Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
QC – Mexico
Prepared by George Foster
QC is a non-bank financial institution providing loans to micro and small businesses in low-income urban communities in northern and central Mexico. QC started operations in 2005 in Monterrey, Mexico, a market that had been overlooked by the financial industry and was served mainly by informal money lenders who charged extremely high interest rates. Since its origins, QC has pursued a unique branchless distribution strategy supported by a network of independent women representatives, which has allowed it to achieve a widespread presence in the markets it serves.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable growing company? How did it change over time?
Robles: “Two events led to the start of QC. Back in 2003, CEMEX retained my consulting firm to help them develop a strategy to finance cement through their distribution network in Mexico. Our recommendation to CEMEX was to develop their own financing arm to serve the end consumer by itself, but its decision was to partner with GE (later shut down due to bad implementation). Later, in 2004 Home Depot Mexico hired our company to look for acquisition candidates to accelerate their growth in household appliances, which led us to analyse several retailers that based their business on consumer credit. We concluded there was room for financing home improvement projects for low-income people and therefore decided to test the market in 2005. While our initial assumptions about the home improvement market proved to be correct, many of our customers continued to ask for financing for other needs, including short-term funding for their home-based businesses, once they paid back their original loans. The decision to broaden our original product offering brought significant growth to QC.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Robles: “I believe that we were open to listen to a customer whose needs had been historically overlooked. During our first years, I spent most of my time in the field understanding the market. We developed our product offering by adapting some financial structures which I had used for structuring venture capital transactions. We also made the decision not to invest in branches in order to cut costs; therefore we started developing a network of independent women representatives (promoters) in poor neighbourhoods who would help screen customers based on their reputation in the community.
“Instead of paying rental fees, our representatives’ homes became our offices. This saved costs and our promoters loved it, since they could work from home and take care of their family. This also forced our employees to be in the field rather staying in their offices. When the network started to take off, the customer base grew fast and the implementation of a proprietary IT system and contact centre allowed us to capitalize the opportunity without opening branches. At some point we decided to furnish each of our representatives with a computer so they could log into our system to process applications and look at their collection reports. Also, I believe that as important as the market opportunity, the support of our investors was a key factor for our success. We have a very active board that has guided our growth and has helped set the vision of QC. All of our board members are experienced business people and are investors in the company; therefore they are fully committed to the success of the company.”
Melendez: “QC’s Board is formed by investors who have a wide range of practical experience in sales, financial analysis, human resources and project management. Members thus not only have their money invested but brought their experience and guidance to help Oscar and his team focus on the key tasks. When a company experiences explosive growth, it is easy to get side tracked to issues that are not pivotal. One of the key decisions we had to face initially was to strike a balance between growing through new customers vs growing through increasing the average loan to current customers. Getting new customers is difficult, since QC’s lending model is ‘solidarity loans’, where a group of 4-5 customers (usually women) are the subjects of the loan. We did a lot of A/B testing to understand the risks and benefits associated with increasing the loan amount to established groups that have been customers for several cycles (a cycle is a 16-week period).”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Robles: “Access to talent: Our community is well known for the availability of qualified human capital. We have been very lucky to attract very creative people who have helped define and implement an innovative business model. Over the last eight years, we have seen that most of the initiatives of major banks to enter the market fail because they tried to adopt traditional banking models to a market that requires intensive service delivered at a very low cost.
Availability of financing: Our industry is capital intensive and since we are not a bank we are not allowed to get deposits from our customers. Therefore access to funding through private investors who were willing to endorse QC has been crucial for our growth.
Changes in legislation: When we started testing the market, one of our major concerns was how to incorporate QC. Prior to 2006 we were limited as the minimum capital requirements for the existing legal alternatives were far beyond our possibilities. In 2006, new legislation, which allowed non-bank institutions with lower capital requirements to be formed, was enacted. This opened up the possibility for QC to expand.
