“I feared and distrusted them: feared them because they could reject me and expose me to mortification of defeat, and mistrusted them because I did not understand them.”

In his reminiscences of youth, Alan Moorehead said this of women, but it could equally apply to many people’s attitude to banks. People’s concerns about banks are phrased in surprisingly similar terms wherever you go in the developing world. (See this clip for a typical example.)

This got me thinking: how much of people’s fear and mistrust of banks is due to a lack of understanding? Let’s explore three typical articulations of the distance between banks and ordinary people.

“Banks are for rich people; what do they want from me?”

The understanding gap here is in the motivations and intentions of banks when they approach the base of the pyramid. It’s a very human reaction: if someone who has never shown any interest in me suddenly starts cozying up, I get on guard. Banks venturing down-market need to explain where they see the opportunity, otherwise people will not believe there is a commitment or, worse, will interpret ulterior motives. This requires articulating a joint vision of success for the bank and the new client segments, and consistently demonstrating behaviors that gives credence to the claim. Equity Bank in Kenya has been particularly effective in conveying the idea that its success is intertwined with the success of ordinary Kenyans; its positioning is credible.

 “Money keeps disappearing from the account; they bleed it with commissions.”

Priciness alone does not alienate poorer people, for unattainably expensive things sometimes become useful aspirational markers (think TVs and higher-end mobile phones). Pricing complexity and lack of transparency don’t necessarily trigger outrage and rejection, as long as I feel I get value every time I get charged (think mobile telephone services). What characterizes bank charges is their lack of connection with people’s perception of value. It’s not easy for banks to justify charges when people are apt to wonder: why should I pay to deposit (giving you money on top of money?), to keep money in a bank (monthly fee, even if I do nothing?), or to get it back (withdrawal fee as ransom?)? M-PESA in Kenya addressed this by loading the price disproportionately on the electronic rather than on the cash in/out legs for the more common transaction sizes, since for most people the little miracle that is M-PESA does not involve the conversion of cash to electronic value but being able to send the value over long distances. This pricing model is the opposite of what a company’s cost orientation would lead to, and a drawback is that it reduces user incentives to evolve towards a digital money ecosystem. M-PESA users may not know exactly how much they are being charged, but they have a good sense of when and what for.

“What if it fails?”

The third obvious sort of distrust is about the permanence of banks. Most people can point to someone, somewhere who lost their money when an institution went under, or simply vanished. Many of the financial institutions that serve the poor are not sufficiently professional and are too small to be of concern for banking authorities. Many operate with a façade of formality but are in fact outside the law. How can I tell? The larger ones may be subject to adverse political interventions. Rumors are rife. It may simply not be worthwhile to try to figure any of this out when all I have is a few tens or hundreds of dollars and plenty of places to stash it in, things or animals to buy, and friends to loan it out to. So if you are a bank, how do you communicate solvency and permanence? Traditionally, banks invested in big marbled premises, but that signals unproductive money-waste and risks putting distance between the bank and prospective customers. A better way may be to display largesse with the community and invest in many local businesses – signaling that as a bank you intend to stay there and grow with the community.

For all these reasons, banks need to make themselves understood if they are to break beyond their traditional markets and serve poorer customers. People need to understand why banks want to do business with them, when and why they require charges, and why they have the power to succeed. Understanding is not just about branding and marketing communications: it’s about demonstrating purpose, benefit and commitment.

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

Image Credit: African Business Review

Have You Read?

The New Client Education Resource Library: Tools for the Microfinance Industry

Financial Education: A Means to a Means

Smart Campaign Unveils e-Learning Course to Boost Client Protection and Financial Education

The following post was recently featured on the Huffington Post’s Impact Blog. The post begins:

A few years ago I visited some coffee farmers in a mountainous section of Uganda. When they were due to be paid for their coffee they spent most of a day traveling down the mountain to the provincial capital. At the office of the coffee marketing company each farmer received an envelope with his payment in cash. On the long journey home the farmers often fell prey to attackers who knew their pockets would be full. A few attacks had been fatal.

For people like those Ugandan farmers, yesterday’s launch of the Better Than Cash Alliance by seven major public and private organizations is potentially very good news. The seven founders of the Alliance – Citi, the Ford and Gates Foundations, the Omidyar Network, Visa, UNCDF and USAID – have joined to promote the transition of the economic lives of the world’s poor from cash to electronic.

Projects to pay government benefits and humanitarian aid in electronic form are a boon. They increase security and accountability while decreasing cost. Until now, however, such projects have been isolated, with no worldwide, deliberate, coordinated push. The Alliance also adds an important new dimension by including in its ambit private sector companies that buy from or sell to the poor (like coffee purchasers).

The Alliance’s theory of change is laid out in a white paper by Bankable Frontier Associates, “The Journey toward ‘Cash Lite,’” which argues that the shift will involve several steps. The paper has the important insight that the early steps may not be as life-changing as one might hope.

