> Posted by Alissa Fishbane and Allison Daminger, Ideas42
What does it take to successfully design, pilot, and scale an effective new financial product or service? Much more than most would realize! That’s why CFI’s recent behavioral insights workshop in Bogota, Colombia, had a clear focus: understanding the challenges of applying behavioral science to the operations of Latin American financial institutions. CFI asked ideas42 to kick off the day with an overview of behavioral science and its implications for the design and scale-up of financial products.
At ideas42, we use insights from behavioral science to diagnose behavioral bottlenecks preventing people from taking their desired actions, and design remedies that help organizations overcome them. We then measure the impact of these remedies through a randomized evaluation before they are fully scaled. Any successful program that hinges on people’s decisions and actions, as nearly all consumer finance initiatives do, requires a behavioral approach.
We’ve found that many promising financial programs underperform simply because people often don’t behave the way we expect. As humans, even when we know what’s best for us, we don’t always follow through. We put off applying for a program that will help us save for retirement, or a loan to expand the family business. And when we do make it through the initial sign-up process, we often fail to save consistently or make monthly payments on time. Whatever the specific challenge may be, the result is that resources aren’t used efficiently. Because of this, neither financial organizations nor the individuals they serve see the returns they could be seeing from a product that accounts for these human tendencies.
But while behaviorally informed product design is an essential piece of the puzzle, there is much more to it, as our recent white paper on scaling financial products found. Institutions have to find pathways to achieving profitability, overcoming any organizational impediments, and navigating often-complex regulatory environments. Solid design alone cannot protect a financial innovation from the many structural challenges it will face.
What’s more, it is rarely acknowledged that the people who are responsible for driving this process within financial institutions will have the same behavioral biases as their intended audience. For example, whether we are playing the role of consumer or provider in a particular setting, we all selectively interpret information; are overconfident about future outcomes; and underestimate how long it will take to get something done. These can make the structural challenges even more difficult to overcome.
At the workshop, Colombian financial inclusion professionals were eager to share lessons from their own experiences. Our resulting conversation centered on four key recommendations:
- Have a “champion” at the top. Without an influential senior leader to protect it throughout the process, any innovation is even more vulnerable to budget cuts and internal priority shifts.
- Involve representatives from many departments early on. Though the role of the sales or legal teams might not be obvious in the early stages of product development, these and other departments may flag important concerns that could derail the innovation if discovered later on. Of course, working across a dozen departments presents a myriad of challenges, and therefore an effective project leader, nominated from the top, is also needed to motivate and communicate within and across specialized teams.
- Make the business case at the outset of a new project. Ensuring that a product will be economically viable at scale doesn’t just enhance profitability; it increases the likelihood that a product will be championed and supported by individuals and departments across the institution.
- Plan for scale from the start. Without a clear vision of how an innovation will later be scaled, a project is likely to be derailed by lack of resources in the budget, resistance from departments not involved in the pilot, distributional hurdles that didn’t exist on a smaller scale, or simply by lack of momentum.
These insights echo findings outlined in our recent white paper, and it was exciting to see our analysis reflected in the real-world experiences of Colombian financial institutions. The workshop in Bogota proved to be a successful exchange of ideas and practices between financial providers and behavioral experts. As ideas42 continues to build our work in the financial inclusion space, we are taking a deeper dive into examining the economics of product models from a provider perspective. Stay tuned to the CFI blog and the ideas42 website for more insights early next year.
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December 17, 2014 at 4:20 am
John Gitau
The statement ” –people often don’t behave the way we expect” is interesting. Which people? And who are we? Suppose it is our expectations that are deviant and not the other people’s behavior? For example, in Kenya, we in the financial inclusion field expect M-pesa consumers to store their digital money values as savings in their mobile wallets. When they withdraw almost all the money, we get surprised and call that deviation. Yet, the real true behavior is that people know best the form they want to keep their money and have many reasons and justifications that behavioral studies may not unravel. So, our expectation is what is deviant. Take another example. People in the security level of Maslow’s hierarchy of needs expect the other people in the physiological need level to be concerned about security. So, they recommend security products for them and when there is no uptake, they conclude that they are not following through what they need. The real truth is that people at physiological level are thinking about food. So anybody thinking security for them will end up reaping deviant expectations.
I like this truth– people driving the process in the financial institutions will have the same behavioral biases as their intended audience. Welcome to the melting point. So, biases are deviant expectations based on the stage within the hierarchy of needs?
It reminds me of a story in Chinua Achebe’s book ” Things Fall Apart”. Unoka was a heavily indebted poor man. When a creditor came to his house early in the morning to demand repayments, Unoka humbly welcomed him and said to him ” Do you see those many lines on the wall? They represent people I owe money, and each line represents a debt. But none of those people have have woken me up early like you have, to ask for their money. I will pay you your money when I get it. The sun shines on those who are standing before it shines on those who are kneeling before them”. The creditor just woke up and left without uttering a word. The lender expected Unoka to have money to pay. But he was irredeemably broke. The lender’s expectation was deviant. About the sun shining first on those standing, it is a hyperbolic metaphor of a dichotomy and knowledge asymmetry- the mismatch between expectation and the truth that confronts behavioral studies.
While the recommendations highlighted in this post sound like climbing a tree from the top, the humble admission of the prevalence of challenges that bedevil the behavioral based product designs is admirable, bereft of the bragaddocio we have witnessed lately hoisting behavioral science as the breakthrough to human behavior we have all been waiting for.