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Financial services that poor people want

Posted on by MSC

Financial institutions trying to serve the mass market rarely seem to have the time to the conduct market research necessary to identify prospective clients’ real needs and aspirations. Many rely on “bath-tub product development” – product ideas developed on the basis of the senior management team’s experience and “gut instinct”, and often rolled out without any pilot-testing … let alone consultation with the target market.

Others prefer the “me too” strategy and thus simply wait, watch and copy products offered by their competitors. India’s “No Frills Accounts” rolled out by a wide variety of banks are a case in point – with dormancy estimated to be 80-90% despite the government’s attempts to push conditional cash transfers through them. MicroSave’s research into this phenomenon revealed that there were a series of features to which poor people aspired and needs that they could clearly articulate … and that poor customers were, in the main, willing to pay for these services.

MicroSave research over the years across Africa and Asia has highlighted that people need (not just want) financial services that are convenient, accessible, affordable and appropriate … and of course reliable in that they are consistently available, on demand. A single transaction account like the No Frills Account is unlikely to meet these criteria … particularly when delivered through traditional banking branch infrastructure.

  • Convenience requires proximity and longer opening hours – most obviously through a distributed agent network.
  • Accessibility often necessitates ATM cards or mobile money solutions to obviate the need to negotiate overcrowded branches, complex forms and intolerant bank staff, and is likely to require us to rethink how we communicate products.
  • Affordable needs to encompass direct costs (transport to the branch and food when the trip take a full day), indirect costs (lost wages and other opportunity costs); and hidden costs (brides and commissions for filling up and processing forms) – and not just the “on the board” fees/interest rates that are formally charged by bank.
  • Appropriate must reflect how poor people live and how they think about and manage their money.

Poor people’s need for appropriate products mean that they need a range of products (just as you and I do) to reflect their life cycle. They also need disciplined systems that break down their accumulation of lump sums into small manageable amounts (saving up, through or down).

The products used to accumulate lump sums should ideally be differentiated and ear-marked for specific needs, in the same way that poor people often ear mark specific income streams for specific uses to help with their mental accounting. For example: savings for a bicycle, to buy some land and for old age are very different in terms of the time horizons and instalment amounts.

Similarly, loans for a medical emergency and for investing in a fixed asset are very different in terms of loan size and structure, as well as the pace at which they need to be appraised and disbursed. This has very important implications for financial institutions seeking to offer a range of products to the lower income market segment: a single transaction account will not help manage a series of complex savings goals; and a standard working capital loan repayable in weekly instalments over a year is only appropriate for a limited set of business people.

As a bare minimum, therefore poor people need a suite of products that includes:

  • A transaction or very basic savings account (linked to a reliable and efficient payments/remittance system that is not too costly);
  • Recurring deposit accounts for different goals (with an attached overdraft to which they have automatic and immediate access – up to 90% of the value of the amount deposited);
  • A general short-term (up to one year) loan (that can be used for working capital as well as consumption smoothing, education etc.);
  • A longer term loan (secured against assets acquired with the loan).

Clearly ,this suite of basic products need to be tailored for, and communicated to, specific markets and market segments – but a market-led approach to product development is essential if we are to have real positive impact on the lives of poor people. Just try imagining how you would manage your finances if you only had access to a typical microcredit product – a loan repayable weekly for 50 weeks!

Principles and Models of an Effective Credit Scoring Tool Design

Posted on by MSC

In this video, MSC’s expert Anup Singh, Domain Leader for MSME financing, discusses the utility of credit scoring tool for standardised appraisal of prospective MSMEs for financing. He mentions about the key design considerations that the banks and financial institutions must keep in mind while developing credit scoring tool for MSMEs’ appraisal. He compares the statistical and judgmental models of credit scoring tool design and discusses cases when each of these can be used.

Digital Financial Services Volume V

Posted on by Parul Tandon

The Digital Financial Services (previously called E/M Banking) Volume V is the tenth publication under the Optimising Performance and Efficiency (OPE) Series. The OPE Series brings together key insights and ideas on specific topics, with clear objective of providing microfinance practitioners with practical and actionable advice.
In response to repeated demands from practitioners, MicroSave has developed this fifth compilation of brief publications on digital financial services. This compendium presents a bouquet of articles addressing digital financial services in India and its scope. The compilation further covers experts’ views for mobile-phone based banking.