Consider the Ugandan coffee farmers. Sometime after my visit, the coffee marketing company arranged to pay into a cooperative bank, which distributed the payments (electronically) into bank accounts in each farmer’s name. At this point the farmers still traveled to town. Rather than standing in line at the coffee company, they stood in line at the cooperative bank. They still went home with cash, because they could not use the money in the village if it was in the bank in town, although they might leave some money on deposit as savings to use on their next trip. They were still prey to robbers, and their lives did not change much. However, they would now show up in national statistics as at least partly “financially included”. The white paper calls this stage “Few to Many”, a situation in which major payers like government sent payments to recipients through electronic means. Because the few payers are usually big, sophisticated organizations, it is relatively easy to convince them to make the electronic switch, and that is why “Few to Many” is step one.

Huge numbers of people in the developing world are in a “Few to Many” stage. The Global Findex, a powerful resource of data on financial inclusion, was released earlier this year with the headline that 41 percent of adults in the developing world have a bank account. In fact, the picture is much less positive than these numbers suggest.

Many bank accounts in the developing world are relatively inactive. In high income countries, most people use their bank accounts as their money management hub, which can be seen by the fact that 72 percent of people with accounts use them actively (e.g. withdraw more than twice per month). Not so in low and middle income countries, where only 17 percent of people with accounts use them actively. Like the Ugandan farmers, many people use accounts simply as a way to get paid or receive government benefits, a classic “Few to Many” situation. If we measured financial inclusion by the number of people who both have and actively use bank accounts, we would have to admit that only 7 percent of the developing world’s adults are “included”. A shockingly small number, indeed.

There is a profound difference in the way people in the developed and developing worlds manage their money. Research such as reported in the landmark book, Portfolios of the Poor, shows that even very poor people conduct complex financial lives to cope with their low and uneven incomes. Money management is conducted through cash in the hand and a balance sheet in the head. Portfolios of the Poor states, “They keep savings at home; join savings clubs and savings-and-loan clubs; transact with family, friends and neighbors, and employers; and, where doing so is feasible and attractive, sign on with formal licensed providers.” When a formal financial service is offered, like government benefits paid to a bank account, the client is unlikely to change how she handles the rest of her portfolio. While putting such payments into electronic form sets people on a path toward financial inclusion, it is not at all certain that they will proceed down the path.

How does one move from a largely informal to a formal financial life? The transition is unlikely to be swift or easy, and won’t be completed in one leap. For the Ugandan farmers, if the cooperative bank puts a branch, an ATM, or a banking agent in the home village, or connects to mobile payments, the “Few to Many” stage would be complete, and the stage would be set for the next stages (“Many to Few” and “Many to Many”) in which the farmers would use electronic means for transactions they initiate. However, these remaining shifts cannot be brought about by a decision at a corporate or ministerial headquarters. They only occur when millions of cash-comfortable individuals are able to pay others electronically and decide to do so. The money management habits of the Ugandan farmers will change significantly only if they are persuaded by low transaction fees and convenience, and even more by whether the friends and corner grocers they transact with accept electronic payments. Confidence that this can and will happen is growing, thanks to the M-Pesa mobile payments revolution in next-door Kenya.

While payments by governments and aid agencies may contribute to financial inclusion, they are only a first step toward a cashless or cash-light world. Policy makers must pay close attention to usage and the factors that influence it, which requires understanding the money management habits and economic networks of low income people. Look to the Better Than Cash Alliance to help make this happen.

Image Credit: Better Than Cash Alliance

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New Technologies for Greater Efficiency and the Client/Loan Officer Relationship

Progress Toward Improved Client Protection in the Indian Microfinance Sector

Smart Campaign Unveils e-Learning Course to Boost Client Protection and Financial Education

Chris Dunford of Freedom from Hunger responds to a question we posed at the end of the recent post regarding Avanza: How does such new technology affect the client/loan officer relationship that is so central to the operations of many MFIs? The post begins:

Although less celebrated than solidarity group and loan contract innovations, another unique feature of microfinance is the regular face time between clients and agents of organizations from outside the isolated world of a poor person.  Agents variously known as loan officers, credit officers, field agents, promoters, or animators can accompany and guide poor clients on their journeys toward mainstream society and economy and can be social intermediaries between the poor and whatever services and opportunities are available in the larger world outside their communities.  The importance of such facilitation increases in proportion to the isolation of the poor, which is especially severe for women and those in very poor, rural communities.

Microfinance providers can be divided into those who recruit, train, supervise, and incentivize their frontline workers to become facilitators for the poor—and those who don’t.  The effects of the various technologies being introduced to increase efficiencies and reduce costs to clients depend on which side of the divide a microfinance provider falls.  I believe that clients will miss face time with field agents only if those field agents had been trained and motivated to be more than loan sales and collection agents.  Like all such arbitrary divisions, there are many cases straddling the borderline, but please bear with this dichotomy for a moment.

