Wal-Mart Embraces Mexican Microlending

Readers may remember when Wal-Mart took its marbles away from the ILC-acquisition game, told the FDIC “thanks” for doing its job of acting promptly on applications so well, and went home to implement Plan B in its quest to dominate the field of selling retail financial services to the average American Jack and Jill. Readers might also remember how clumsily Wal-Mart played the PR card during the ILC- application process by opening up a retail banking business in Mexico while at the same time denying that it had any intention to enter the same line of business in the U.S.

A recent article in BusinessWeek gives critics and neutral observers a taste of what life under Wal-Mart Bank might eventually be like. South of the border, Wal-Mart and its “micro lending” competitors are making payday lenders and pawn shop managers look like a convent of Carmelite nuns.

For three decades, micro-lending was seen as a tool of nonprofit economic development. Now poor people are turning into one of the world's least likely sources of untapped profit, primarily because they will pay interest rates most Americans would consider outrageous, if not usurious.

With no legal limits on interest levels and little government oversight, for-profit banks in Mexico impose annual interest rates on poor borrowers that typically range from 50% to 120%. That compares with a worldwide average of 31% among nonprofit micro-lending institutions, and the 22% to 29% that Americans with bad credit histories incur on credit-card debt. [Mexican bank Banco] Azteca's business model succeeds not only because it can charge credit-starved clients almost whatever it wants. Equally important is that low-income Mexicans anxious about maintaining their reputation tend to pay back what they owe, regardless of the hardship. Those who slip behind receive frequent visits from motorcycle-riding collection agents. Default rates are infinitesimal. "We lend to them as much as they can borrow," says Azteca Vice-Chairman Luis Niño de Rivera, "and they can borrow as much as they can pay."

[…] Much larger companies based in the U.S.and Europe have also have picked up the whiff of profits. Wal-Mart Stores, which obtained a Mexican banking license a year ago, began offering loans for purchases at 16 of its 997 Mexican outlets in November. In the U.S., the retailer markets itself as a friend to the budget-conscious. In Mexico, it charges interest rates that might set off popular and political revolts back home, although Wal-Mart describes its terms as appropriate to the Mexican market. At one store west of Mexico City, a 32-inch LG plasma TV with a price tag of $957 can ultimately cost as much as $1,474, thanks to a 52-week payment plan that carries an annual percentage rate (APR) of 86%.

I assume that when the Beasts of Bentonville whined to their mother when they were little that “Everybody is doing it!”, she didn’t correct them by observing that “No, not everybody: you’re not doing it.” If the local banks are screwing the peasants, then Wal-Mart jumps on board without blinking an eye.

Then again, in this respect, Wal-Mart’s is merely acting like any other U.S. bank.

Banamex Mexico's second-largest bank and a wholly owned unit of Citigroup, is stepping up its pitches of personal loans to the working poor in 127 cities where it operates shops called Crédito Familiar, or Family Credit. HSBC Holdings last year bought a 20% stake in Financiera Independencia, a high-interest consumer lender that went public on Nov. 1. The Swiss insurer Zurich Financial Services is underwriting term life insurance policies that are sold along with small loans in Mexico. And homegrown nonprofit Compartamos morphed into a full-fledged commercial bank last year; it went public in April, reaping hundreds of millions of dollars for investors. All are examples of how financial players worldwide are pursuing profits by putting loans within reach of deprived borrowers.

The article correctly presents the argument that payday lenders and other bottom feeders lenders to subprime borrowers  in the U.S.have used to justify their stratospheric interest rates and fees. The high fees and rates are required to justify the risk involved, and that without such high rates and fees no credit would be available to the poor. Thus, subprime lenders, like Wal-Mart, give the poor opportunities to acquire products they would never be able to acquire without such expensive credit, such as an always-essential flat-screen giant television and a cappuccino maker for their little dog Pepe. On the other hand, BusinessWeek also points out the flip side of those benefits. 

