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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With more than 2.5 billion people around the world remaining un- or underbanked and major fluctuations in activity and usage among existing accounts, the financial inclusion industry still has work to do to increase the uptake and adoption of new products and services while also increasing the number of regularly active clients.

Many people understand the potential benefit of financial services and have the intention to use savings and loan products to improve their financial well-being. However, research shows that human beings do not always follow-through on their intentions. Frequently, we experience an intention-action gap due to psychological and external factors.

If we want to achieve full financial inclusion, we cannot simply offer more financial products and services to more people and hope they need, want, like, and use them. Instead, we should spend the necessary resources to ensure our products and services work for clients by doing two things:

1. Design products that meet the needs, desires, and preferences of our clients by collaborating with them on the design and delivery of these products.

2. Help our clients follow-through with the intentions and goals they have for their financial lives by focusing on taking action rather than just providing more information.

A new approach to product and service innovation, behavioral research and design, attempts to do just this. Drawing on insights from behavioral economics and principles from human-centered design, behavioral research and design attempts to uncover deep personal and contextual motivators and influencers to human behavior so we can better design products and services in a client-centered way. The goal of this method is not to focus on stated preferences and opinion or market research, but rather to develop deep empathy for human needs and desires while also making sense of observable behaviors – which may be contrary to people’s stated preferences. The tools often used in this approach involve in-depth interviews, behavioral and empathy mapping, customer journey maps, and other techniques focused on a small, indicative group of people. The multidisciplinary approach can help us better understand the motivations underlying people’s current behaviors and help us make more informed predictions about how people will behave when faced with new decisions in the future.

On behalf of ideas42, I recently led a project to improve microsavings outcomes among low-income clients of CARD Bank, Inc. in the Philippines. In collaboration with Grameen Foundation, my team used tools from behavioral economics and human-centered design to develop insights about people’s savings behavior. We used the market research and client segmentation CARD Bank, Inc. had already done to get a broad understanding of their clients and combined it with in-depth behavioral interviews, small focus groups, and rigorous quantitative analysis of transactional and administrative data to understand current savings challenges. The behavioral research we conducted informed the design of interventions to help people follow-through with their stated goals and intentions to save for their future. The outcome was surprising, and very successful!

Our behavioral diagnosis highlighted several key barriers to improving savings outcomes including two about savings goals and behaviors:

1. The savings “goals” clients have are distant and abstract, while immediate financial needs and temptations feel pressing.

2. Clients open new savings accounts with little intention or plan about how to use the account to reach their savings goals.

Savings Plan created to help clients set goals and make a plan for savings behavior.

To resolve these behavioral challenges, we designed four low-cost, easy-to-implement interventions that altered the account opening process and how clients engaged with their savings accounts. Most notably, we created a Savings Plan that incorporated goal-setting, plan-making, the feeling of having made a commitment and personalization to help clients overcome savings dormancy.

We conducted a randomized controlled trial to measure the impact of our interventions and we found that clients who were exposed to the behavioral interventions made initial deposits 15 percent higher than those who opened accounts using the standard process, and were 73 percent more likely to initiate a transaction in the new account. The intervention appears to have had the effect of increasing balances 37 percent compared to the control group over the course of the eight-week pilot.

Our project taught me some valuable lessons about improving financial behaviors at the BoP, which are relevant for other industries as well:

1. Developing a deep understanding of people’s intentions and the contextual or environmental barriers that prevent them from realizing their intentions, can support improved design and delivery. In the Philippines case, this meant we assisted clients in making concrete, aspirational savings goals with detailed, actionable plans for how they would meet that goal.

2. Using proven behavioral levers leads to successful design of savings products, which leads to improved savings behavior. In this case, we used several levers to incite improved savings such as goal-setting, the feeling of having made a commitment, specific plan-making, and personalization of the experience. Clients at CARD Bank, Inc. seemed to understand that saving was important for their families and would be helpful to them. They wanted to save but various things got in their way. As such, we could re-design specific features of how the savings products were presented and used to help clients realize their intentions.

3. Leveraging rigorous data analysis is an important component of developing a deep understanding of existing human behavior – and financial service providers need to support and develop this capability. Quantitative analysis allowed us to test several hypotheses about savings behavior that would have been hard to test with qualitative research alone. The combination of research methods resulted in a more holistic and comprehensive approach to product innovation.

While this project in the Philippines was successful, we’ve really just begun to scratch the surface of client-centered approaches to financial inclusion. Behavioral research and design attempts to understand the internal determinants (self efficacy, intentions, current knowledge, and behavior), social determinants (social norms and group identity), and environmental factors and obstacles (physical cues, architectural and spatial influences) influencing individuals’ experience. This depth of understanding can then be leveraged into products, services, and interventions that have the most potential for bridging the gap between intention and action.

This is not to say that every client has an intention-action problem and that this approach would solve his or her financial challenges. Instead, a methodology that focuses on understanding the specific behaviors, contextual challenges, and client experience will allow you to develop a bespoke solution for your clients’ particular needs. Additionally, more general market research and client segmentation tools help compliment the specialized and focused behavioral research method. This is yet another set of tools we can add to our toolkit to arrive at client-centered design and delivery of financial services.

If you’d like to read more about the savings project with CARD Bank, Inc. in the Philippines, you can download the white paper here. 

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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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