Too much of post-microcredit financial inclusion still operates as a numbers game. We declare victors and write up successes based on headline customer acquisition rates, without looking much at underlying usage patterns. We continue to quote customer uptake or account registration numbers when providers give us nothing else to go by. We declare customers active and ourselves satisfied when customers use the service once every 1-3 months – can you imagine the education, electricity, water and sanitation people doing that? We judge customer relevance by scrutinizing average per-customer transaction volumes and sizes, even though those are usually driven entirely by the top ten percent of the distribution. If we looked deeper, we would find that many of those who are deemed to be underbanked are actually irrelevantly banked.

Glossing over usage data is a symptom that we are an industry which thrives on hype, an almost inevitable consequence when you mix a commendable spirit of do-goodism, deep donor pockets, and insatiable social media platforms. But it also has a lot to do with the fact that we actually know very little about what drives customer usage and value of formal financial services, beyond the occasional loan and remote payment.

Especially in the savings space, we are lacking an overall perspective on how to tackle the problem of relevance. We feel we need data, so we engage researchers to run excruciatingly detailed financial diaries, quantitative surveys, and randomized control trials. We feel we need product ideas, so we hire consultants to tell us what is successful elsewhere, though alas that is generally based on those awkward headline customer acquisition numbers. We feel we need processes, so we engage branded designers to run innovative rapid prototyping exercises. But it feels difficult to make all this come together purposefully.

A more structured approach would be based on formulating some key questions which can help sharpen our focus and narrow the solution search space. Let me propose three such questions, again focused on savings:

1. Changing savings behaviors versus changing savings mechanisms. A classic evaluation framework which VCs use to evaluate projects is the Ansoff matrix: is the proposed project targeting an existing or a new product, and is it doing so in an existing or a new market? They will typically shun heroic projects which propose new products in new markets. The analogy in financial inclusion would be: are we trying to get people to save more (changing behavior), or are we trying to create new ways for them to channel their existing savings behavior (new mechanism)? Put differently: are we trying to find new savings triggers (through behavioral insights or financial education) or are we trying to productize existing informal practices? My guess is that the latter will be an easier path than the former, though both are in principle valid. Unfortunately, much current savings product innovation is aiming for a muddled middle: new ways for people to do new things.

2. Primacy of savings goals versus savings vessels. It´s quite clear that separation of money into distinct lumps is core to people´s savings practices, as this helps them budget and maintain discipline in how money is used. But in staging this separation through a formal savings service, is it better to reinforce the savings goals or the savings vehicles themselves? A plethora of new web-based banking services, mostly in developed countries, now require that the customer start by articulating a goal (e.g. SmartyPig, Goalmine, Simple, Coinc). Being goal-oriented is meant to enhance motivation to save and build discipline. These services in fact have a financial education agenda. And yet my own observation is that most poor people do not have very concrete goals beyond some immediate concerns like paying the next round of bills or some inevitable lifecycle ones like marrying a daughter. They don’t lack other goals (like buying home appliances), they just keep them purposely fuzzy. If you have precarious finances, this is advantageous because your objectives must adapt to your evolving circumstances, and you can´t afford to set your heart on any one thing because there is a good chance you won´t get it due to circumstances beyond your control. Instead of fixing on concrete goals, they come to see their savings vehicles (cows, jewels, a ROSCA, etc.) as a proxy for a bunch of things they might buy with them if they achieve their savings goals. Forcing them to pick a goal may not feel natural to them, and that´s not for lack of financial savvy or determination.

3. Help me save versus help me keep it saved. Will formal savings services be more useful to people by helping them fall into a pattern of setting money aside regularly (providing discipline in), or by helping them avoid temptations to raid the money they´ve previously set aside when it is not so justified (providing discipline out)? In other words, should they emphasize rules about when and how much to save, or frictions which lay out conditions for liquidity? This is of course a question of balance. In informal finance, participating in ROSCAs and taking on loans are the main discipline-in mechanisms, while longer-term informal savings mechanism such as cows and jewels offer no rules but have many liquidity frictions built into them (indivisibility, waiting period, social peer pressure, financial penalty,…) which could be usefully emulated by formal financial products.

