> Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”

“Know your client” is a popular phrase in conversations about financial inclusion and business in general. But where does such knowledge come from? Does it end with your client’s expressed needs and desires? Can it also incorporate behavioral research insights or consumer protections that the client may not even demand?

Shawn Cole of Harvard Business School opened the second day of “Rethinking Financial Inclusion” – a one-week program offered by Harvard Kennedy School Executive Education – with a question all providers might ask themselves when modifying existing products or developing new ones: “If you were the customer, would you go for that deal?”

Cole pointed out that products meant to “bank the unbanked” (i.e., first-time users) must be designed differently from products meant to tempt new customers away from competitors. He described the experience of First National Bank of South Africa in responding to government calls to encourage savings among the poor and draw black South Africans into the predominantly white formal banking sector. First National Bank decided to offer a lottery with large prizes to new depositors.

In debating whether a lottery would attract customers, participants cited examples from their own work, such as a mobile money account offering free insurance to savers who maintain a sufficient balance in their accounts. Recognizing that the poor are already saving, informally, the challenge is to develop products that draw them into the formal sector safely and responsibly. Another provider warned against complicated offers. “Structured products can be very esoteric.”

The concerns participants voiced fell into two categories: ones that apply to anyone (e.g. for nearly everyone a flashy new product loses its luster after the third page of terms and conditions), and ones that are specific to the poor (e.g. how do you draw people into banking, when even walking into the building itself is intimidating?). Both sets of concerns underline the need for financial capability development and customer-centered product innovation. The potential interest in formal financial products may be there, but uptake is obstructed by consumers’ lack of confidence, or poor understanding of the products’ components, or inability to surmount intimidating “barriers to entry” such as small print.

Sendhil Mullainathan presenting at the FI2020 Global Forum

In an effort to clarify the principles that govern how many low-income consumers make decisions, Sendhil Mullainathan – a behavioral economist and cofounder of ideas42 – laid down some core concepts about the psychology of the poor that program participants went on to use throughout the week. Mullainathan drew on his recent book, Scarcity: Why Having Too Little Means So Much, coauthored with psychologist Eldar Shafir. Their thesis is that scarcity – whether of time, or of money – has predictable effects on the mind. While there are benefits to scarcity (say, the heightened focus we experience when working on a deadline) there are also severe costs, as considerations beyond the immediate scarcity are neglected. His experiments with both rich and poor subjects in rich and poor countries – and some even with the same subjects in periods of scarcity and plenty – reveal how in the face of poverty, the mind jettisons certain important processes.

Mullainathan cited studies that prove that, out of necessity, the poor are “money experts” – for example, less likely to be duped by misleading price structures. On the other hand, he likened the mind operating under financial scarcity to a web browser functioning more slowly when multiple windows are open, and bandwidth is taken up by multiple tasks. He called this the “bandwidth tax.” The need for cash for a medical expense today falls within the poor client’s bandwidth; the high interest a moneylender will charge tomorrow, outside. Options that are more sensible but incur costs such as travel or fine print are ignored, not out of ignorance or laziness, but out of necessity.

Financial products meant for the poor are more likely to fail if they do not take both phenomena – the increased shrewdness of the poor and their decreased bandwidth – into account. “We think in terms of financial constraints,” Mullainathan said, “but we must design products for bandwidth constraints.”

In an afternoon session, Piyush Tantia, who works with Mullainathan at ideas42, presented several real-world examples of how behavioral questions come into design, such as how to get Nigerian farmers to buy flood insurance when they have a cultural disdain for insurance companies, and how to solve cash-flow problems for Indian villagers who prefer not to have cash on hand so they can’t be asked to lend it out to friends and relatives.

Tantia shared details of how CARD Bank, an MFI in the Philippines, succeeded in getting people to actually use the savings accounts they had. The bank developed a new account opening process that allowed clients to set a specific savings goal, helped them make a savings plan, and gave them calendars to visually track their progress. The result, as shown in a randomized trial, was larger opening deposits, greater likelihood to make a second deposit, and a higher balance seven weeks later.

“The behavioral aspect is the hardest part of the design process,” Tantia concluded. “People are not rational economic models.”

By the end of the day, participants were already incorporating the behavioral lexicon. They were starting to think about customers in a new and, it is hoped, more insightful way.

Rohini Pande and Asim Ijaz Khwaja of Evidence for Policy Design (EPoD) at Harvard Kennedy School will offer the “Rethinking Financial Inclusion: Smart Design for Policy and Practice” program again next May 10-15, 2015. Visit the HKS Executive Education website for details.

For more information on Financial Inclusion 2020, sign up for campaign updates.

V. McIntyre is a freelance writer based in London.

Image credit: The Center for Financial Inclusion

Have you read?

Day One at “Rethinking Financial Inclusion: Smart Design for Policy and Practice” – Penicillin Versus the Magic Bullet, or, Why Data is Not Mere Annoyance

Behavioral Approaches to Product Innovation at the Base of the Pyramid

Contemplating Scarcity and Its Implications for Microfinance and Poverty Alleviation