The following post, written by Tilman Ehrbeck, CEO of CGAP, was originally published on the Huffington Post Business Blog, with the title Behavioral Insights to Advance Financial Inclusion — or Why Swedes Are Not Necessarily Better Human Beings Than Danes.
In Sweden, all new drivers start out registered to be organ donors in the event of their passing. They have the freedom to opt out without negative consequences. Fourteen percent decide to do so and 86 percent remain organ donors. Across the Oresund, less than 10 miles away, Danes have to proactively decide whether they want to become organ donors. Less than 5 percent do, and more than 95 percent don’t. On the global scale of things, Sweden and Denmark are culturally quite similar: generally credited with being open-minded, socially responsible, common-sense Scandinavians.
The vast difference between Swedish and Danish organ donor participation rates (technically “presumed consent”) despite all the cultural similarities is one of the most dramatic examples of the power of policy design that takes into account pervasive human cognitive and behavioral biases to help us do what we generally think is a good thing, but often have a hard time following through with. One such bias is that, when decisions are tough, we tend to prefer the status quo; and relatedly, it’s much harder to proactively opt for something, rather than to simply stick with the offered default choice. (The approach, popularized by the term ‘nudging,’ even led the UK Prime Minister to set up a ‘nudge’ policy advisory unit.)
Based on the earlier path-breaking work on human decision-making by psychologists, an increasing number of economists have pushed and developed the notion of behavioral finance over the last decade, and increasingly business leaders, policymakers and regulators are picking up on these ideas to advance financial access for the poor and to improve consumer protection that actually works in financial services. New products are being developed and new policies are being formulated not on the basis of how people ought to behave, but based on what they actually do and not do.
In Malawi, Opportunity Bank observed that farmers had a hard time holding onto to post-harvest cash and often reached the next planting season without the required resources. Based on this observation, the bank developed a commitment savings product that allows farmers to stash away post-harvest payouts and distribute them over the year to smooth cash flows. The introduction of this project was accompanied by a randomized impact evaluation. The effects were significant. Farmers with access to the new product managed their savings and cash flow better, and in the subsequent season used more agricultural inputs (a 26 percent increase), had higher crop sales (a 22 percent increase in value of crop output) and a 17 percent increase in household expenditure relative to a control group without such access.
There are other such examples of behaviorally-informed product innovations. Green Bank in the Philippines offers a SEED (Save, Earn, Enjoy, Deposit) commitment savings product, which enables clients to withdraw from the account only once their goal date or amount is reached. Jipange KuSave in Kenya has tested the provision of interest-free loans with a third of the amount held back as savings. And Bancomer in Mexico has developed a savings product concept that mirrors the savings behavior of low-income Mexican households who literally use different cookies jars to separate savings for different future purposes.
Similarly, policymakers have begun recognizing that statutes on the books that ignore the reality of low-income families are of limited value. They have started to incorporate demand-side insights into their approaches. In Mexico, for example, the financial consumer protection agency “mystery shopped” financial services to assess how well bank staff were conveying disclosure norms to consumers. They found widespread misinformation and biases towards different types of personalities and even styles of dress that prompted them to rethink their approach to disclosure.
In the Philippines, consumer testing of credit contracts has led to reforms to the Truth-in-Lending Act. And in Senegal, policymakers have used consumer surveys to test and improve the functioning of dispute resolution mechanisms.
To read the rest of the post, visit the Huffington Post Business Blog.
Image credit: Paragon Wealth Management
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December 31, 2012 at 6:39 am
John Gitau
The insights herein are practically useful, especially as a guide to product development and financial behavior change catalysis.
January 4, 2013 at 3:11 am
John Gitau
In a recent Havard Business Review interview with Mohammad Yunus of Grameen Bank (www.yunuscentre.org) the power of a “nudge’ was dramatically demonstrated.
In one of the questions, the interviewer, Alison Beard asked Yunus “In the joint ventures you’ve done with big corporations, what are some of the obstacles you’ve faced?”
Yunus response was as follows: “I have more excitements than problems. But there was one interesting problem with Danone that became a classic case. We had a 50-50 joint venture agreement. Grameen would give Euros 500,000 and so would Danone. Grameen had no problem. But Danone could not provide its half. Weeks went by, they could not. Months went by, they could not. Finally, they explained. Their lawyers were objecting, saying that the money belonged to shareholders and therefore couldn’t be used to invest in a company that would not pay them a dividend.
But then Danone came up with a solution. It sent out a letter to all shareholders before the annual general meeting saying: “we want to start a company in Bangladesh that will tackle the problem of malnourished children. If you want to use part of your dividend to invest in this company, please sign up and tell us what percentage you want to put in”. Around 97% or 98% of the shareholders signed up and Danone ended up with Euros 35 million. So, there was a problem and there was a solution.
Following Tilman’s analysis in this post, had Danone phrased their letter to shareholders without a prompt on dividend percentage, leaving the shareholders to figure out how much of their dividends amount to invest in the new company, the contribution results would have been different.
When we guide the low income people in saving, in addition to using ‘savings products concept that mirror their savings behavior’, creative prompts can be used to achieve similar desired results.
In a case where I was offering financial literacy practical training to rural women groups in Kenya, upon giving them a Ksh,1000 note and asking them how much of it they would save, the values they gave were diverse. Some would say Ksh 100, others Ksh 200 with the highest proposed value being Ksh 300.
In another group, when I gave the same Ksh 1,000 in loose form of ksh 100 denominations and asked them how much of it they would save, the result was different with the highest value being ksh 500. Loose money value sent in their minds the idea of much. I would practically ask them to deposit the amount they planned to save in a bag and I would watch them toy around with the notes, each time adding into the bag after realizing they had more left in their hands to spend.
In the first case of ksh 1,000 single note for the first group, I guess the signal in their minds was ‘too little to save’. In addition, having to figure out in their minds how much from the note to save was more difficult, calling for calculation that left them unmotivated. In the second case, saving was made easier by the split factor and the seeing ‘more money’ and more left in the hands after the defined saving.
Like in the Grameen case above, perhaps invigorating desired behavior change is just a creativity away and choice of words becomes significant.
The lawyers in this case appear as obstinate obstacles to Danone’s empowerment goal. Within the financial inclusion fraternity, do we have conservative hardliners stuck to policies that block than enable? What is our openness to understanding customer behavior and crafting creative ways to accelerate behavior change?
Do we give more credit to the Danone Board for their creative pro-activity or the shareholders for their generosity? I would give more credit to the board for actually doing what Tim is suggesting in this post.
There is more to learn from behavior in this field of financial inclusion and my estimate is that this is the direction we need to look for rapid and wider inclusion.