There may be better questions or better ways of articulating these particular questions. But it seems to me that if we don´t frame the discussion at this level it will be difficult to have a constructive global debate on how to promote formal financial services.

Image credit: IPA

Ignacio Mas is an independent consultant. You can learn more about his work here.

Have you read?

Savings Is Key to Merchant Payments in Developing Countries

Microfinance and Savings Outreach: What Are We Measuring?

Layering Financial Inclusion, Informal on Formal

Accurately assessing financial inclusion levels is fundamental for guiding inclusion efforts, but doing so on a large scale remains an issue, in spite of a growing supply of data and resources. A new composite index from the International Monetary Fund aims to change this. The new tool incorporates multiple inclusion dimensions and advanced methodologies, creating the ability to generate easily comparable inclusion calculations at the country, region, income, or even operational level.

ATM, Bangkok, Thailand

The new index addresses criticisms of previous financial inclusion indices, particularly the inability to accurately incorporate multiple financial inclusion dimensions into one tool. The index was built using data from IMF’s Financial Access Survey and from the World Bank’s World Development Indicators dataset. Released late last month, along with the tool, the IMF published the results of running the index using the country information included in IMF’s dataset for 2009 to 2012.

The index is based on a definition of financial inclusion that incorporates the dimensions of outreach, usage, and quality of financial services. To capture outreach, the index employs the variables of number of ATMs and financial institutions per landmass or adult population. According to the World Bank Global Findex, out of the 2.5 billion people who are excluded from formal financial services, 20 percent cite physical distance from the point of service as the main reason for not having an account. For usage, the index incorporates the variables of percentage of adults with at least one type of regulated deposit account, and percentage of adults with at least one type of regulated loan account. Although the IMF recognizes services quality as cornerstone to inclusion, they indicate there is not yet ample data to enable its incorporation in the index. However, expanding the index in future iterations to include quality is indicated as a possibility.

Among the results uncovered by running the index, the new tool found that the assessed countries’ inclusion rankings remained generally stable relative to one another between 2009 and 2012. However, one trend illustrated by the composite financial inclusion index, as well as by the outreach and usage sub-indexes, was a polarization based on income levels. For example, in 2009 seven out of the ten top-ranked inclusion countries were high and upper-middle income, and by 2012 this increased to eight countries. For outreach specifically, high and upper-middle income countries accounted for half of the top ten in 2009, and by 2012 they accounted for eight of the top ten. On the opposite end, this polarizing dynamic based on income was illustrated for the lowest ranking countries, too, for all three areas of outreach, usage, and overall inclusion.

Examining performance by region, the top ten ranking countries for all three indices demonstrate great geographic diversity. Though there is a preponderance of densely-populated and smaller-sized countries in the top ten for outreach (for example, Mauritius and the Maldives ranked one and two every year their data was available), the high-ranking countries for the other two areas exhibit more varied size and population distributions. Brunei and Thailand, regularly ranking in the top three for usage, demonstrate such diversity. This regional variation among the top rankings was not shown in the lower rankings. The African and Middle East & Central Asia regions accounted for almost the entire bottom ten for usage every year. For overall inclusion, the African region occupied six out of the bottom ten spots in 2011, and eight out of the bottom ten in 2012. In this final year studied, the bottom three countries were the Republic of Congo, followed by the Central African Republic, and, least inclusive, Chad.

For more on the new resource, click here.

Image credit: Allie_Caulfield

Have you read?

The Power of Mapping Financial Services Data

Adventurers, Unite: Voyaging Through Data in Our Mapping the Invisible Market Website

G20 Financial Inclusion Indicators: The New Data Sandbox