But it creates tempting hazards as well, which in Mexico are drawing many unsophisticated families into a maze of debts. Pawnshops and loan sharks, whose interest rates of up to 300% have plagued generations of Mexicans, now face rivals offering terms that are less harsh. But along the road to previously unavailable financing, some Mexicans are stumbling badly.

Adding to the chances of being tempted into a maze, according to BusinessWeek, is the fact that in Mexico, unlike in the U.S., the annual percentage rate does not have to be disclosed when a Wal-Mart finances the purchase of consumer goods. Based upon recent experiences in U.S. subprime lending, and my personal experience in representing publicly-traded pawn shop companies, rent-to-own companies, and similar lenders on the margins of mainstream financial services, it’s highly doubtful that any borrower reads an APR disclosure, understands it if he or she reads it, or would let deter them in any event from buying the essential luxury goods that they just have to have.

You’d think that such a lending philosophy would add up to a heap of bad debt the size of Mt. Everest, but that’s not the case. Mexican banks benefit from some interesting accounting rules, a lack of personal bankruptcy protection (no Mexican equivalent of Dick Durbin in Mexico), and from a culture that frowns upon not paying your debt (no Mexican Sheila Bairs calling for borrower bailouts, either). 

Azteca deducts the depreciated value of seized goods from outstanding loan balances, so if someone who doesn't pay has enough possessions to cover the debt, the bank considers it paid. Azteca bars such customers from borrowing again but doesn't count them as having defaulted, which helps explain its stated loan failure rate of just 1%. Banks serving more prosperous clients average a 5.3% default rate on consumer loans.

Mexican lenders benefit from attitudes cultivated in a society lacking a welfare safety net, personal bankruptcy system, or meaningful consumer protection laws. Credit bureaus have recently sprung up in Mexico, including one that Elektra helped start in 2005, and many among the working poor worry about sullying their new credit ratings. They assume that, one way or the other, they or their relatives will just have to pay back whatever they borrow, says Gustavo A. Del Angel, an economic historian who studies micro-finance at the Center of Research & Economic Teaching in Mexico City.

Borrowers who fall behind realistically fear public embarrassment. Photocopies of debtors' national identification cards sometimes turn up on telephone poles and at central marketplaces with warnings that say "DON'T LEND TO THIS PERSON!" Six months ago, an Azteca agent in San Martín Texmelucan posted such flyers. The company fired him. "Our system is not intended to be publicly shaming," says Niño de Rivera, Azteca's vice-chairman, but he acknowledges it "is intended to exercise peer pressure."

The banking regulators in Mexico don’t seem to be exercising a firm hand in controlling abuses. Actually, they seem like they use more a “limp-wristed” approach to bank regulation. 

Even as Mexico's economy modernizes, companies operate with minimal oversight from government. Luis Pazos, head of Condusef, Mexico's regulator of consumer financial transactions, says his agency logs complaints about Azteca's collection methods and the adequacy of its disclosure of credit terms. "We've talked with that bank about the bad manners they've had," he says. But Condusef hasn't taken any substantial action against Azteca, which says it scrupulously polices the behavior of its employees.

Can’t you see an American payday lender being shamed into changing his evil ways because some regulator chided him for “bad manners”? Excuse me, I have to mop up the coffee I just spewed all over my monitor.

When all else fails, the banks turn to the lawyers. Now, that’s a direct parallel to the way things work in El Norte. 

Last year, in a brash move characteristic of Grupo Salinas, lawyers for Azteca went to court rather than comply with a new law requiring banks to inform clients of the total financing costs they are charged. Azteca sought a type of protective order with which individuals or companies can shield themselves from application of a particular law or other government action. A federal judge granted the exception.

Wal-Mart’s "When in Rome" attitude about doing banking business in Mexico lends credence to those of its critics who warned during the ILC debate that opening the door even a crack to Wal-Mart would have been a big mistake. Self-restraint doesn’t seem to be a primary character trait of Wal-Mart.

Comments

[Arturo]

It is not surprising that Obama was able to smear Clinton in last night's debate with the charge (quite true) that she once sat on the Board of Directors of Wal-Mart. Mere association with the company is enough, in some quarters, to taint a person's character.