State Bank of Chile (Banco Estado): Guaranteeing access to banking services at a minimal cost
A profitable bank that aspires to serve every citizen with competitive prices through a smart operation
Public owned State Bank of Chile has the mission to assure access to banking services to all the Chilean population and to do that minimizing costs. State owned banks have a very bad track record of not being sustainable throughout the world due to mainly two things: a poor operational model (not aligned to its mission) or an irresponsible business model that is impossible to execute. Nevertheless the State Bank of Chile has been able to escape this trap, its effectiveness relies mainly in i) setting an operational goal in its mission and ii) aligning effectively the operational model to the business proposition.
Business model
As a state owned bank the value proposition of this institution is to offer financial services to every citizen in Chile. In terms of product and service offering the mission requires competitive interest rates, a wide range of transactional and lending products, and a focus on people not served by private institutions (e.g. rural inhabitants or low income citizens among others).
An interesting example of the value proposition is the ID bank account, an account available to any citizen who wants to get one and that has as its number the national identification number (or passport number) of that citizen. This account is almost commission free with few exceptions for specific services linked to the account. The only requisite is to have a valid national ID and be older than 12 for women and 14 for men (therefore the time to open the account is trivial).
Loans are also more accessible and have low interest rates. Nevertheless risk management is not something to flex around, products are designed to reflect risk properly and executives are well equipped to make responsible decisions.
How is this sustainable?
Operational model
Offering accessible products requires two things. An extensive network to reach every corner of the country and a lean operation to minimize cost to assure a sustainable business. This is a very complicated task but it is the center of every decision in the company. An interesting example of this is the choice to migrate to open source systems (e.g. Linux based) to minimize costs.
Reaching customer is the furthest places of the southern nation is tricky and it is done both through traditional branches and the internet but also through innovative alliances with small groceries stores throughout the country.
Models alignment and performance
As explained in the previous paragraphs the bank mission statement has linked together the business model and the operational model. But of course this is easier said than done.
One of the best examples of how this two models match is the ‘Caja Vecina’ network. ‘Caja Vecina’ stands for ‘Neighbor teller’ in Spanish and it is a very smart solution to create more touchpoints with customers and give them a chance to access banking services (especially in remote or low income areas). ‘Caja Vecina’ is a network of partnerships between the bank and small grocery shops (even kiosks) that through POS (point of sales machines) allow the small business to operate like small branches (e.g. pay bills or loans, withdraw small amounts, etc.)
Beyond the network there are other relevant efforts to fulfill the bank’s mission. For me the most relevant competitive advantage is the processes in place that require each new project or decision to refer back to the mission statement. Even though this can complicate the time to market it assures in the long term the sustainability of a business model that is fragile given its aspirations.
‘Banco Estado’ is definitely a story of effective alignment of Business and Operational models. The bank holds the 1st place in market share of accounts, savings, mortgages and micro lending, it is also among the top 3 banks in terms of assets under management and is the highest rated bank in Latin America. Despite the challenges the bank has also recorded significant profits in the past three years, above 15% ROE, and thanks to its effectiveness Chile has the lowest unbanked population of the region.
Sources:
- Personal experience as consultant to the bank
- www.bancoestado.cl
- Investor Relations presentation – Nov 2015: http://www.corporativo.bancoestado.cl/docs/default-source/documentos/corporate_presentation-nov2015.pdf?sfvrsn=2
Rene,
Great post!! It’s great to see that the State Bank of Chile has done such an effective job of providing access to banking for the citizens of its country. I’m curious to know more about what sort of model they use to assess the risk profile of low income customers when determining what interest rate to charge them for a loan. There is definitely a tradeoff between making loans accessible and making loans profitable/sustainable for the bank. Additionally, I’d love to know if the banks of other countries in the region are doing anything in response to the success story of the bank of Chile – is anyone else trying to replicate the operating or business model?
Great post Rene! Very interesting business model. It would be very interesting to see the impact of such a model on the private banking system in Chile. I would imagine that one benefit of a strong public owned bank is to put pressure on the private banks to differentiate through superior customer experience and innovative product offering. Not sure how successful the private banks have been, and if on the contrary they are not able to compete.