Monthly Archives: March 2024

“Many ask why Banks in Chile are so profitable? “

Posted on by

We charge you more because we can, we control your country…:

Many Banks have told me that when talking about what used to be the more admired democracy in LATAM for the right side of the political spectrum.

Let’s analyze just data. comparing Canadian Banks with Chilean Banks since many are own by the same companies :

Canada Data :

To understand the ratio where banks in Canada make money based on the information you’ve provided, we need to compare the interest rates banks pay on deposits versus what they charge on loans. The interest rates banks offer for savings or deposits are the costs to the bank, and the rates they charge on loans represent their income. The difference between these rates is a key source of bank revenue, often referred to as the “net interest margin.”

Interest Earned on Deposits

  1. Standard Interest Range: 0.65% to 1.90%
  2. Smart Interest: An additional 0.50% for saving at least $200 a month (up to a balance limit of $200,000).
  3. Bonus Interest: A bonus interest rate of 3.35% for the first four months on new accounts (up to a balance limit of $1,000,000).
  4. Maximum Interest Potential: Up to 5.75%.

Average Personal Loan Interest Rates by Credit Score

  • Poor (500 to 579): 17.49%
  • Fair (580 to 669): 14.20%
  • Good (670 to 739): 9.85%
  • Excellent (740 to 900): 7.20%

Analysis

Banks make money on the spread between what they pay out in interest on deposits and what they earn on loans. The exact ratio can vary widely depending on the mix of loans and deposits a bank has, as well as the specific rates involved.

  • On Deposits: The bank’s cost can vary from as low as 0.65% to as high as 5.75%, considering all types of interests including standard, smart, and bonus interests.
  • On Loans: The bank’s income from loans can range from 7.20% (excellent credit) to 17.49% (poor credit).

Calculating the Ratio

To calculate a simple ratio of income to cost, we can consider the lowest earning rate on loans (7.20%) and the highest cost rate on deposits (5.75%).

However, a more accurate measure would consider the average loan rate and the weighted average cost of deposits, taking into account how much money is held in accounts with each interest rate. Given the vast range in loan interest rates and the potential for high deposit rates (up to 5.75%), the net interest margin can vary significantly.

Let’s proceed with a simplified calculation using the lowest loan rate (for excellent credit scores) and the highest potential deposit rate to get a conservative estimate of the bank’s interest margin.

Interest Margin Ratio=Lowest Loan RateHighest Deposit Rate=7.20%5.75%Interest Margin Ratio=Highest Deposit RateLowest Loan Rate​=5.75%7.20%​

Let’s calculate this ratio.

The simplified interest margin ratio, using the lowest loan rate (7.20%) and the highest potential deposit rate (5.75%), is approximately 1.25. This means that for every dollar the bank pays in interest on deposits, it earns about $1.25 in interest from loans to borrowers with excellent credit scores. It’s important to note that this is a very simplified analysis and actual bank profitability from interest can vary based on a multitude of factors, including the distribution of loans across different credit scores and the actual balances held at various interest rates for deposits. ​​

What when take a look at Chile :


To analyze the interest margin ratio for banks in Chile using the numbers you’ve provided, we’ll consider the interest rates banks pay (or equivalent financial metrics) and the rates they charge on loans.

Deposit Rates in Chile

From your description, it seems the focus is on the general interest environment rather than specific deposit rates offered by banks. However, the provided average value of 4.69% with a minimum of 0.32% and a maximum of 11.25% could serve as a proxy for the cost of funds or interest paid on deposits over time. For our purposes, let’s use the average rate of 4.69% as a stand-in for the cost of deposits, acknowledging this is a simplification.

Lending Rates in Chile

  1. Bank Lending Rate in 2023: Averaged 16.61%.
  2. Credit Card and Retail Loans: Averaged 42% over the last five years, with a high of 48% in 2023.

Analysis

For this analysis, we will compare the average cost of deposits (4.69%) to:

  1. The average bank lending rate in 2023 (16.61%).
  2. The average rate for credit card and retail loans over the last five years (42%).
  3. The high rate for credit card and retail loans in 2023 (48%).

This will give us an understanding of the range of interest margin ratios banks in Chile might experience across different types of lending.

Let’s calculate these ratios now.Error analyzing

The calculated interest margin ratios for banks in Chile, based on the provided data, are as follows:

  1. For the average bank lending rate in 2023 (16.61%) compared to the average cost of deposits (4.69%), the interest margin ratio is approximately 3.54. This means that for every dollar the bank pays in interest on deposits, it earns about $3.54 in interest from loans.
  2. For the average rate for credit card and retail loans over the last five years (42%) compared to the average cost of deposits, the interest margin ratio is approximately 8.96. This indicates that for every dollar paid in deposit interest, the bank earns about $8.96 in interest from credit card and retail loans.
  3. For the high rate for credit card and retail loans in 2023 (48%) compared to the average cost of deposits, the interest margin ratio is approximately 10.23. This suggests that for every dollar paid in interest on deposits, the bank earns about $10.23 in interest from these loans at the high rate.

These ratios illustrate the significant difference in potential profitability between traditional lending and credit card or retail loan products, with the latter offering substantially higher margins. ​

So how do Bankers explains the differences vs one an another ?

When comparing the interest margin ratios in Canada and Chile, several key observations stand out, reflecting differences in the banking landscapes and economic conditions of the two countries:

Canada’s Banking Environment

  • The interest margin ratio calculated for Canada, using a simplified approach and conservative estimates (the lowest loan rate for excellent credit and the highest deposit rate), was approximately 1.25. This suggests a relatively narrower margin between what banks earn on loans and what they pay on deposits.
  • The Canadian banking system is known for its stability and conservative lending practices. The relatively lower margin reflects a more regulated environment, where interest rates on loans and deposits are closer together, partially due to competitive pressures and a focus on maintaining financial system stability.

