Cross-Selling – The practice of selling a new product to established clients who are currently using other products, (e.g. when a financial institution markets a loan to savings account holders).

When done correctly, cross-selling can offer advantages to both clients and providers; new products increase revenue lines and customer loyalty while customers receive access to a wider product range from a provider they know.  Cross-selling can also decrease customer acquisition costs.  Unlike product bundling, cross-selling does not require clients to purchase services they might deem unnecessary. 

Spotlight Fact: Small savings services are arguably the most important financial service for the poor, yet they are costly to provide.  A new CGAP study by Glenn Westley and Xavier Martín Palomas shows that cross-selling increases the viability of small savers.  As the paper states, “If the MFI earns a profit on the [cross] sale of [other] products, this profit may partially, fully, or more than fully compensate for the high operating costs of small savings.” The study highlights ADOPEM, an MFI in the Dominican Republic, where cross-selling loans and insurance products to small savers earns the institution a total of US $1.34 million in profits.  Without its small savers ADOPEM would lose 30 percent of its profits.

Suggested Resources:

For more details about how cross-selling can improve the business case for small savers, see: Glenn D. Westley and Xavier Martín Palomas, “Is there a Business Case for Small Savers?,” CGAP, Occasional Paper No. 18.

For more financial inclusion terms, please visit the Financial Inclusion Glossary.

Flickr credit:  AndyRob

Word of the Week – Continually Excluded: Individuals who remain financially excluded despite progress to date toward financial inclusion.

The continually excluded represent groups of people that are most difficult to reach with financial services, such as people with disabilities, rural and remote populations, and extremely poor populations.  As financial inclusion pushes out the viability frontier the continually excluded segment will shrink but will continue to represent the populations which require the most innovation in order to serve.

Spotlight Fact: A recent paper by the Center— “A New Financial Access Frontier: People with Disabilities”—summarizes expert estimates that there are 650 million disabled people in the world and 520 million (80 percent) live in developing countries.  At the same time, less than half of one percent of all microfinance clients are disabled people. Although financial services are not appropriate for all disabled people, they nevertheless constitute an important segment of the continually excluded.

Suggested Resources:

To learn more about financial inclusion for disabled people, read: Josh Goldstein, “A New Financial Access Frontier: People with Disabilities,” Concept Paper, Center for Financial Inclusion, June 2010.

To read more about other types of continually excluded populations such as the “ultra poor” and innovative programs to bring appropriate financial services to them, we recommend: Syed Hashemi and Richard Rosenberg, “Graduating the Poorest into Microfinance: Linking Safety Nets and Financial Services” CGAP Focus Note No. 34, February 2006.

For an example of how understanding the continuously excluded can help improve national financial inclusion strategies, see: “Mexico’s Prospects for Full Financial Inclusion,” White Paper, Center for Financial Inclusion, September 2009.

For more financial inclusion terms, please visit the Financial Inclusion Glossary.

For more information on CFI’s Financial Inclusion 2020 campaign, sign up for updates here.

Flickr credit: khrawlings

Access to financial services creates calmer waters by smoothing consumption

Word of the Week – Consumption Smoothing: Reduction in the variability in consumption by households, often through the use of financial services.

Consumption smoothing is often cited as a benefit of access to financial services.  For many financially excluded households, income and consumption are volatile.  As explained in Portfolios of the Poor, “One of the least remarked-on problems of living on two dollars a day is that you don’t literally get that amount each day…you make more on some days, less on others, and often get no income at all.” Savings and loans allow people to tap into past income (through savings) or future income (through loans), helping them smooth consumption. Consumption smoothing can refer to short, medium, or life-cycle time horizons.

Spotlight Fact: Research has shown that access to financial services can reduce a household’s consumption variability by about 50 percent.  In other words, when faced with income shocks, households with access to microfinance experience the shock with half the severity of those without access.

Suggested Resources:
For a look at how poor families manage risk through income and consumption smoothing, and what the associated costs are, a good place to start is with Jonathan Morduch’s “Income and Consumption Smoothing,” The Journal of Economic Perspectives, Vol. 9 No. 3 (summer, 1995).

For a study that demonstrates the long-term effects on consumption smoothing of financial access: Nidhiya Menon, “Consumption Smoothing in Microcredit Programs,” (Manuscript, Brandeis University, August 2003).

For a detailed account of how the poor manage their resources and why they need formal financial services:  Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, Portfolios of the Poor, (Princeton: Princeton University Press, 2009).

For more financial inclusion terms, please visit the Financial Inclusion Glossary.

For more information on CFI’s Financial Inclusion 2020 campaign, sign up for updates here. 

Flickr credit: richardefreedman

Word of the Week – Consumer Credit – Credit allowing an individual to purchase and/or use a consumer good or service while paying for it over a set repayment period.

Consumer credit is in many countries the fastest-growing financial service, but it doesn’t always receive the most attention in terms of financial inclusion. Consumer credit may be offered by retailers who finance purchases of their merchandise. Financial institutions may offer it in the form of personal loans or credit cards.

