Credit for Sales.

With loans still not flowing in Mexico, retailers, manufacturers and service providers are bringing in business by offering their own financing.

DANIEL CAYON, WHO OWNS A DOG-TRAINING-AND-CARE institute in Mexico City, is looking to update the computer he uses for his business and his personal affairs, but he doesn't have the money to pay for it all at once. He's thought about charging it on his credit card, but he's afraid of the finance charges for which he'll be nicked if interest rates shoot up. So he's now considering a deal through telephone giant Telefonos de Mexico (Telmex) and online service Prodigy in which he could get Internet service as well as a new Acer computer for 998 pesos down (about US$100.00) and a fixed 449 pesos a month for two years. "I couldn't buy a new computer without financing," he says.

Cayon is not alone. Since the infamous peso devaluation of 1994, which led to soaring interest rates, high inflation and a banking system burdened with $65 billion worth of bad debt, many Mexicans still find it difficult to obtain the financing they need to buy computers, refrigerators, electronics and other high-ticket items. So they're turning to companies like Telmex to help finance their purchases.

Welcome to the world of non-bank banking, which is turning the traditional banking industry in Mexico on its head. Today, all kinds of businesses are performing banking functions as they lend money to customers to help them buy their products--a practice more formally known as retail finance.

Computer maker Hewlett-Packard (HP) has been particularly aggressive in Mexico and throughout Latin America. HP provides financing for 24 to 40 months on the purchase or rental of equipment with no down payment, no fees to open an account and no commissions or insurance payments. The financing is in dollars, and customers can pay off their loans in local currency. "We have the most aggressive financial offer in the technology market," insists Lorena Mondragon, HP'S director of technology finance for Mexico and sales manager for Latin America.

Because of uncertainty about the exchange rate in Brazil and presidential elections next year in Mexico, this year HP introduced more flexible terms in both countries to allow customers to obtain financing in local currency, according to Mondragon. The average interest rate on HP financing in Latin American countries as a whole is 11% to 13% annualized in dollars. Financing is available through HP offices in larger Latin American countries and through HP distributors in smaller countries.

Since its launch in 1994, HP'S program has grown to the point that the company finances 85% of its sales of medical equipment and 30% of its sales of computers in Latin America. "The final objective is for each HP product to be offered with a monthly payment:," Mondragon says.

No charity here. Telmex has also jumped in, launching the "Prodigy Internet Plus" program last June (Prodigy is also controlled by Telmex Chairman Carlos Slim Helu). The reason for the program is obvious: The financing helps get more Mexicans wired to the Internet and increases the use of Telmex's phone lines. All payments are charged directly to the customer's phone bill. "Prodigy Internet Plus is the most economical and convenient way to obtain Internet service and a personal computer," Telmex boasts in a faxed response to questions posed by LATIN TRADE.

Don't think of these programs as charity. While the companies that offer retail financing are taking the risk of offering credit to those who can't get it elsewhere, they're also getting back two things in return: interest rate charges so high they make banks green with envy and a steady stream of customers.

At the height-or depth-of the Mexican economic crisis, DirecTV started offering retail financing four years ago to bring in customers. The satellite TV service finances the use of its descrambler "in a type of rent:," says Rodolfo Torres, the company's chief of systems. Over three years, the client pays the equivalent of $9 per month for the descrambler. "There is no interest and we get no profit [from the financing]:," he says. "What we want is for the client to pay for the use of the signal every month." The basic package of DirecTV, offering 134 channels, costs the equivalent of $24.90 per month.

For Elektra, which sells home appliances, furniture and electronics, retail finance offers several payoffs. Since 1981, the company has offered financing to low-income clients, weathering three major devaluations and economic slumps with no damage to its portfolio. That's remarkable, considering Elektra's interest rates average 10 points above bank credit cards, which charge anywhere from 38% to 57% annually.

Elektra now has a database of 3.5 million clients with complete credit reports and is lending to 1.5 million active clients. Stacked up against Mexico's banking system, which in total has about 15 million clients, that's a pretty big non-bank bank for one store chain.

There are several secrets to Elektra's success. The stores make careful credit checks. "We have a large staff of investigators and collectors who make on-site investigations to see how the clients live and where they work," says Esteban Galindez, Elektra's director of investor relations.

Once they're approved, clients make weekly payments at one of the 917 Elektra stores. If the payment doesn't show up for two weeks, Elektra sends an agent to visit the client to check into the matter.

Elektra has other safeguards as well. It lends only to customers who live near the store, assuring easy access. And it will not allow a weekly payment to exceed 20% of a customer's income, which amounts to about $450 per month for the average Elektra client. In case of default, Elektra holds guarantees, including the item purchased and collateral of the customer's residence.

Historically, Elektra has lost only 3% of its loan portfolio--a far cry from Mexico's banks, which are sitting with a past-due loan portfolio to the private sector of 35%, according to Mexic6s Central Bank, Banco de Mexico Fewer than 1% of Elektra's loans have ended with repossession of the purchase and Elektra has never been forced to take a home against a bad loan, Galfndez claims.

The Elektra default rate is exemplary for retail finance, which should not be higher than 6%, according to Jorge Garizurieta, senior manager of consulting firm Deloitte & Touche in Mexico City.

Retail finance has become so important that Deloitte & Touche surveyed 133 executives in 17 countries to learn what makes retail finance tick. Their key finding: That the firms able to compete will be those that get to know their customer and offer personalized services, integrate delivery channels including telephone, on-line and branch office customer service and create a customer-centered culture in their business. Says Javier Romero, a partner at Deloitte & Touche responsible for the financial sector: "In retail banking, the secret will be knowing the client:" Like potential computer purchaser Daniel Cayon.

Virtually a Bank

The state of the art in retail finance is being tested in Mexico by Inbursa, a bank controlled by Telmex's Carlos Slim Helu.

AT THE CUICUILCO SHOPPING CENTER ON THE SOUTHERN RIM OF Mexico City, Inbursa has launched a pilot program that allows some 2,000 people to use "smart cards" equipped with processor chips as if they were checking accounts. The cards can make deposits, pay phone bills and accept charges for purchases at stores owned by Slim's conglomerate, such as Sanborn's restaurant and drugstore chain.

The vision for smart cards is grand. The cards will work at any of Telmex's 250,000 phone booths, which will be converted to accept the chips. The cards will be sold at the same 80,000 distribution points where Telmex phone cards are currently sold, according to Juan Mesa, smart card director at Inbursa. Other companies, Including MasterCard and Visa, are also piloting smart cards.

Slim's expanding his empire into non-bank banking has become a sensitive issue, and the Central Bank and the National Banking and Securities Commission are studying it to make a recommendation for legislation that will pave the way for virtual banking.

But that doesn't worry Mesa, who is looking to the day of a cashless economy in Mexico, where people could pay their phone, water, electricity and cable TV bills at kiosks located at subway stops, shopping centers and universities. Says Mesa: "That's where we have to be-where people go."