In one of my posts on The Evidence Project blog, I explored evidence that addresses these questions: Is attendance at microfinance group meetings solely a cost that some people, especially women, are willing to pay for access to services?  Or do clients value the group, its members, and its meetings for their own sake?  In other words, is this a benefit over and above the value of the financial or other services made available through the group?

Group dynamics are very important.  Of course, the culture and personalities of group members are huge factors, but the recruitment, training, supervision, and incentives for frontline staff seem to be key determinants for healthy and happy group dynamics.  This effect seems to be an underappreciated by-product of the training and support of frontline staff by microfinance providers who offer some form of education at regular meetings with their clients.  In the experience of the partners and affiliates of Freedom from Hunger, Pro Mujer, and Opportunity International and several independent microfinance providers, training and support to enable field staff to become facilitators of a learner-centered process (suited to adult learners with considerable life experience) teaches the field agents to interact with their clients in more respectful, supportive and mutually satisfying ways.  Some microfinance institution leaders believe such training and support for their field agents make them better agents in all respects, not just for offering education to their clients.

Frontline staff members engaging their clients in education seem, on average, to have much more personal and respectful relationships with their clients than those who solely perform as loan officers and collection agents.  While the evidence is hardly conclusive (particularly because so few efforts have been made to find such evidence), I can offer one intriguing result from a natural experiment that occurred in Bolivia during the 1999 debtors’ revolt, when microfinance clients throughout Bolivia were organized and encouraged by political opportunists to default on their loans en masse.  All the major microfinance providers were hit extremely hard by this collective action—except for CRECER and Pro Mujer, the only two that provided good-quality adult education to client groups.  We asked several of the CRECER clients why they did not join the revolt and default on their CRECER loans.  The typical answer was, “Because we can tell that CRECER cares about us.”

Such positive relationships seem to turn group membership and meetings from a net cost to the client (in terms of travel and time at meetings and peer pressure to repay) into a net benefit (in terms of knowledge of options, personal and group self-confidence, mutual assistance, and connections with the outside world). This effect seems to occur regardless of particular education content other than group self-management and knowledge of the microfinance provider.  If training field agents to be education facilitators was in fact the cause of CRECER and Pro Mujer clients declining to join the debtors’ revolt, the benefit of the training accrued not only directly to the clients but also indirectly to the microfinance institution as increased client loyalty.

This benefit is what clients will miss as new technologies reduce or replace face time with field agents and fellow clients.  They won’t miss the “just business” loan officers and collection agents; I would encourage their employers to move full speed ahead to replace that kind of face time with new, more personalized but impersonal technologies.

On the other hand, I predict that the poorer the clients, the more likely it is that lack of good-quality face time with real people will hinder their financial inclusion and the positive impact of microfinance on their lives.

The good news is there is plenty of opportunity for innovation with new technologies to complement rather than replace quality interaction with real people.  Can you offer examples or possibilities of such innovation?

Image Credit: Pro Mujer

Have you read?

A Call for Caution in Judging the Merits of Financial Education: ‘A Review of Bridging the Gap’

Social Motives, Generosity, and Africa – Top Picks of the Microfinance Blogosphere

Keep on Talking about Impact

Within the microfinance industry we are very fortunate to have so many great resources at our disposal. The challenge for practitioners however, lies in how to effectively deliver the content to clients.

In 2011, the Smart Campaign’s Steering Committee launched a new Client Voice Task Force – whose members represent diverse stakeholder groups throughout the microfinance industry- to bring the voice of the client more squarely into the Campaign. One of the initiatives the task force identified as helpful to the microfinance industry was the development of a  client education resource library. To make this happen, a group within the task force set out to compile a comprehensive list of existing client education materials that are in use within the industry.

Today, the Smart Campaign is launching this initiative! The new library is the start of a list that represents existing tools and resources that the task force identified as models of client protection focused client education materials. These resources were chosen to help microfinance institutions communicate to clients about their rights and responsibilities.

All of the resources address consumers’ rights and responsibilities and relate to one or more of the Client Protection Principles. For example, one of the resources - Getting it Right: How to Resolve a Problem with your Financial Institution - is a guide produced by the Monetary Authority of Singapore as part of the MoneySENSE initiative, a national financial education program. This guide helps clients understand what type of dispute resolution schemes are available within the institution and is directly related to the Smart Campaign’s seventh Principle – Mechanisms for Complaint Resolution. Another resource, My Guide to Microfinance Lending, is a manual that describes difficult experiences that microfinance borrowers in Kenya have gone through in order to communicate vital information to prevent tough times. This resource is related to Prevention of Over-indebtedness, the second Client Protection Principle.

The resources are not only from a diverse group of regions and institutions but also spread across a wide range of mediums such as brochures, post cards, capsules, videos and cartoons. This library is still in development and will continue to expand as new materials are identified. Resource submissions and suggestions are welcome via comments@smartcampaign.org.

Don’t forget to check out the new Client Education Resource Library here!

Have you Read?

 The Smart Campaign Publishes Example ‘Codes of Ethics’ from MFIs around the World

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