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The need for intuition rather than simplicity around account features

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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.

Naming sub-accounts to trigger intuition (and fun) around customer intentions

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Imagine you are operating a mobile money system, and you want to enhance the service by offering digital jam jars, essentially sub-accounts to which the user can assign different purposes and characteristics. The first issue you’ll have is: what to call them?

That’s already different to the experience with traditional jam jars: because you experience actual jars as distinct physical entities, you know what each jar is for without having to give a moment’s thought to names. In the digital world, you’ll need names if you want to be able to tell them apart. Indeed, one of the biggest challenges with designing digital financial services is how explicit everything has got to be.

One option is to let the username them freely: education, bicycle, etc. There is a practical issue that it’ll test the patience and dexterity of most users if they have to enter such text on the tiny numeric keypads of ordinary mobile phones, and it will be outright infeasible for illiterate people.

I have suggested elsewhere that sub-accounts might be associated with dates, which are easier to enter (the month could be selectable from a menu, and the day-of-month is one or two digits). An added advantage with associating sub-accounts with dates is that they can be created on the fly, simply by sending money to oneself to a future date. In contrast, named accounts would need to be defined before money can be sent to them.

But there is a more fundamental problem with both user-defined names and dates: users may not have an explicit purpose or time horizon in mind, as they often deal with fuzzy goals: what does one type then? User-defined purposes and dates might work for shorter-term, date-bound payments such as when school fees are due or when a loan needs to be repaid. But it is less likely to work for situations when people want to accumulate value but hasn’t yet decided what exactly they will do with that money, or when they’ll need it by (e.g. when exactly a child might marry).

An alternative approach is to have the user select the name from a pre-defined list of options which are presented on the mobile phone. Based on some customer research, you could come up with a common list of jam jar purposes. The labels could be made fairly generic to capture fuzzier goals: education, transportation, home, my business… This is what most banks do today when they position multiple accounts for specialized uses. But there is a degree of prescription and inflexibility here which might put off some users. The market may interpret it as a solution for poor people who (it is felt) need to be told what to save for, and more educated, affluent ones may reject it. There is no scope for users to project their needs in any unique way, so there will be little sense of ownership over the sub-accounts.

How about –and here’s where the fun begins— presenting a list of label options which in themselves are not needs or goals but are suggestive enough to invite users to project their own purpose into them? It might be colors: from ice blue (education!) through deep black(my secret!) to red hot (vacation!). These names have much more emotional content already. Why not go the full length, and name the accounts directly from a list of emotions: I’m feeling virtuous, I’m feeling naughty, I’m feeling peckish, I’m feeling rich, I’m feeling lucky. I don’t need to illustrate their uses, do I?

But the reality is that people are not likely to forget the purpose of their jam jars, so perhaps the names should be more focused on reinforcing intended usage patterns, in terms of duration or size of goal or speed of money movement. Rather than concrete dates, names could represent fuzzier notions of time: next quarter, later, much later, who knows when. Or they could simply be cold numbers, standing in for rough size of goal: 100, 1k, 10k, 100k.

If you think these abstract notions are too far from people’s intuitions, one could use more concrete imagery. Names might be drawn from (localized) bodies of water: an ocean (longer-term, open-ended accumulation), a lake (mid-size, one-off project), a flowing stream (regular expenditures such as school fees), a seasonal torrent (the annual town festivity). Or they could be animals: a rabbit (pocket money), a gazelle (the goal you want to achieve in a rush), an elephant (the big one). I suspect, though, that these names are a tad too obvious, and may be seen more as prescriptive than merely suggestive.

In fact, why not prompt the user to combine names? Select the color red and the amount 10kand you’ve got the account 10k of red. One could also envision a hybrid system where, for example, users could send money to a couple of dates in the next quarter (for well-known recurrent expenditures such as rent on a plot of land, a loan repayment, and school fees), plus to a couple of colors (for fuzzier, longer-term goals).

Would you like your money to be like colors or emotions or animals? Imagine if that was the first question on an account opening form, what message of difference you’d be passing. Imagine the word of mouth as clients discuss with each other what each color or each body of water might mean. Imagine the segmentation possibilities, because of youth like names of cars and musical bands. Imagine that you introduced a new naming category every six months to keep your offer fresh.

If such naming conventions connected with people’s psychology, they would offer excellent opportunities for marketing and financial education. Do you have enough elephants in your portfolio? Is all your water free flowing? Do you want to cool down your flaming yellow/red portfolio?

