The following post, written by Tilman Ehrbeck, CEO of CGAP, was originally published on the Huffington Post Business Blog, with the title

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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The following post, written by Jeanette Thomas, was originally published on the CGAP Microfinance Blog. It reinforces the importance of appropriate product design in achieving full financial inclusion. The Smart Campaign, which is about to launch its Client Protection Certification Program, includes a Client Protection Principle for appropriate product design and delivery as informed by client characteristics, needs, and feedback. 

Twenty-two million households in Mexico are middle or low income, and only half of them have a bank account. It’s not that they lack access. Most have had a bank account, but closed it after fees and commissions drained their balances. They are not so much “unbanked” as “de-banked”—they have voluntarily opted out of having a bank account because the banks don’t offer what they need.

Earlier this year CGAP, in partnership with Bancomer, commissioned IDEO.org, the non-profit arm of the California firm known for its human-centered design methodology, to create a savings product that would meet the needs of low income Mexicans. Bancomer, a large Mexican bank, wants to reach more people by offering products that will work for the low income market. This video tells the story of how the team developed products that meet the needs of poor clients, while also making the business case for the bank.

The team set out to re-bank the de-banked. But to do so they had to come up with a product that was better than the informal alternatives. “How do you beat the mattress?” asks IDEO.org consultant Karen Greiner. “What would bring them back?”

People associate the bank with a commission. Magali Crux, a detergent seller in Chalco, a migrant town on the southwestern outskirts of Mexico City, says “To tell you the truth, I don’t really trust banks.”

“She has such a negative experience of the bank,” explains IDEO.org’s business designer Chava Zepeda, “that she doesn’t want to get a bank account.”

Poor and low income Mexicans have found ingenious ways to “bank” themselves through informal mechanisms and social networks of family, friends, and neighbors.

They separate their savings into different containers as a way to manage their money, and to prioritize what can be spent. They stash savings into separate cans, or Tupperware that they hide in the kitchen, as a way to save themselves from temptation.

They use tandas—informal savings and loans groups— as a means to borrow and save. Almost everyone the team met during the research was either in a tanda or organized tandas.

Finding a way for the bank to provide additional value for low income customers that goes beyond the informal alternatives was key for the success of the project.

To read the rest of the post, and to watch the above mentioned video, visit the CGAP Microfinance Blog.

Image credit: CGAP

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