Spotlight Fact: Although consumer and micro-loans can look alike in size and be distributed to the same groups of borrowers, they generally differ in several ways:

• Micro-credit is intended for income-generating entrepreneurial purposes, while consumer credit is meant to aid in purchasing goods. (Despite this, both forms of credit can often be used for different purposes; micro-entrepreneurs may use consumer credit to fuel their business or take out a micro-loan to buy a consumer good. Tracking the end-use of loans is difficult.)
• Consumer credit is more often given to salaried workers, while traditionally microcredit is extended to households operating in the informal sector.
• Consumer loans are generally made against collateral. Microloans are not collateralized and require a more hands-on and costly assessment by loan officers to be distributed. (This can explain why consumer credit sometimes tends to grow at a faster rate than micro-credit.)

Although consumer credit is not intended to help develop micro-enterprises, it can play an important role in helping smooth low-income people’s consumption.  At the same time, when consumer credit competes with microfinance (especially in environments where institutions are growing rapidly and credit bureaus do not exist), it can contribute to client over-indebtedness and saddle them with other problems.

Suggested Resource: For a great summary of the dynamics between micro-credit and consumer credit, as well as the risks that arise when blending the two credit types, we recommend: “Consumer Credits for the Poor – Risk or Opportunity?” by responsAbility.

For more financial inclusion terms, please visit the Financial Inclusion Glossary.

For more information on CFI’s Financial Inclusion 2020 campaign, sign up for updates here. 

Smart Microfinance protects clients, businesses and the industry as a whole.

Word of the Week – Client Protection Principles: Standards of appropriate treatment that clients should expect to receive when doing business with a microfinance institution, as agreed upon by the microfinance industry-wide effort called The Smart Campaign. 

The Client Protection Principles include: 1. Avoidance of over-indebtedness; 2. Transparent and responsible pricing; 3. Appropriate collections practices; 4. Ethical staff behavior; 5. Mechanisms for redress of grievances; 6. Privacy of client data.  

Spotlight Fact:  The Client Protection Principles are evolving with the guidance of a Smart Campaign Task Force on “The Evolution of the Principles,” made up of microfinance industry leaders.  One recent change added the words “and responsible” to the principle on transparent pricing to emphasize the need to keep pricing as affordable as possible consistent with institutional sustainability.  The Task Force is working to broaden the principles so that they can be applied to the provision of all financial services, not only credit. 

The Smart Campaign has gathered nearly 1,200 endorsers of the Client Protection Principles, representing 110 countries.    

Suggested Resources: 

1. Smart Microfinance and the Client Protection Principles – an introduction and explanation of the principles.
2. Getting Started Questionnaire: Client Protection Self Assessment for Microfinance Institutions – a tool for MFIs that are interested in operationalizing the client protection principles.
3. Smart Lending: Client Protection in the Lending Process – how and where the client protection principles can be applied in the credit process.
4. Implementing the Client Protection Principles:  Guide for Investors – a tool for investors interested in supporting the industry’s implementation of the client protection principles.

For more financial inclusion terms, please visit the Financial Inclusion Glossary. 

Flickr credit: Karen Roe

Traveling hours to reach the nearest bank branch is common and expensive for the poor

Word of the Week – Branchless Banking: Banking models and delivery channels that deliver financial services to clients through outlets other than full-service bank branches.

Branchless banking refers to mobile banking, correspondent and agent banking, electronic banking, and the use of ATMs.  The appeal of branchless banking in context of financial inclusion is its ability to close the location gap and increase affordability through automation.

Spotlight Fact: Studies estimate that branchless banking solutions, such as mobile banking, can drive down the cost of banking for clients by up to 5 to 10 times, just by eliminating the need to travel to the nearest branch. On the side of the providers, estimates show that mobile banking can reduce the cost of delivering financial services by more than 50 percent.

Suggested Resources:

•  Mark Pickens, David Porteous, and Sarah Rotman, “Scenarios for Branchless Banking in 2020” CGAP Focus Note, No. 57, October 2009, http://www.cgap.org/gm/document-1.9.40599/FN57.pdf
• Barclays and Economist Intelligence Unit, “Banking for billions: Increasing access to financial services” http://www.newsroom.barclays.com/Media-Library/Banking-for-Billions-report-165f.aspx

For more financial inclusion terms, please visit the Financial Inclusion Glossary.

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

Flickr credit: moyerphotos

Words of the Week:

Biometrics – Technology for recognizing individuals based on physical traits, such as fingerprints. Used as a form of identification and access control.

Biometric Card – A card that uses biometric technology to identify and authenticate the card user.

Generally biometric cards use fingerprints to validate that the cardholder is the card owner.  Biometric cards serve as effective identification cards for individuals who lack other forms of formal identification, or are illiterate.  Biometric cards can be combined with smart cards to prevent use of the card in financial transactions by individuals who are not the card owner, making transactions more secure.