The Metamon project showed us how difficult it is to create a generalizable metaphor for money management. Instead, invite each user to playfully develop the metaphor that works for him or her. This is mass customization at work. Give the naming power to people, so that they can own their system of virtual jars more fully and meaningfully.

Why is the chicken afraid to cross the road?

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In midtown Manhattan, native New Yorkers and veteran commuters like to play a game called “chicken” with oncoming traffic, especially at rush hour. They step off the pavement as the light is turning red, or simply because it’s been red for an unacceptable waiting period, and stride fearlessly into the car lanes. They make no eye contact with drivers. They ignore the horns and screaming epithets. Victors reach the other side unscathed.

Out-of-towners look on appalled that anyone would be so reckless—and so determined to get to the other side faster than the rules allow.

In mobile payments and digital financial services in general, mobile operators and banks are engaged in another version of chicken. Credit-card companies, technology service providers, even handset manufacturers and the Post are also queuing up to cross, but most of these are waiting to see which of the key enablers goes first (and who “owns” the customer, makes money, does not get run over, etc.)

Both banks and MNOs hesitate for the same and different reasons.

Same: Have you ever worked for a commercial bank or a phone company? If yes, you already know the reasons. If not, you can guess. Both are heavily regulated, conservative, careful institutions. One is tasked with protecting your insured deposits; the other manages the telecom networks you depend on almost as much as your money. “Reckless” and “determined to get to the other side faster than the rules allow” are not descriptors most people want applied to either.

Different: MNOs can’t really get to the other side safely without the retail banks and their deposit guarantee insurance right behind them. And though the banks need phones to be the digital wallets, they remain deeply uncertain whether these new markets, comprised mostly of low to very low depositors, offer sufficient rewards.

So, for the moment, in countries not named Kenya, most either remain huddled on the timid side of the street or move forward, cautiously, with pilot projects and pauses.

  • Several GSMA mobile money “sprinters”—Telesom Zaad (Somaliland), Telenor Easypaisa and UBL Omni (Pakistan), Orange Money (Madagascar)—venture across with alacrity, but more regulatory support is critical to ensure against fraud, money-laundering, terrorism, and all the other spectres banks like to invoke … after the sprinters have taken off.
  • Sometimes they just bicker (DRC, Mali, Rwanda, Zambia, most of Eastern Europe).
  • The most famous bank-led model is India (with close to half a billion unbanked potential customers). The more sophisticated NFC and internet-based mobile payment systems in the US, Europe, and Japan all involve bank sponsors or partners. But no one is making real money yet, quite a few are still losing money, and even Bank Technology News is getting nervous.

Another reason both sides can be forgiven for vacillating is the markedly lower customer adoption figures than anticipated. Somewhere between 200-300 million, mobile money subscribers were projected for 2013 by the likes of Jupiter Research, McKinsey, and CGAP. Meanwhile, the GSMA MMU 2012 Global Money Adoption Survey shows only 30 million active users. In a recent Intermedia Financial Inclusion Tracker Survey which focused on Pakistan, findings indicate 87% of mobile money transactions in their study are still conducted over-the-counter via courier and similar services. Reasons include:

  • Account opening with one of the “sprinters” (see above) is too difficult.
  • OTC services already reliably connect senders and their extended family and social networks at relatively low cost.
  • Marketing and promotion remain limited, and at least 40% of the sample is not even aware of the alternatives.

Nevertheless, despite this and other pertinent evidence to the contrary, MicroSave’s bet is on the mobile carriers and the ultimate success of mobile money. Mostly because (1) MNOs actually want these customers and the banks don’t, and (2) barring a new device that suddenly and unexpectedly enjoys 86% global market penetration, phones will, in fact, be the easiest, fastest, cheapest way to move money around—P2P, G2P, and internationally—for at least the next ten years, and probably longer.

For more on mobile money transfers and RBI’s recent new policies, please see MicroSave’s blogs on Mobile Money: Rosy vs. Real and Financial Inclusion Just Became More Inclusive…Maybe.

The telco business plan depends on volume and ever-increasing usage. Operators are thrilled by Cisco’s prediction that mobile phones will outnumber the earth’s population by the end of this year. Banks need high deposits, low withdrawals, and less than 2% fraud to make money and cover their ever-escalating deposit insurance costs. Their goal is rich people using retail banking services infrequently. (For more specifics on these very different approaches to the best bottom line, please see here.)