Product Development: Reasons why MFIs Fail to Focus on It

Posted on by MSC

In this video MSC expert Anant Jayant Natu talks about the inherent constraints in the operational context of microfinance institutions (MFI) that limit the possibility of a rigorous focus on product development. He also touches upon some factors that can drive the product development process in spite of these constraints. The intangible nature of financial product and a demand driven microfinance market are presented as two key reasons for MFIs’ lack of interest and focus in product development. However, under competitive pressures faced in maturing markets, where client retention and market expansion become an absolute necessity for survival, MFIs have indeed shown that they adopt product development as a deliberate strategy.

Research with a roll of the dice

Posted on by MSC

Anyone who has spent even a little time asking people questions about money—how they spend it, how they save, how they plan ahead—already knows the responses do not always accurately reflect what’s happening in real life. For a lot of reasons.

MicroSave has given a fair amount of thought as to how we might manage this exchange to achieve less biased results, particularly since much of our research is qualitative. (We are after the reasons, why and how, specific aspects of financial inclusion succeed or fail.) Participatory research methods focus on community rather than individual needs help make respondents less self-conscious and more willing to engage.

Nevertheless, anything involving cash flow and payments, behaviour patterns, or a specific new offering, still elicits a biased response.

The most obvious reasons being that most of us, rich or poor, would prefer to present our money management skills in the best possible light, rather than admit to a researcher—or anyone else—uncertainty, fear, or ignorance. Research participants also tend to over-think the situation and respond to what they believe the moderator wants to hear. We already know, for example, what happens when we ask respondents—no matter how subtly—a hypothetical question about a new cattle insurance offering or better debt management.

Almost all of us went to school. Everyone, including students with only brief and limited exposure to education, learn early that if you tell the teacher what s/he hopes you will say, you are far more likely to succeed in that class, and every other class, than the kids who ask too many questions and promote alternate opinions. (A lot has been written on this topic, but here is a useful summary of what goes wrong in classrooms—and its longer-term effects.)

So, how do we move away from respondents seeking to provide what they believe are the “right” answers? One solution we came up with that seems to be working surprising well is to involve them in games such as Chutes and Ladders whereby decisions, in this case financial ones, have gratifying, or dire, consequences.

But since it’s just a simple game, players can take more risks, feel less chagrined when they fail, and discuss the consequences of their actions more candidly. Our research questions and follow-up probes become part of the game, rather than a discussion about abstractions and hypotheticals. The understanding is better when one is in action [rather] than listening or reading.

financial-inclusion-consultancy

Hypothetical situations are also easier to introduce in a simple game, and for respondents to answer spontaneously without the worry of making “mistakes”. In some instances, we even award small prizes like chocolates and pens to game winners, again to shift the focus away from correct or incorrect answers.

Instead of introducing a new form of livestock protection as a new service and asking who might sign up for it, we incorporate the question into one of many decision points in game. As a result, answers now range from “Yes” (generally those who have many cattle and already understand the cost benefits of insurance) to “No” (those who have very few and see insurance as too expensive) to “Not sure” (the many who are unclear about what insurance entails and, in a game, welcome an explanation). We discuss all three answers and then move on with a roll of the dice.

“Games aren’t tests; they’re just fun,” notes Premasis Mukherjee, a senior MicroSaveresearcher. “Everyone gets involved—and everyone is also reminded, very usefully, the important role luck plays in all our lives.”

MicroSave has already used this technique with some gratifying results in our recent studies on information sources and financial capability and financial metaphors. We plan to incorporate it in current and future research efforts as well.

We would be delighted to hear your own thoughts on using games and other informal, appealing techniques that encourage more personal involvement. Our goal is to free respondents from the performance anxieties many experience—and the less than trustworthy responses that result—in too many research situations. These are nevertheless still experiments in progress and others’ findings, positive and negative, are very welcome.

For more information on these methodologies, please contact us at akhilesh@MicroSave.netand akhand@MicroSave.net.

The need for intuition rather than simplicity around account features

Posted on by MSC

In a previous post, we explored how creative naming systems might be used to inject a sense of individualized relevance and personal ownership over a set of otherwise standard sub-accounts. Because they are intangible, engaging sub-account names may become hooks onto which people can project their own financial mental models and goals.

