Sarka Svoboda from PIC Solutions provides some insights
Historically, companies in the mail order or home shopping industry were some of the first to ever offer consumer credit to customers. What is interesting is that despite being one of the most established credit granting industries in many market places, the home shopping industry is still growing at a rapid pace. Historically mail order marketing strategies have been directed at the mass market through the availability of credit purchases at low affordable instalments.
Reasons for growth in the established marketsThe reasons for the industry's continued growth in the established markets are multi-fold. The biggest influence on growth is that there has been a massive shift in what consumers value as important. Convenience and timesaving are now seen by consumers as valuable commodities when deciding where they will spend their money. Not so long ago, consumers enjoyed the daily and weekly exercise of 'doing the shopping.' However, in recent years, this exercise has lost its appeal for many, due to the ever-increasing demands of work on our lives and available free time.
Differences in emerging marketsThere is also significant growth in the home shopping industry in emerging markets; however the reasons for this growth are different. In emerging markets, the majority of the population are still predominantly rural based and often are without reliable means of transport. This has meant that many consumers are denied access to retail stores where they can purchase services and products. The issues of remoteness, poor transport and infrastructure have thus presented many opportunities to the mail order industry.
With the introduction of credit facilities to this predominantly rural and often lower income group of consumers the home shopping industry has made available to millions of people products that were previously unobtainable. Through credit facilities, shopping has now turned into an affordable experience and for many consumers this is the first form of credit that they establish.
As home shopping accounts have now become the most common form of 'entry-level' credit, many companies have lowered their application and credit bureau score cut-offs in order to maximise the acceptance rates of this target market. For these consumers, opening and utilising a mail order account responsibly, is a means to establishing a track record that will result in being accepted for other forms of credit facilities that were not possible in the past.
Challenges in emerging markets
Competition from retailersOne of the biggest challenges facing the home shopping industry is increased competition from established retail chains. Typically, these retail chains have large market shares and budgets and with their attractive window dressing and mid-month sales they are increasingly attractive to rural consumers. By far the biggest threat from the established retailers is the extension of credit to consumers who previously only qualified for credit from home shopping companies. By developing a greater understanding of this sub-population and their payment patterns, retailers are in a better position to extend credit and compete with the mail order firms.
Postal servicesOne of the biggest challenges for almost all home shopping companies operating in emerging markets is that of poor postal services. Obviously, slow or unreliable services can have a dramatic impact on the delivery of goods to customers, returns, payments, orders etc. The solutions vary from country to country, ranging from using private courier services, setting up industry pressure groups to lobbying the government to improve postal services, creating an internal delivery function within the company and finally, the use of pick-up points.
Third party payment pointsIn order to address some of the challenges of unreliable postal facilities, companies in many markets have implemented third party payment points. These make it possible for the consumer to make multiple-payments on different accounts, all at one payment point. If these payment points are easily accessible and are available countrywide it makes the payment experience convenient for the consumer and creates a constant cash flow for the mail order company. By promoting and advertising third party payment points home shopping companies can also encourage improved payment behaviour.
From the consumers' perspective, third party payment points not only offer convenience, but given the high incidence of fraud associated with poor postal services, printed receipts generated at the payment points are seen as a 'safer' option than sending payments through the post.
TechnologyAn example of technology successfully implemented in emerging markets is the use of Predictive Diallers. These have proven to be very effective and appropriate to this industry and environment. Typically dialler staff are used for both inbound and outbound campaigns and diallers are also utilised for both collections and marketing functions. Some of the challenges in emerging markets are varying levels of telecommunications infrastructure, the practice of families and neighbours sharing one telephone line, plus the continuing existence of multi-party telephone lines.
E-CommerceE-commerce has huge benefits for the home shopping industry and the impact on companies in the established markets has been marked. The impact of e-commerce on mail order in emerging markets is still limited, primarily due to the low penetration of home computers and Internet access in mass market populations. Most mail order companies in the emerging markets have set up websites and offer limited ordering functionality, but it is forecast that the vast majority of orders will continue to be placed through existing channels for the foreseeable future. It is not until Internet access becomes more affordable that e-commerce will have a significant impact on the industry in the emerging markets. Better Internet access will take place through a combination of free Internet Service Providers, free/cheaper local telephone calls and television web access, the latter eliminating the need to purchase a PC.
Diverse populationsA major difference between established and emerging markets tends to be diversity of populations. The established markets are primarily homogenous, whereas emerging markets tend to be more diverse, both ethnically, culturally and linguistically.
For example, in South Africa with 11 different official languages, catering for language diversity is a challenge and staffing complements and skill sets have to support this additional service. When the current language medium is a second language for the majority of the customer base, this in itself presents many problems such as misunderstandings, misconceptions and the inability of customers and staff to express themselves.
Studies of the target market also need to be undertaken to ascertain whether literacy is a given. In emerging markets it is dangerous to assume that customers have the same levels of literacy as that of customers in established markets. The challenge to companies is to educate their customer base in a professional and helpful manner through Customer Service Centres.
Granting credit in emerging marketsIn order to compete successfully with other industries, the implementation of policies, processes and risk evaluation of each customer is vital for home shopping companies. To address this challenge, the mail order companies have become sophisticated users of Credit Bureaux and credit scoring models. This is logical as the market that these companies are operating in tends to be high risk and so the risks of offering credit facilities to the mass market can be limited by using advanced risk management techniques and models. Companies that operate in lower risk markets or industries have less of a pressing need to implement and refine these tools.
CollectionsIn the mail order industry cash flow is essential. Accordingly, the collections function plays a major role within any mail order organisation and due to high volumes of high-risk delinquent accounts; the use of predictive diallers is common as predictive dialler technology allows for significant gains in productivity.
Specific challenges for collections operations in the emerging markets are numerous: contactability is a major problem in that it is very difficult to trace and ultimately contact debtors in predominantly rural areas. Lack of postal delivery to addresses, the use of central post office boxes as a contact address, and the lack of landline telephones all pose major obstacles. In addition, there is the issue of affordability as often in emerging markets there is no welfare net for customers who become ill or lose their jobs. Illness or unemployment here can have catastrophic consequences. Contrast this to unemployed customers in established markets who can still afford to make minimum payments because of unemployment insurance or welfare support.
EducationFor first time credit users, in the emerging market, the credit application process can be a daunting one. In most cases, the terms of the credit agreement may be too complex for the average customer, especially if the agreement is not written in their home language. It is often the case that the debtor does not understand their duties and responsibilities under the credit agreement and the implications of non-compliance. In emerging markets, credit education overheads are significantly higher than in the established markets where a basic understanding of credit is taken for granted. In addition, in emerging markets, great effort is taken to try and make the credit agreement as user-friendly as possible.
In both the established and emerging markets there has been a definite trend towards home shopping as consumers purchase increasing amounts of goods over the telephone, Internet or via fax and agents. This creates significant opportunities for companies but they first need to understand that this trend is driven by different dynamics in each of the marketplaces.
Technology such as the Internet, predictive diallers, and optical character recognition equipment provide opportunities to add value to the business bottom line. The challenge for each company is to re-think the operational infrastructure of their business so that it can best support consumer expectations.
Even though the home shopping industry has been established for over a hundred years, it has proved to be dynamic, continually adjusting to the numerous challenges over the years. In particular, home shopping organisations whether they are located in the established or the emerging markets tend to be at the forefront of the application of risk management analytical models and technology. This is in large part due to the fact that they operate in a higher-risk environment that leaves little margin for errors in judgement.
© Banker Middle East 2006
