Competing to Serve the Poor
The 2010 microfinance crisis in India was a wake-up call to impact investors, elevating concerns about safeguarding the interests of poor customers. The community debated a number of policy measures—from price ceilings to limitations on product innovation—that were all meant to prevent another crisis.
Strangely missing from the discussion, however, was the crucial role of competition. Centuries of economic development have shown that in robust competitive markets customers have the best chance of accessing affordable goods and services that reliably meet their needs. Vigorous competition reliably drives down prices while increasing quality and spurring innovation. Policymakers and advocates wishing to safeguard the interests of the poor should encourage fierce and open competition as it not only drives prices down, but also increases access and enhances both quality and accountability. Below are two examples of how competition has positively influenced two industries serving the poor.
Reducing Prices and Increasing Access in Mobile
Consider the example of mobile phones. Mobile phones enable a variety of previously unavailable services for the poor—allowing farmers to track when water deliveries will arrive at their village and business owners to quickly pay suppliers. But whereas in Mexico, a local phone call costs roughly 33 cents a minute, in Ghana it costs about five cents. Why this disparity?
Competition is a big part of the explanation. In Mexico, the mobile phone market is a monopoly. Telcel, owned by Carlos Slim, controls 70% of the industry, keeping prices artificially high and precluding many of the nation's poor from using these services. A 2012 OECD report, encouraging Mexico to reform policies to foster competition, estimates that the Slim monopoly costs the Mexican economy near $25 billion per year, roughly 2% of GDP. In a country where more than half of the population lives below the poverty line, the lack of competitive policy does no favors for the disadvantaged.
Contrast that to Ghana, where there are less than 10,000 kilometers of paved roadway but nearly ten times more mobile phones (21.166 million) than landlines (284,700). In a country with a population of over 24 million, these numbers suggest there are either a number of Ghanaian babies with cell phones, or more likely, some adults carrying more than one because the cost is so low. This is the result of a series of policy measures enabling fierce competition between more than a half-dozen competing companies—including MTN, Tigo, Kasapa, Vodaphone, Zain, and Glo. Intense pressure to offer the best deal makes SIM cards available for purchase on the street and a new no-frills cell phone cost as low as U.S. $18.
Enhancing Quality and Accountability in Microfinance
In microfinance, just like in the case of mobile, competitive pressures (rather than government fiat) have reliably delivered the lowest prices for poor customers.
Compare, for example, the experience of Bolivia and Peru with Colombia and Chile. In the former, policymakers actively encouraged competition in microfinance, driving microfinance institutions to improve their efficiency—and pass the savings on to customers. In Colombia and Chile, by contrast, anti-competitive regulations such as price caps and subsidy have thwarted the growth of the market and resulted in limited price reductions for the consumer.
This effect was underlined by a recent study of over 1,300 microfinance institutions, that shows that interest rates in countries with robust competition are substantially lower than interest rates in countries with more limited competition—often by as much as eight percentage points.
Competitive markets also tend to make companies more accountable for the quality of products and services they deliver. In Bolivia and Peru, as elsewhere, microfinance customers who are not satisfied with the services one bank or microfinance institution offers can simply turn to another provider. Companies are thus incented to offer higher quality and more diverse products tailored to the needs of specific segments.
The takeaway here is straightforward: Any policymaker serving the poor should consider competitive policy foremost in her arsenal of tools. Time and again we have seen how competition, rather than price caps or government fiat, reduces prices while improving quality, innovation and accountability.
Competition is not a panacea, and obviously policies need to be tailored to meet the needs of specific market segments and demographic groups. Appropriate regulation that ensures transparency and consumer protection is critical. But enabling competitive markets to flourish may be one of the quickest and most scalable ways to ensure the needs of these poor customers are met responsibly.
Thanks to Rosita Najmi for helpful insights and discussions on this post.
This article originally appeared as part of Harvard Business Review's online series, Scaling Social Impact. With sponsorship from Omidyar Network and in partnership with The Bridgespan Group, the series explores how entrepreneurs and more-established organizations are using market forces to create social good.