But the least intuitive part of banking is not the uses that customers may want to project into each account but rather the features embodied in them. An account is a vessel onto which a set of rules are attached, typically relating to rewards, programmed transactions (automatic sweeps and recurrent deposit obligations), and especially liquidity frictions. The problem with most accounts is that those frictions and rules, desirable as they may be in and of themselves, appear arbitrary. That makes them hard to remember and comprehend. Two free withdrawals a month, minimum withdrawal sizes, penalties on early withdrawals: why, oh why?  When you need money desperately and a seemingly arbitrary rule stands between you and your money, the result is going to be frustration and rejection of the product.

Informal savings options also have a number of liquidity frictions, but somehow they make sense to us. A cow, for instance, has at least seven frictions: (i) a waiting period, as it cannot be sold immediately; (ii) indivisibility, as you can’t sell only a leg; (iii) a financial penalty, as there are transaction costs involved in buying and selling a cow; (iv) mental labeling, as the cow invites clear associations to the kind of purposes one may save for; (v) the fact that it produces milk puts in people’s minds in the category of a productive investment rather than mere savings which raises the (mental) stakes of selling it; (vi) peer pressure, as the whole town will get to know if you sell a cow; and (vii) social meaning, as cows often represent divinity or fertility or completeness of family in various cultures. Notice how some of these frictions are merely economic, some purely psychological, and others entirely social.

That’s a lot of friction features on cow-savings. But the remarkable thing is how intuitive it all is. It’s not that the frictions are attached to the cow; the collection of frictions is what gives a sense of cowness to the cow. The cow doesn’t come with an account user manual, a set of terms and conditions. Likewise, pigs and goats are different bundles of these frictions: more divisible, faster to sell, less socially conspicuous, etc. A key advantage of informal savings instruments is precisely how intuitive they are in terms of what they might be used for and especially what are the liquidity conditions they embody. Digital accounts appear, in comparison, as arbitrary jumbles of rules.

Can we come up with sub-account names that are evocative not only of purpose and intended use pattern but also of the features of the account, and in particular rewards and liquidity frictions? At a rudimentary level, it’s easy: the I’m feeling lucky account doesn’t pay interest but has a lottery mechanism; the elephant account does not allow for partial withdrawals. But this may not be so intuitive either: you can’t just pull out one of the frictions in an elephant and expect customers to find that intuitive.

The following might sound very odd, but imagine that the sub-accounts were named after the days in a week: Sunday (for the family), Monday (the big hairy goal), Friday (me!). These accounts would only offer liquidity on their name day; you might not even see them when check balances on other days. That doesn’t mean the user would necessarily liquidate Monday money next Monday; it only means that every week you have an option of unlocking money in case you really need to, but you won’t be exposed to decision fatigue the rest of the week. The name here is doing double duty: as a suggestion of purpose and as a reminder of the degree of availability of liquidity.

Another type of friction is the time lock-up. Accounts can be named simply after the month when they become liquid.

Take another type of friction: minimum transaction denominations. You could have accounts called chicken, goat, pig and cow, in which you could only transact in multiples of $3, $30, $100 and $300 respectively. This would permit using the language of buying and selling stuff rather than the language of saving and dis-saving.

Now consider frictions around the notion of peer pressure. Imagine that you could send money to a friend who you designate as your money guard. The money physically leaves your account and goes into his; it shows in his balance rather than yours. But your friend can’t withdraw it or otherwise dispose of the money. He can only do one thing with that money: send it back to you – when you ask him for it.

Imagine that when you came across a little money you could send it to August 15th, or to Fridays, or to November, or to money guard Pete; or you could buy the equivalent of one goat with it; or you could send it to banana yellow (which has no frictions other than mental labeling). There need be no mention of sub-accounts at all; it’s just money that you’ve pushed aside, maybe ear-marked for a purpose that only you know, and which becomes available under specific, easy-to-remember conditions. (There would always have to be a way of advancing any locked up money in case of emergency, through a secured loan for instance; a kind of reset button.)

We usually talk about the need for formal financial services to be simple. Actually, that’s not right. What we need is for services to be intuitive. As we just saw, there is nothing simple about the cow as a savings vehicle. Yet it is abundantly obvious what sorts of constraints or frictions you are getting yourself into when you sink your money into a cow. Many formal or digital offerings are very simple in comparison but offer no intuition. The account rules seem like an arbitrary imposition, you have to learn them, and you feel cheated when you get caught by a friction you didn’t remember. Not so with the cow. To compensate for this intrinsic lack of intuition, the name of digital products needs to convey first and foremost the key liquidity features they embody.