Technology: Our business model is technology intensive. We take advantage of every piece of new technology to reduce our costs and improve our services. For instance, we were among the first in the industry to use mobile technology to report collections in real time. Every time we renew a loan, our credit officers request each of our customers to fill up a service survey on a tablet and the results are sent to our officers so they can contact the customer to resolve any problems. We know the exact location of each of our customers by using GPS tracking data, etc. All of this is possible because we are headquartered in Monterrey where it is easy to find reliable technology partners.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Robles: “One of the obstacles we faced in the beginning was a lack of access to capital. Despite the fact that microfinance can have a tremendous impact to alleviate poverty, sources for funding were limited. We looked at development banks in Mexico and their funds were scarce or non-existent back in 2005. In the international markets, Mexico was not on the priority list for many microfinance funds as they were focusing on projects in other parts of the world. The situation changed in 2008 as the potential of the Mexican market became known when Compartamos, a large Mexican competitor, decided to pursue one of the world’s first IPOs in the microfinance sector, and capital became available.”
Melendez: “Finding good promoters has always been a key challenge that QC has had to face. The promoter is the sales agent, but also the collection agent. Any company that is in the business of lending money knows that “uncollectible” loans are the main devil to avoid. A good promoter gets good customers, keeps the company in good financial health. We’ve had to experiment with many ways to recruit promoters, with mass media and more personalized approaches. We have found that old fashioned flyer distribution in public markets and similar popular venues works best.”
Q5: Describe the key areas where interaction with larger companies helped promote your growth path.
Robles: “Since we deliver financial services without relying on our own branches, we have established alliances with large chains of convenience stores with regional or countrywide presence, including Seven-Eleven and Oxxo, both of which are headquartered in Monterrey. The support of these larger companies has been crucial for our expansion plans. Also, AT&T has become an important partner for our communications needs. They were very interested in QC since the beginning and have been very flexible to support our infrastructure and provide some value added services.”
Q6: Describe the challenges and potential problems that larger companies may have played in limiting the growth path of your company.
Robles: “Prior to the establishment of partnerships with convenience stores, we tried to establish relationships with traditional banks. With the exception of two of them, the rest of the bank system would not allow us to open accounts with them, the main rationale being that they looked at us as potential competitors.”
Q7: What were the biggest challenges in building growth internationally? How did you meet or adapt to those challenges?
Robles: “I believe there are still significant opportunities in the domestic market that need to be analysed before we decide to enter new markets. Being a Mexican company, the US does not seem to offer a market potential for our products. One possibility is Central and South America; however we still need to establish our presence in central Mexico before thinking of an international expansion.”
Melendez: “I agree with Oscar completely. The Monterrey market is not as great as it used to be, with more competitors, the effect of the organized crime violence, and in general due to the adverse effects of the recent economic crises. We are now trying to explore different types of loans, like lending to small and medium-sized companies overlooked by the traditional financial system. We still need to understand better how we can successfully replicate our Monterrey model in other markets. Our Puebla and Estado de Mexico expansions have shown good results, but are still in very early stages. Our competitive advantage is still in Mexico. Once we have other segments and more cities, we can think about international.”
Q8: What major role, if any, did key aspects of the ecosystem in the country(countries) you first sought international growth either promote or impede your ability to grow in those international markets?
Robles: “Our business model is catered to the urban market. It would be very difficult for us to expand in smaller countries where microfinance is mainly a rural business. In order to operate successfully, we rely a lot on information systems and this seems to be an obstacle even in smaller towns in Mexico where communications infrastructure is not readily available and people with technical skills are scarce.”
Q9: Seeking international growth often has both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in seeking international growth.
Robles: “I believe the high moment was from 2008 to 2010. Our customer base kept growing and delinquency rates were low, therefore profitability was very attractive. However, in 2007 Compartamos, our largest competitor, decided to pursue one of the world’s first IPOs in the microfinance sector. Since then, commercialization and the expansion of new competitors began, as new activity was sufficiently attractive for new players to come in and compete. Starting in 2011 we saw many clients borrowing simultaneously from multiple sources. This has translated into higher delinquency rates and lower profitability. We believe that Mexico may be at the tipping point where a crisis can develop. Over-indebtedness has forced us to be more cautious and reduce our growth. At this point in time, we are exploiting big data to reduce our exposure and come out stronger of a credit bubble.”
Melendez: “In general, QC went from one loan to 10,000 clients in the span of a few years. This is impressive. We are a major presence in Monterrey, but we face some challenges in this market and still need to crack other markets. We need to find a way to continue growing to reach a scale where we can have exit strategies that are attractive to the founder and the investors.”