Unik S.A.

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25762
Company name	Unik S.A.
Country	Brazil
Sector	Finance & Insurance
Environmental category	C
Department	Global Financial Markets Group
Status	Pending Approval

Date SPI disclosed	October 12, 2007
Projected board date	November 15, 2007

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Unik is one of the leading nationwide issuer of payroll cards in Brazil. It provides basic financial services to under-banked, lower-income Brazilian workers as well as pensioners, and makes working capital financing available to commercial establishments who sell basic necessities to these types of consumers. In Brazil, unlike other countries like the United States, the payroll card business effectively acts as a mechanism for interest-free, wage advances to lower-income workers, who otherwise might not have any other form of contact with financial sector services and entities.

Unik has business operations throughout Brazil, including a well-developed franchise in the country’s relatively poor northeast regions. Approximately 250,000 employees at 3,000 companies that are currently part of the nationwide Unik network have activated Unik payroll cards, the latter of which can be used to make purchases at approximately 16,000 commercial establishments that are now affiliated with Unik and linked to its IT systems. In total, the firm has approximately 750,000 cards outstanding, and its current card activation rate of approximately 30% is expected to rise in the near term as additional product/service offerings are made available to its cardholders. Commercial establishments affiliated with Unik tend mostly to be small, local food stores and pharmacies, given the fact that a relatively high proportion of spending by lower-income workers is allocated towards food and health-related expenditures (as opposed to bigger ticket, consumer finance items). Employees can make purchases at commercial establishments who are part of the Unik network up to a BRL 150 per month limit, as long as this latter amount is less than 1/3 of the relevant individual’s current, unpaid monthly salary. After purchases are made by payroll cardholders, the relevant commercial establishment receives (via the Unik network) cash payment from employers (for goods and services sold to employees). Thus, Unik effectively performs a billing function between its affiliated commercial establishments on the one hand, and employers on the other hand, thereby taking the settlement/credit risk of employers in its network when it assumes the obligation to pay commercial establishments for goods and services purchased by employees using its payroll cards.

Three basic revenue streams arise from the above-mentioned payroll card business. First, employees pay a nominal monthly activation fee to be able to use their payroll cards in the Unik network. Second, Unik receives interchange fees from commercial establishments on purchases made by its payroll cardholders. Finally, the firm generates two types of revenue associated with receivables that arise from such purchases. On the one hand, float arises from the timing mismatch between receipt of funds from employers, and payments made to commercial establishments. On the other hand, the firm is increasingly using some of its financial resources to provide working capital financing to commercial establishments in its network – by buying receivables that arise as a result of purchases made by its cardholders. In the latter regard, Unik typically offers a more cost-effective factoring product to commercial establishments, compared to that available from Brazilian banks and factoring companies. Moreover, the basic credit risk-mitigation approach underpinning Unik’s receivables factoring operations can be applied to other working capital financing products that the firm soon plans to offer commercial establishments in its network (such as check discounting and credit guarantees).

With 2 million payroll cards outstanding to only 6% of formal, private sector employees compared, for example, to 6.8, 60, 159, and 91 million benefit, credit, debit, and dedicated store charge cards, respectively, in Brazil, the basic payroll card business model described above is characterized by considerable growth potential. Nevertheless, Unik’s operations are also being adapted to act as a business and delivery platform for other financial service offerings that meet the needs of (and therefore capitalize on commercial opportunities involving) other segments of lower-income Brazilians who tend to be under-banked – if they are banked at all. These include offering payroll cards to regional and municipal public sector employees and retirees, as well as facilitating utilization of the Unik network by commercial banks as a distribution and delivery platform for other financial service offerings.

The three most important of the latter – which are already under development and/or being implemented – entail:

First, the provision of correspondent banking services;

Second, the extension of revolving (in other words, inter-month in addition to intra-month) credit to Unik cardholders; and

Third, enabling the use of Unik cards for “top-up” purchases of various products and services (for example, pre-paid cellular phone time, cooking gas, insurance, etc.) utilizing both intra-month and revolving credit.

In each of these areas, Unik typically works together with third-party entities who want to make their products/services more readily available to lower-income customers, but who may not have (or may not be able to justify the high fixed costs of establishing) a stand-alone distribution network for the relevant product/service offerings.

Anticipated development impact of the project

The project has 2 main developmental impacts.

First, it increases the access of large numbers of un-banked, lower-income Brazilians to basic credit resources and financial services.

Lower-income individuals who work in Brazil’s public and private formal employment sectors (40% of the country’s total workforce) as well as lower-income formal sector retirees represent largely untapped clients for basic banking and financial services. And a key characteristic of the income/expenditure profile of many lower-income workers is that their monthly spending patterns are often not matched by their monthly salary receipts. In other words, wages received at the end of any given month by a lower-income worker are often not sufficient to meet a household’s out-of-pocket expenses during the entire following month for basic necessities such as food, cooking supplies, medicine, and clothing. In this environment, Unik’s basic payroll card product helps large numbers of lower-income Brazilian meet basic subsistence needs.

Furthermore, two of Unik’s product initiatives mentioned above (involving correspondent banking and revolving credit) represent particularly effective ways for financial service and product offerings to be made more broadly available to currently underserved segments of the Brazilian population. In the first case, any person not having a checking account (in other words, not just Unik cardholders) can undertake cash payment of basic bills as well as accounts at commercial establishments in the firm’s network, rather than at banks or the relevant product/service providers. Importantly, this correspondent banking functionality can be further broadened to allow individuals to make cash deposits into bank accounts via Unik-affiliated commercial establishments who are part of the firm’s evolving corresponding bank network. Thus, the Unik business franchise represents a particularly attractive, low-cost as well as low-risk platform for financial entities to expand their correspondent banking activities, in order to better cater to the needs of under-banked, lower-income Brazilians – both those employed in the country’s formal sector, as well as the large proportion employed in the country’s informal sector. In the second case, banks with whom the firm is establishing partnerships can provide revolving (in other words, inter-month) credit to Unik cardholders who are private sector employees, as well as public sector employees and retirees. Repayment for the relevant credit amounts provided to Unik cardholders typically comes from consignment of future salary or pension payments.

Second, it makes more working capital resources available to large numbers of commercial establishments who sell basic necessities to lower-income Brazilians.

This development impact arises from Unik’s ability to provide working capital financing to commercial establishments and merchants in its network at rates cheaper than the latter might get from banks or factoring companies, if they are able to obtain such financing at all.

IFC's expected development contribution

Equity and debt funding provided by IFC are integral to completing the company’s recapitalization, and positioning it for further growth. Furthermore, it is anticipated that Unik’s innovative business model might be replicated in other countries, possibly with IFC assistance.

Environmental and social issues - Category C

This project involves providing consumer finance and basic financial services to lower-income individuals, as well as working capital finance to micro- and small-sized enterprises that sell basic necessities to these types of consumers. It has been classified as a Category C project according to IFC’s Environmental and Social Review Procedure. No further review is required. The company will be required to inform IFC in the event of any change in the nature or scope of its contemplated business or operations.

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