The following post was originally published on the ideas42 blog.

For many of us, saving enough for retirement remains a murky, unrealized goal. Behavioral science has already proven useful in some ways, but there are still many opportunities to apply a behavioral lens to better preparing for the future.

In Mexico, not putting aside enough for retirement is a persistent problem for many people. As a result, 27 percent of the nation’s elderly live in poverty. While recent reforms to the retirement system have provided more Mexicans with individual retirement accounts than ever before, mandatory contribution rates remain too low to provide for post-retirement living expenses. To cover the rest, the system currently allows people to make voluntary contributions to their individual accounts. The problem is that they don’t: currently, less than 1 percent of the 50 million account holders make at least one contribution each year.

In an attempt to increase contributions, the Mexican government has recently changed the system so that people can make deposits at 7-Eleven® stores and Telecomm® branches. The ubiquity of these two outlets across the country has reduced hassles and simplified the deposit process – and yet voluntary contributions still remain low.

So what’s going on? To try and answer this question, and find ways to overcome the problem, ideas42 is partnering with The MetLife Foundation to design behavioral solutions aimed at increasing voluntary retirement contributions made through 7-Eleven and Telecomm locations.

A crucial part of this work is building a deeper understanding of the context and key behavioral factors involved in Mexican retirement contributions, which is why we’re collaborating with a number of organizations with a vast expertise in this area, including CONSAR (Mexico’s commission of the retirement system), the 12 Afores (nationally approved retirement fund administrators) and Amafore (their national association).

After conducting in-depth interviews with over 50 account holders and surveying over 100 7-Eleven and Telecomm customers across three cities in Mexico, we’ve identified several initial behavioral insights. These include:

• People often choose savings methods that allow instant access, rather than the delayed gratification of long-term investments. As a result, many favor keeping their savings in the form of physical goods, such as inventory for their small businesses, or cash. When they do formally save, they opt for more liquid savings accounts.
• Similarly, short-term savings goals (and their more immediate rewards) trump long-term ones. This is partly because most people have trouble imagining what their lives will look like once they’ve stopped working. With only abstract notions and ideas, we might become apprehensive about our futures, which can lead to feelings of hopelessness. Alternatively, we might be over-optimistic, leading us to think that things will simply work themselves out when the time comes instead of spurring us to take real action.
• Individual concerns regarding retirement are kept private, while friends’ and family’s short-term spending and consumption habits are highly visible. This creates a false perception that others are not worried about or planning for their futures.
• Finally, people are rarely prompted to think about or actively engage with their retirement accounts. They don’t know how the retirement system works, or what it does specifically with their money. Therefore, if they do think about long-term savings, many don’t think of these accounts as viable options.

Inspired by these insights and others, in the coming months we’ll be focusing on generating design recommendations for the Mexican retirement system. Through this partnership, ideas42 will pilot multiple behavioral interventions that we hope will ultimately lead to improving the long-term financial health of millions of people in Mexico.

Image credit: World Bank

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In the past decade, a group of key empirical studies have argued that a lack of education and financial knowledge can lead individuals to miss opportunities to benefit from financial services. Some may fail to save enough for retirement, others may over-invest in risky assets, while still others miss out on tax advantages, fail to refinance costly mortgages, or even remain outside of the formal financial sector completely. These studies suggest that such behavior is based on the reality that making financial decisions has become increasingly complicated. At the same time, as a result of sweeping changes in the economic and demographic environments, individuals have become increasingly responsible for their own financial decisions and the consequences of such decisions over the long-term. Changes in public pension plans, an increase in life expectancy, and an increase in the cost of health insurance have placed on the individual the weight of momentous decisions such as whether to take out private retirement insurance, or how much to save. Easier access to credit, a general increase in the accessibility and complexity of products and services, and a number of other factors make a range of financial decisions more consequential – and harder.

