and mobile banking. This increase in the supply of financial services has coincided with a rapid expansion of household debt to GDP from 8.7 percent in 2000 to 14.3 percent in 2011, with a recent study estimating debt service at 35 percent of household income (Lopez-Bolaños, 2012). Among the components of household debt, consumer debt has been a key driver of this increase, rising from 7.7 percent in 1994 as a share of banking sector debt to 23 percent in 2011.<sup>6</sup> Consumer credit in 2011 represented 40 percent of all bank earnings in interest, commissions and annual fees. Much of this growth in consumer credit comes from bringing low-income individuals that relied on informal sources into the formal financial system for the first time. These individuals tend to have lower levels of education and may thus be worse equipped when deciding among financial products (Lusardi and Mitchell, 2011). According to the 2008 Mexican Income and Expenditure Survey (ENIGH), 42 percent of households making a credit card payment had a head of household with less than high school education and one in six had only primary education or less (Bruhn, Ibarra and McKenzie, 2013). The irregular (and sometimes unpredictable) income flows of many low-income individuals suggest that more flexible credit and savings products will be more suitable than others with stiff penalties for missed or partial installment payments or high minimum balance fees. In addition, financial products offered to low-income households tend to be relatively more expensive because they entail either smaller loan amounts (or higher risk) or smaller savings balances that are more expensive to administer.<sup>7</sup> For all these reasons, this study focuses on consumer credit and savings products targeted to low-income households.

Savings and credit products in Mexico are offered by a range of financial institutions including the new players that have a particular focus on low and middle-income Mexicans. These include banks established by large retail chains, such as Banco Walmart, Banco Azteca (part of the Elektra Group, affiliated with the Elektra retail chain), Banco Coppel and Banco Ahorro Famsa, as well as credit providers that have recently obtained banking licenses, such as Banco Compartamos. Besides these banks, the commercial banking sector also includes “traditional” banks such as HSBC, Banorte, Bancomer and Banamex.

Sociedades Cooperativas de Ahorro y Préstamo (SCAPs, more commonly known as Cajas de Ahorro) are non-profit, cooperative-based institutions and offer both credit and savings services. Sociedades Financieras Populares (SOFIPOS) also offer both credit and savings products, typically serving low-income consumer segments, but unlike Cajas de Ahorro they are not considered non-profit

> 6 According to a series of focus groups we conducted at the time of the study, low–income households mainly use credit to either finance an emergency or a durable asset.

> 7 In the credit card market, Scholnik, Massoud and Saunders (2013) find evidence that poorer consumers are more likely to incur unnecessary late fees and overlimit fees even when funds in their deposit accounts were available. In Mexico, using CONDUSEF’s online calculator we find a total annual cost for a 12 month loan of 100,000 Pesos  ranges from 19.3 percent and 154.4 percent; while  total annual cost for a  percent for a 12 month loan of 10,000 Pesos ranges from 22.6% to 190.1%. Source: <u>http://e-portalif.condusef.gob.mx/condusef_personalnomina/captura.php, accessed on October, 16, 2013.</u>

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