Mobile Money–Influencers of Success is a deeper analysis of numerous other factors that are easy to overlook but matter just as much as the numbers. They include:

  • Regulatory environments (why India, for example, is less favorable than Kenya, Senegal, or Egypt for mobile operators offering payment and banking services);
  • Financial/technical literacy, access, and social norms (Easypaisa and Omni may be sprinters, but many poor Pakistanis still prefer the more familiar OTC service);
  • The right accounts and services for these customers (hint: “Tiny” and “No Frills” accounts have failed to win hearts and minds);
  • The cash-in/cash-out problem (Western banking and credit cards needed 30+ years to induce commercial, educational, health, and most other small and large business concerns to fully participate in digital payments. The rest of the world may take at least as long to catch up. And we will most likely always need some CICO agents.)

Tomorrow is harder to imagine than we sometimes think. Six years ago, the top ten phones sold around the world were Nokia’s. All ten. Then in 2008, Apple’s iPhone moved into first place and everything changed. New technology and unlikely business models will continue to disrupt our assumptions, so those noted above are indeed suspect.

What won’t change any time soon are people, affluent or indigent, and their attitudes toward money. Digital financial services (mobile banking, branchless banking) will only work if customers trust it and think it’s better than what they have now. Banks and operators and all the other potential enablers matter, but they will never matter as much as they think they do.

Rethinking microfinance: This time with rules

Posted on by MSC

Microfinance has an image problem. It has had for a while now—instances of corruption, unfair interest rates, cover-ups, suicides due to coercive collection tactics—and the real victims are inevitably not the microfinance institutions (MFIs), but their clients: poor people caught in spiraling debt and little hope of legal recourse or financial relief.

Many directly involved in microfinance and related fieldwork do not agree with skeptics like David Roodman and Hugh Sinclair and would argue that the benefits still outweigh the problems noted above. Nevertheless, the need for more rigorous review and transparency is indisputable.

But HOW exactly does one impose “transparency” and more exigent controls for institutions that are not banks, and thus not subject to local or international banking regulations, and rely heavily, in some cases, on the trust and goodwill of absentee donors?

Social Performance Management (SPM or Responsible Finance for short, since both are easier to remember) is one possible solution to refocus the mission of microfinance and to provide more concrete support for their many struggling clients.

The idea of a social bottom line is not new. UN agencies and others whose charters differ from a market-based approach would argue that social audits have underpinned their work for more than 40 years. And SPM has slightly different meanings, depending on who is proposing it as a solution for MFIs and other problems that beset financial inclusion.

In general, however, most can agree that this aspect of social performance measures how well a money-lending/savings institution has translated its social goals into practice. Even more generally, these goals break down as:

  • Intention and Design: MFIs and their supporters’ mission—and how they plan to implement it (easy to assess, equally easy to succumb to dreaded “mission drift” )
  • Output: Number of loans and savings accounts, and average size (relatively easy to monitor and assess)
  • Outcome: Improved money management for small businesses or households (also possible to assess)
  • Impact: Effects on individual and community income, savings, and longer-term effects on education, nutrition, sanitation, health, etc. (more complicated, maybe impossible to assess fully and accurately)

(For an early but helpful overview of SPM, please see this CERISE Social Performance and the CGAP Social Indicators Initiative’s report. For a broader and more in-depth look at Responsible Finance and its many components, please click here.)

All very well and good so far. But how does one actually move the guiding principles above from the reports and PowerPoint slides into early planning and daily practice? We already know the impact assessments are tough, and, no surprise, many MFIs, including credit and savings cooperatives, see SPM as too expensive, too time-consuming, or the wrong solution to the problem.

One way to shift the focus away from the institutions and their hesitations and back to the MFI customers and their needs is MicroSave’s MFI Client Protection assessment tool, known as ServQual.

Tested last year with 357 microfinance clients in India, the Philippines, and Bangladesh, ServQual yielded some rather surprising results. (Research often does which is why it is worth doing and paying attention to). In the first two countries, respondents rated fair and respectful treatment from MFIs as the most important aspect of client protection in their opinion, followed by transparency. Interestingly, complaint resolution and data privacy ranked last in the seven aspects of client protection discussed in the 82 group and individual interviews. For more about this research, please click here.