Governments, financial services providers, and related stakeholders have responded accordingly in recent years developing financial education programs and initiatives, but the results have been mixed. The bulk of the evidence available confirms that, in general, the level of financial literacy throughout the world is very low, especially among the more vulnerable groups: those with very low education or income such as senior citizens, young women, and immigrants. The lack of financial literacy within these groups has proven to extend beyond economic effects and produce negative consequences on health, general well-being, and life satisfaction. Many of the programs that have been introduced were part of empirical studies that evaluated the impact of financial education programs on subsequent financial behavior. There are many such studies that show that financial education improves financial decision-making.

Nevertheless, a body of work has opened an intense debate over whether financial education and information can truly affect the financial behavior of individuals (see here, and here). In many cases, despite the availability of financial education, persistently high rates of debt and default, and low rates of saving and financial planning for retirement have been shown to persist. The empirical evidence obtained from surveys and experimental work often shows that individuals pay little attention to the information and that their capacity to process it is limited. Most of the empirical literature to-date indicates that traditional financial education – clients receiving information in a classroom style setting or through printed materials – does not necessarily translate into behavioral changes, especially in the short-term.

However, this research also showed opportunities in the way financial education information can be transmitted, particularly, methods that factor in psychological aspects such as individuals’ cognitive biases are key to transforming financial behavior over the long-term. The existing information is often excessive and tough for individuals to process completely. These studies concluded that in order to improve individuals’ financial decision-making ability, the financial decision-making process must be simplified, and barriers for processing information must be reduced. For example, this might take the form of narrowing the number of options available or delivering text messages that may influence behavior at key moments. The latter falls within a group of practices identified as behavioral “nudges” by organizations working with behavioral science, like ideas42. In short, current research indicates that with financial education, effectiveness is largely a question of taking into account the psychological makeup of individuals.

In fact, nowadays there is a broad consensus among psychological, social, and economic studies that cognitive characteristics affect social and economic behaviors. Notwithstanding this, these studies tend to conclude that cognitive characteristics only predict a small part of personal behavior. Non-cognitive or personal characteristics seem to have a role as significant as that of cognitive skills. B.W. Roberts, a leading personality psychologist, defines¹ personal characteristics as “the relatively enduring patterns of thoughts, feelings, and behaviors that reflect the tendency to respond in certain ways under certain circumstances.” Psychologists have sketched a relatively commonly-accepted taxonomy of personal characteristics known as the Big Five: Openness to Experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism. The papers² of J. Heckman, T. Kautz, and their research team (2013) review the recent evidence obtained by economists and personality psychologists regarding how cognitive and personal characteristics can be used to predict educational attainment, labor market success, health, criminality, and financial decisions.

Interestingly, these studies show there is hard evidence that both personality and cognitive characteristics are not “set in stone” and can change over the life cycle. Specifically, while genetics have a significant influence, parents, education, and social environments shape individuals, especially in the early years. However, there is some evidence that personality traits are more malleable than cognitive characteristics at later ages.

Financial education intervention programs should thus be based on these results. In particular, measuring personal characteristics makes it possible to identify people who tend to show weaker financial habits – high rates of debt, high default, low rates of long-term savings, etc. – and design tailored interventions. In addition, researchers conclude that most successful intervention programs are not as effective as the most successful early childhood programs. Consequently, as changing behaviors is not simple, teaching healthy financial behaviors from an early age allows the foundations to be laid for the development of strong lifelong money management.

Given the importance of these factors in effecting change, here are a few points that the research suggests would help financial education become more effective in supporting adults and older people.

• Personalized counseling
• Opportunities to gain experience by putting lessons into practice
• A focus on small changes in financial behavior, taking into account the individual’s disposition to change
• Programs that acknowledge the individual’s socioeconomic situation
• Continuing and ongoing education, support, and motivation

As factors that influence behavior are increasingly understood, a major challenge remains to incorporate those features into the design and delivery of financial education programs.

Image credit: McKay Savage

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[1] Roberts, B.W. (2009) “Back to the Future: Personality Assessment and Personality Development”, Journal of Research in Personality, vol. 43, 137-145.

[2] Almlund, M., A.L., Duckworth, J. Heckman, and T. Kautz (2011) “Personality Psychology and Economics”. In: Hanushek, E., S. Machin, and L. Woessmann (eds), Handbook of the Economics of Education, vol. 4. Amsterdam: Elsevier, 1-181.

