which we have long worked is just starting to develop. Our company is really not known by end consumers, even though it’s a very large company when you see the numbers.

How has your product portfolio evolved over the past three years, and what will your growth strategy focus on going forward?

We started our business with durable goods loans, leveraging our synergy with MABE. From there we moved into the payroll loans business in 2004. Then, in 2007, we started providing group loans. From then on our portfolio has been evolving more toward payroll loans because of their maturity. Group loans have a very short maturity of about three months. In contrast, the maturity of durable goods loans is about a year and of payroll loans over three years. Around 57% of our loans are payroll loans and 43% are from the other business lines. Today we are the leaders in the public sector payroll loans business. We want to remain at that level, and I forecast growth of between 15% and 20% per annum. Two years ago we undertook an analysis of used car financing. We focus on the base of the pyramid and look at products that traditional banks have, but that are not doing hugely well at the base. At Crédito Real, we’ve built expertise in analyzing people and making fast credit decisions at the very low end of the pyramid where people don’t have a credit history. We look at traditional products, such as auto financing, but we look at how we can do it differently to access low-income people. We discovered that the competition was not coming from traditional banks, but entities similar to ourselves. The largest contributor to growth over the coming years will definitely come from used car sales and SME loans. These are virgin markets with huge growth potential, and also because of the significant government support programs that will be made available.

What is Crédito Real’s role in supporting SMEs, and how important are they in terms of national growth?

Two years ago we also started financing SMEs, especially the smaller ones. They are established businesses that lack traditional finance. They exist between the informal and formal economies, and as such offer real opportunities. A year ago, when President Peña Nieto took office, he announced many programs to support companies willing to lend money to this sector of the economy. That’s when we really concentrated on it. We already work with Nafinsa, and have enjoyed a great relationship for around 15 years. Today, it is seeking to lend more to SMEs in the same way as Bancomext. Everybody targeting the SME sector is looking for intermediaries that know how to lend to this sector, such as ourselves. There are many players already in the market. Banks have had SME-oriented products for many years, and yet there are many niches within SMEs that need to be addressed. We are focusing on the smaller of those that generate revenue of between Ps5 million and Ps50 million a year. You cannot really base a credit assessment on their own financials, which is why we focus on analyzing the owner of the company. If, for example, we are to lend money to a beauty salon, much of its income is in cash, so the only way to know its true financial capacity is to familiarize yourself with the business. We send people to observe the business, whereupon we can better assess what kind of loan we can provide. This is something the banks don’t do today. We never wait for people to come to us; we approach customers on the street and directly at their businesses.

How do your latest acquisitions fit into your strategy?

We’ve learned with the microcredit business that we’re not operators, but are very good at finding them. For example, now that we’re going into the SME business we have started conducting a nationwide analysis. We found two or three interesting companies and purchased one last year. This company has existed for more than a decade, but failed to grow because it lacked the financing, only growing its portfolio to Ps600 million. It had the potential to grow to perhaps Ps2 billion. Now we work with that company as a partner, and they continue operating it themselves. What we buy is an exclusivity agreement. Traditional banks were approaching payroll lenders, so the way to retain them was to purchase a stake in their company. We are doing the same with car financing, having just signed an agreement for a used car business in Mexico that has also been in operation for a couple of years. We have been good at identifying people with innovative business models. Our strategy for the future will be the same, namely to look for financing opportunities through people that are interested in non-traditional activities and that are profitable but unable to grow.

How do you view the development of the financial sector in the country?

We are behind most Latin American countries not only in market participation, but also in technology, scope, and product range, and urgently need to catch up. If financial reform guarantees that collections are made easier, then more institutions would be willing to lend money, thereby growing the sector. We need to see how the reforms materialize. I approve of the proposed reform in general because it appears to be pro-business. Time will reveal its effectiveness, however.

How do you think the reform process will impact your operations?

We’ve gone over the whole reform program, and our operations will remain the same. We are in the process of applying to the authorities for a banking license, but we don’t want to be a traditional bank. There are a few things in the reform and in the laws that make it easier to operate as a bank in the future. The application process will take between 18 and 24 months. We have sufficient capital to become a bank, but getting a banking license doesn’t mean that you need to operate as one. It’s useful simply to have the option at some stage to do so.

How will government support influence your business?

There have always been support programs, but today they are expanding in scope. That’s good for us too, since we are not pursuing the same pool of customers as the traditional banks. There’s space for everybody. Yet, as the country develops financially, companies like ours will inevitably merge with the banks to benefit from being able to offer the full range of services from high-tier business to the lower end all under one roof. However, I think we are still some years away from that scenario.

© The Business Year – February 2014