Chile’s Banking Environment

  • In Chile, the interest margin ratios calculated were significantly higher, with ratios of 3.54 for traditional bank lending, 8.96 for the average rate on credit card and retail loans over the last five years, and 10.23 for the high rate in 2023. These higher ratios indicate a much larger spread between the interest banks earn on loans and what they pay on deposits.
  • The higher ratios in Chile can be attributed to several factors, including potentially higher operational costs, risk premiums due to economic volatility, and a different regulatory environment. Credit card and retail loans, in particular, show exceptionally high interest rates, reflecting the higher risk and possibly higher default rates associated with these types of lending.

Effective Multibenefit Marketing

Posted on by

When an exceptional product, service, or solution fails to gain momentum, the challenge often lies in its marketing strategy. This predicament is notably prevalent across industries like food, travel, and financial services, where the competition is fierce and consumer expectations are high. The secret to overcoming this hurdle is rooted in multibenefit marketing – a comprehensive approach that showcases the various advantages your offering brings to the table.

To dissect the issue, it’s crucial to scrutinize the benefits your product or service provides. This analysis isn’t merely about listing features; it’s about understanding how these features translate into functional, symbolic, and experiential benefits for your customers. For instance, in the food industry, a product might not only offer the functional benefit of nutrition but also the symbolic benefit of sustainability and the experiential benefit of unique flavors. Similarly, travel services can highlight the practicality of hassle-free planning, the prestige of exclusive destinations, and the joy of immersive experiences. Financial services can promise the efficiency of transactions, the status of premium offerings, and the peace of mind that comes with expert advice.

If your offering is struggling to make an impact, it’s time to reevaluate your marketing approach. Are you effectively communicating how your product or service meets various customer needs and desires? By emphasizing the multifaceted benefits, you can appeal to a broader audience and enhance your product’s attractiveness. This strategy not only distinguishes your offering from competitors but also addresses the diverse motivations behind customer choices, increasing your likelihood of success.

In essence, if you find your groundbreaking product, service, or solution languishing in obscurity, consider whether your marketing effectively highlights its multiple benefits. This approach could be the catalyst you need to capture the attention and hearts of potential customers, propelling your offering to the success it truly deserves.

So how you got here?

Many will tell you that if you build an amazing product it will sell by itself, but many companies have found that it requires not just an amazing product but then the effort of the Marketing Team to position that product, specifically, tangible, in several categories. During my time as head of Marketing in several industries from Food, Technology and Financial Services, I always used a rule for those programs and assigning spending to it, even before you can think on what media, where , etc.. you have to make sure you define this 3 benefits :

– Functional Benefits: Practical advantages like time-saving, cost reduction, or problem-solving. For instance, a car’s good mileage or a software’s user-friendly interface.

– Symbolic Benefits: The status or identity the product confers on its owner, making them feel successful, eco-friendly, or part of an exclusive group. Examples are the elegance of an Apple product or Patagonia’s eco-conscious image.

– Experiential Benefits: The feelings or sensations experienced during use, such as joy, comfort, or nostalgia. Disneyland’s immersive entertainment and the comforting aroma of cinnamon rolls are prime examples.

EVEN MORE NOW

In today’s competitive market, successful brands understand that effective marketing transcends mere product promotion. It involves a holistic approach that encompasses multiple types of benefits to resonate deeply with consumers.

This strategy is not confined to any single industry but is applicable across various sectors, including Food, Travel, and Financial Services. I have been involved in those three, so my take of how it will look my definition of targeting.

Food Industry: Take, for example, a gourmet restaurant that sources its ingredients locally. The functional benefits here include the freshness and quality of the food. Symbolically, it communicates a commitment to community support and environmental sustainability, enhancing the diner’s perception of contributing to a greater cause. The experiential benefit comes from the unique dining experience, where the story of each dish adds to the overall enjoyment and satisfaction of the meal. This multifaceted approach not only attracts customers looking for a high-quality meal but also those who value environmental sustainability and community support.

Travel Industry: In the travel sector, a luxury tour operator might offer packages to exotic destinations. The functional benefits include comprehensive travel planning, comfortable accommodations, and personalized itineraries. On a symbolic level, it conveys a sense of exclusivity and achievement, appealing to the traveler’s desire for prestige and social status. The experiential benefits are found in the immersive experiences offered, from private tours of hidden gems to exclusive access events, providing travelers with memories that last a lifetime. This blend of benefits appeals to a wide range of travelers, from those seeking convenience and comfort to those desiring unique and enriching experiences.

Financial Services: A wealth management firm provides another excellent example. Functionally, it offers sound financial advice and investment strategies. Symbolically, being a client of a reputed firm can signify financial success and security. The experiential benefit comes from the personalized service and the sense of confidence and peace of mind that comes from knowing one’s financial future is in good hands. This combination of benefits attracts clients not just for the financial expertise but for the prestige and personalized experience as well.

The most effective marketing strategies are those that offer a blend of functional, symbolic, and experiential benefits. By appealing to a broad spectrum of consumer needs and desires, brands can differentiate themselves in a crowded marketplace. Whether it’s the food we eat, the places we travel, or the way we manage our finances, the value of a product or service is greatly enhanced when it’s marketed through a multi-faceted lens. As businesses continue to evolve, so too will the art of marketing, always with the goal of creating deeper connections with consumers.