In my breakout group at CFI’s workshop last week in Bogota, everyone talked at once. With eight voices coming at me, my brain’s very basic ability to understand Spanish shut down. The workshop participants were bursting with ideas they urgently wanted to express. But, as my colleague Sonja Kelly pointed out, a situation where everyone is speaking and no one is listening is an apt metaphor for the problem the workshop sought to address.

The workshop focused on the challenges in integrating insights from behavioral economics into the operations of financial institutions. Two organizations that leverage behavioral economics for product design, ideas42 and Innovations for Poverty Action, presented the research perspective. Closely connected with academics at Harvard, Yale, MIT, and Princeton, both organizations start from the research finding that a number of cognitive and emotional biases cause people to make decisions that depart from rationality, and that these biases can significantly affect the use of financial services. Ideas42 focuses on identifying features in product design and delivery that, while not overruling choice, nudge people in a desirable direction – features such as commitment savings accounts or reminder messages to encourage savings. IPA promotes the same kinds of nudges, but focuses on the testing of these innovations through randomized controlled trials.

Most of the participants represented a cross-section of the financial inclusion sector in Colombia – many banks, several microfinance institutions, and the public sector Banca de las Oportunidades program were present. The financial inclusion market segment is increasingly contested territory in Colombia, and every major bank has had some experience trying to create products and channels to reach it.

To launch the conversation, we asked several experts to recount their experiences in introducing “client-centric” innovations, bringing in the work of additional organizations, this time associated with the U.S. West Coast – Stanford and Silicon Valley. Included were proponents of human centered design and Juntos Finanzas, an entrepreneurial start-up that uses data analytics to provide tailored financial capability messages to clients of financial institutions. Finally, two more homegrown experiences from the Accion Latin America network were represented – one involving savings and the other financial education for microinsurance.

Some lessons immediately popped out. In several cases, well-crafted products, designed with deep understanding of client behavior were not implemented due to snags encountered inside the implementing financial institutions. And even those that succeeded faced major challenges before gaining a secure place within their organizations. Challenges ranged from changes at the CEO level, to pressure for faster return on investment, to unsupportive frontline staff.

We thought this needed further exploration, so we posed some hypothetical products with integrated behavioral insights and asked participants in small groups to assume the roles of various actors within a financial institution. Each group’s task was to design and roll out the proposed products. It was at this point that participants began to talk over each other. The legal department and the IT department, the HR department and the finance department, the product department and the marketing department – everyone had crucial and legitimate issues, each needing solutions before the product could proceed. At that stage the behavioral experts in each group tended to step back and watch the simulated institutions battle it out internally as questions about behavioral economics took a back seat to the practicalities of implementing change inside institutions.

The overarching takeaway of the day was that no matter how inspired or close to the client, good product design is only the first step toward a successful offer. Experts who bring important new insights cannot assume that their work ends with product design. As Gerhard Coetzee wrote in this blog space on the very same day as this workshop, a new product is primed for success only after thorough analysis of the inner workings of an institution and a plan is aligned with the interests of its various areas. Behavioral insights and other customer-oriented product features must make it through the “noise” within the institution, competing with all of the other things a bank must attend to in order to survive.

From my (perhaps biased) position as someone who has worked at Accion, this kind of analysis and planning is exactly the know-how Accion has built up over the years as it has worked to build healthy microfinance institutions. Accion, for its part, has not particularly embraced behavioral economics insights. So opportunities for mutual learning exist.

Many specific lessons emerged from the day’s discussion, and we would like to continue to share them with you. CFI will assemble them into a brief note within a few weeks. Please stay tuned.

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Close to Washington, D.C.’s antipode in Perth, Australia I attended the Fifth Annual Responsible Finance Forum, which this year focused on responsible digital finance. The organizers assembled an impressive mix of representatives from all three legs of the responsible finance stool – industry, regulators, and consumers. A number of familiar risk areas were examined during the two great days of presentations, debate, and discussion, and three prominent themes emerged for me: the centrality of the service agent, the increasing importance of financial education, and considering responsible finance at the ecosystem level.