Other projects seeking to make Output, Outcome, Input and other intangible headings more concrete often use USSPM, or Universal Standards of SPM. This tool helps evaluate systems and processes for both client protection and MFI staff treatment and translates the “mission” into specific goals and measurable results. (There’s more, but these are the basics.)

“We promote breaking-down social performance into practical steps and by a degree of importance,” explains Yamini Annadanam, MicroSave’s Responsible Finance practice group leader. “Most MFIs actually have some existing practices. These standards can give them the confidence to build on what they already have. And that is more a matter of filling in a few key gaps, rather than implementing something entirely new.”

This initial engagement with the MFIs is complicated enough, as anyone involved in SPM in other parts of the world will attest, but the far harder piece is actual implementation and enforcement. One of the reasons many who believe in financial inclusion also believe banks and their regulators must play a more active role in local and global microfinance is because of money, especially other people’s money, need legally binding restrictions and penalties, in addition to universal standards and suggested codes of conduct. This protection is important for all creditors and investors everywhere, but all the more necessary for the clientele microfinance seeks to serve.

Can India achieve financial inclusion without the mobile network operators?

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India is attempting to create financial inclusion using direct benefit transfers as the flywheel that turns the engine of an electronic payment system, the creating volumes and interoperability necessary for real financial inclusion. Currently volumes at rural agents are simply not adequate – resulting in very low commissions and debilitating levels of agent churn. Furthermore, MicroSave has already demonstrated that “integration and interoperability of financial services is good for the poor, and great for banks and governments”.

But India is seeking to do this largely without the mobile network operators (MNOs), preferring a bank-led, bio-metric card-based, model. MNOs offer great advantages, but (in the Indian context at least) also suffer from disadvantages. Nonetheless, worldwide, almost all, successful digital finance services are MNO-led – see GSMA-MMU’s deployment tracker.

In their paper “A Digital Pathway to Financial Inclusion”, Radcliffe and Voorhies outline how basic mobile connectivity and digital remote payments are the first two necessary steps towards an inclusive digital economy.

So can India really achieve financial inclusion without involving the mobile network operators?

MicroSave’s work with Equity Bank has clearly shown that a bank-led model can indeed be successful and rapidly achieve high volumes of transactions. Indeed, Equity Bank’s agent-based banking model looks set to take Kenyan customers to Radcliffe and Voorhies’ Stage 3 of a full range of digital financial services. However, while there are disadvantages in an MNO-led approach to financial inclusion, it is increasingly clear that achieving a bank-led model of financial without MNOs leading the way is unlikely.

MNOs are better suited to managing high volumes of low value transactions (the mere mention of which is enough to give most bankers nightmares). Furthermore, most banks simply do not see the business proposition at the base of the pyramid or are too busy responding to more traditional high value, low volume opportunities offered by the burgeoning middle classes in most developing countries. Furthermore mobile- (as opposed to card-) based systems allow person-to-person and person-to-business payments (utility bills etc.) without using agents – thus offering an important user value proposition.

MNOs can (and perhaps must) play a catalytic role to bring banks into the market and thus achieve Radclifffe and Voorhies’ Stage 3 … by demonstrating that they can and will play an important role in the payments systems, and in the case of M-Shwari, beyond. This is turn will persuade banks leverage digital financial services to serve the base of the pyramid.

Fortunately, the business case for MNOs is based on reducing customer churn and digitising payments for airtime as well as the revenues for managing payments transactions. And payments are inter-spatial transfers that can be confirmed either by receiving the money, and/or with a simple call by the sender to the receiver – thus building instant trust. These factors (together with MNOs’ natural advantages as first movers in this market) put them in the perfect position to make the market for digital financial services.

The business case for banks is primarily based on offering a range of products. But since many of these products (for example insurance and savings) are inter-temporal (as opposed to inter-spatial) in nature, immediate confirmation and thus trust in the new digital financial system is much more difficult to achieve.

MNO-led systems therefore have a hugely important role to play to create the market – to build people’s confidence in digital financial services and local agent-based systems – and thus lay the foundation for digital financial inclusion. Emerging models such as the Axis Bank-Airtel and ICICI Bank-Vodafone tie-ups bode well for the future.

But if the Reserve Bank of India really wanted to turbo charge financial inclusion it would allow MNOs to act as issuers of e-money with proportionate supervision as discussed by Kate Lauer and Michael Tarazi, “Supervising Nonbank E-Money Issuers”, CGAP Brief, July 2012.

This blog was earlier published on GSMA website.