> Posted by Guy Stuart, Faculty Council Member, The Center for Financial Inclusion

In her recent paper “The Financial Behavior of Rural Residents: Findings from Five Latin American Countries,” Jacqueline Urquizo segments the savings market at three levels. The first level identifies whether the individual saves or not. The second level identifies how they save – in constant, small amounts, in sporadically larger amounts, or by simply holding, statically, a sum that they accumulated in the past. The third level identifies the source of savings: money set aside before the individual makes their usual expenditures; money left over after all expenditures have been made; or money earned through extra, income-generating activities.

Though data I have collected using the Financial Diaries methodology, suggest that almost all people save, even if it is only from week-to-week to smooth consumption, the paper’s approach to segmentation offers a key insight. That is, its approach to market segmentation focuses attention on consumer behavior rather than their socio-economic characteristics, such as age, income or livelihood. Though the latter and the former are related, consumer behavior is far more important for financial service providers to understand than consumers’ socio-economic characteristics.

It is the behavior of the consumer that dictates how a financial service provider can best channel his or her cash flow into a savings account. For example, a sporadic saver, saving money when the normal variance in their cash flow gives them extra to put aside, may not be the ideal candidate for a commitment savings account that requires regular payments. But they might be an ideal candidate for some sort of direct deposit service, if the reason for their sporadic savings behavior is that they occasionally make large sales (such as the sale of a large piece of furniture by a carpenter) in an established market, where buyers could pay them by depositing money directly into their account. (Though see here for an interesting hybrid, where direct deposit is combined with a commitment to freeze some of the money in the account for a specified period.)

Traditional market research often uses the socio-economic characteristics of consumers as a proxy for behavior. But new research tools, such as Financial Diaries or the mining of MFIs’ and banks’ own transactional data, allow us to focus on consumer behavior more directly. Furthermore, Urquizo’s paper has shown that one can use traditional methods, such as cross-sectional surveys, to get at consumer behavior. Regardless of the method, the important point is to keep the focus on behavior. And from that starting point, we should also be looking to understand the factors that drive behavior. For this we should turn our attention to the needs and motivations of consumers and the social structures in which they are embedded.

Guy Stuart is an independent consultant, Senior Advisor to Microfinance Opportunities, and Fellow, Ash Center, Harvard University. Mr. Stuart is also a member of the CFI Faculty Council.

Have you read?

New Credit-Risk Models for the Unbanked

What Financial Diaries Reveal about M-PESA Use

What Do We Really Know About Financial Behavior in Rural Areas?