Spotlight Quote: “Before any notion of biometrics or other such front-end technologies are entertained, MFIs need to ensure that adequate and efficient core management information systems (MIS) are in place, says Normand Arsenault, a global IT systems consultant and microfinance specialist. The risk of not doing so, he says, is that investments in technology will simply add costs without improving scalability, productivity and services to customers.”

Suggested Resource: Steve Whalen, with contributions from CGAP Staff and echange LLC., “Biometrics Technology,” CGAP IT Innovation Series.

For more financial inclusion terms, please visit the Financial Inclusion Glossary.

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

Flickr credit: didbygraham

Word of the Week — Banking Outlet: A physical place where clients can access a financial service.

The following can all be considered banking outlets: a bank branch, an ATM, a banking agent (such as a gas station or post office that provides financial services), a retail store with in-store banking, a mobile phone, a website (in the case of e-banking), or a point of sale (POS) device (these are portable devices with antennas or connected to tellers that function as a sort of ATM).

The existence of convenient and easily accessible banking outlets is a significant part of expanding financial inclusion.

Spotlight Fact: Center for Financial Inclusion research shows that 35-45 percent of Mexican households live in towns that lack any banking outlet.

Other researchers have found enormous country-by-country differences in access to banking outlets.

Mexico, for example, has 7.6 bank branches per 100,000 people, while in Spain the comparable figure is 95.9. Spain also averages 78.9 bank branches per 1,000 sq. km., compared to only 4.1 branches for a comparable area in Mexico.

Suggested Resources: To read more of the research on banking outlets, see Thorsten Beck, Asli Demirgüç-Kunt, Maria Soledad Martinez Peria, “Reaching Out: Access to and Use of Banking Services Across Countries,”Journal of Financial Economics (85)1.

For more financial inclusion terms, please visit the Financial Inclusion Glossary.

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

Word of the Week – Avoidance of Over-indebtedness:

A Client Protection Principle that states that providers will take reasonable steps to ensure that credit will be extended only if borrowers have an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness.

Responsibility for avoiding over-indebtedness rests with both clients and institutions. For clients, this means making prudent decisions and judging their repay­ment capacity. For institutions, this means carefully assessing a client’s ability to repay. Over-indebtedness is not the same as multiple-borrowing—when borrowers take simultaneous loans from several sources—because borrowers might be capable of handling several loans without becoming over-indebted. Nonetheless, lack of credit bureaus and information-sharing between providers poses risks because it prevents institutions from being able to verify the existing indebtedness of prospective clients.

Spotlight Fact: One of the greatest challenges around over-indebtedness is how to measure it. We understand over-indebtedness in general terms but it is difficult to articulate with measurable precision. As Rich Rosenberg asks, is a client over-indebted when a loan equals a certain percentage of her disposable income? Or is it when she says that she finds it difficult to repay? If we could define and measure over-indebtedness more clearly it will help us to prevent it.

Suggested Resource:

• “Facing Over-indebtedness at Partner Microcredit Foundation” SmartNote – Read about one MFI’s strategy to avoid client over-indebtedness.
• “Avoiding Over-indebtedness” – A Smart Campaign webinar on how to identify, evaluate, and avoid over-indebtedness.

For more financial inclusion terms, visit the Center’s interactive Financial Inclusion Glossary.

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

Flickr credit: sektordua

Graph from: Adrian Gonzalez, "Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus" MIX Data Brief, No. 4

Word of the Week – APR:

An acronym for Annual Percentage Rate; a form of stating an interest rate in which the interest rate is annualized and all fees are incorporated.

Quotation of rates in APR terms facilitates price comparison.  It is important that clients are able to compare prices and select the loan with the greatest value for their money; however, diverse manners of portraying the price of a loan make it difficult for microfinance clients to compare interest rates.  APRs are always declining balance rates.  Additionally, an APR does not include compounding interest unlike the effective interest rate (EIR). See also nominal APR.

Spotlight Fact: Despite the recent debate on whether microfinance institutions are making unfair profits from the poor by charging exuberant interest rates, a recent MIX publication that analyzed over 1,000 MFIs, shows evidence that operating expenses are far more influential on microfinance interest rates than profits, and that removing profits altogether would not change interest rates for clients substantially.

“The most important result from this analysis is that operating expense is the largest factor contributing to the level of both [interest rate] premiums and interest rate (yields) levels of microfinance in­stitutions…For both yield and premium, the relative contribution of profits is less than one-eighth of the relative contribution of operating expenses.”

Suggested Resources:

• “Responsible Pricing: The State of the Practice” (July, 2010) –A recent paper by the Smart Campaign examines the full range of approaches to responsible pricing of loans, including interest rate caps, promoting competition, comparative transparency, and return on equity limitations.
• “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Muhammad Yunus,” MIX Data Brief, No. 4—A publication by Microfinance Information Exchange (MIX) that analyzes the interest rates of global MFIs in order to better understand the factors affecting the prices of microfinance loans.

Graph from: Adrian Gonzalez, “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus” MIX Data Brief, No. 4