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.

Have you read?

Applying Behavioral Insights Inside Latin American Financial Institutions: What Happened at Our Workshop

Financial Capability Stakeholders Join J.P. Morgan in New Solutions Lab

Smart Design for Policy and Practice: Consider Bandwidth – Insights from Harvard Kennedy School’s “Rethinking Financial Inclusion”

There are endless ways to measure the successes of a given year. Number of clients reached. Total new stakeholder endorsement. Amount of capital invested… Though when assessing almost anything, it’s important to think holistically and not be biased by the numbers. That said, I think I can speak for most of the Center in saying that we are excited to share that several CFI-affiliated publications were among the Microfinance Gateway’s Most Popular Publications of 2012. No small feat considering 546 new resources were added to the Gateway this past year. Here’s a brief listing of the CFI pubs that made this top cut:

Over-Indebtedness in Microfinance: An Empirical Analysis of Related Factors on the Borrower Level

This paper by Jessica Schicks analyses the over-indebtedness of microborrowers in Ghana, examining its relationship with poverty, adverse shocks, loan returns, and financial literacy. In defining over-indebtedness, the paper adopts a client perspective, taking into account clients’ repayment struggles and the sacrifices they make to fulfill payment obligations. Some of the paper’s findings are the following:

• Poorer micro-borrowers are more likely to be over-indebted;
• Risk of over-indebtedness further increases with the occurrence of adverse economic shocks to a borrower’s income or expenses;
• Likelihood of over-indebtedness is higher for borrowers with low returns on their investment and if borrowers use loans at least in part for non-productive purposes;
• Over-indebtedness is higher for borrowers with low, debt-specific financial literacy. General financial literacy is negatively associated with over-indebtedness.

The paper received research and financial support from the Smart Campaign. A less academic version of the paper, published by the Smart Campaign in 2011, can be found here.

Smart Microinsurance: An Overview for Microfinance Institutions on Incorporating Client Protection Practices into Microinsurance

Produced jointly by the Smart Campaign and the Microinsurance Network, this toolkit provides client protection guidance for MFIs offering microinsurance products through external insurance companies. The toolkit includes three sections: a listing of social performance indicators for microinsurance; guidance for product design and partnerships; and guidance for incorporating the Client Protection Principles into each phase of the microinsurance process. The toolkit identifies service points of contact and offers best practices for policies and procedures.

Risk and Relevance: The 2012 Microfinance Banana Skins Survey

Although in a different category than the Most Popular Publications of 2012, the Banana Skins report of 2012 was among the top four in the Gateway’s Most Popular Microfinance Voices of 2012 category. The Banana Skins report series presents the most pressing risks facing the microfinance industry and what can be done to manage them. Staying Relevant, the fourth report in the series, found a pressing importance on managing corporate governance risk.

For the full library of CFI publications, papers, and resources, visit our website. 

Image credit: CGAP Microfinance Gateway

Have you read?

Microinsurance on the Roadmap to Financial Inclusion

Banana Skins 2012: Improving MFI Governance

CFI Publishes ‘Over-Indebtedness of Microborrowers in Ghana’ Report by Jessica Schicks