The first day of the forum focused on the identification of risks to consumers from digital financial services (DFS) and the second day was framed around how to mitigate and minimize those risks. An online “Global Pulse Survey” that CGAP conducted as well as some demand-side research conducted by MicroSave and Bankable Frontier Associates (BFA) brought both the practitioner and consumer perspectives on DFS risks to the forefront. The MicroSave and BFA research canvassed nearly 700 DFS users and 50 non-users through focus groups in Colombia, Bangladesh, the Philippines, and Uganda. While respondents of the survey and focus groups identified a wide variety of harms or worries, some common items emerged, listed in the table below. Though preliminary, this data is extremely important in helping us frame the areas where stakeholders could focus to mitigate against client harm and risk. These risks fall squarely into the framework of the Smart Campaign’s seven Client Protection Principles, furthering our belief that a principles framework can carry forward into digital financial services.

The Centrality of the Agent

(click to enlarge)

Most of the risks to clients mentioned during the conference stem from behaviors or practices by an agent of a mobile money or branchless banking network. Agents, typically operators of retail outlets or small kiosks, occupy a murky position that is not well understood by customers or even the agents themselves. They are representatives of services, like MTN or Easypaisa, but are not employees. Yet many customers interact only or primarily with agents, never coming in contact with full-time staff members of a DFS service. In these cases, agent behavior colors the perception of the entire service. MicroSave spoke of extremely high turnover in agents, particularly in Uganda, and others discussed lack of training and incentives for agents to treat clients well. There were some positive examples, such as those presented by Oxigen, India’s largest money transfer service provider, but the centrality of the agent to client protection concerns was clear. While some forward-thinking participants in the conference envisioned a system that bypassed the agent and was completely mobile, most agreed that for the near-term agents are here to stay and are an integral part of the DFS ecosystem. There is a need for more thinking around the incentives, training, and practices that could help to minimize the risk of agent harm to clients.

Financial Education

Another common refrain was the need for strong financial education for clients to support the increasing complexity of DFS, to help clients “self-protect” and minimize their own risk. While the need for financial education is huge, evidence to support its effectiveness is slim. With each clarion call sounded at the conference for large financial education efforts, I pondered the cost-effectiveness of investing a small percentage of programmatic money into rigorous evaluations. Folks like Innovations for Poverty Action, ideas42, and Microfinance Opportunities are on the cutting edge of understanding the evidence on what works in financial education, particularly regarding the use of behavioral psychology insights to shape design and delivery, and technology as a delivery channel. Of course implementation should not cease completely until all the evidence emerges, but given the importance put upon financial education, and the money likely to be spent on financial education programs, there should be more attention to experimentation and evidence.

Responsible Ecosystem

While the framing of the forum was around the client protection risks to consumers, there were consistent calls for a responsible DFS ecosystem that involved interoperability, processing systems that allow for maximum usage and reduction of costs to consumers. Participants cited the emergence of SWIFT, which established common standards for financial transactions and data processing in the mid-1970s in the hopes that analogous systems could be developed and deployed for financial inclusion. Ripple, an open payment protocol that simplifies interbank payments and makes them faster, and Klickex, a currency exchange service, were held up as potential examples. While further removed from the treatment of a client by a financial institution, progress on these issues would certainly yield benefits to clients in terms of reduction of costs and increase of value.

Looking back on the two productive days in Perth, and still fighting off jet lag after safely circumnavigating the globe, I’m encouraged by the enthusiasm and attention demonstrated for responsible digital finance. With the rapid expansion of technology-enabled services, action in this area from all stakeholders will be needed to ensure that clients are adequately protected.

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Fifteen years ago in the microfinance space you may have been able to get away with understanding very little about your clients. Without much competition, MFIs could probably still make a decent profit by offering one product to all their clients using only one delivery channel. Thankfully, those days are gone.

The base of the pyramid is no longer a hidden or forgotten market segment. In fact, according to the recently-released 2014 Microfinance Banana Skins report, the pendulum is swinging in the opposite direction. Overindebtedness once again tops the charts as the biggest perceived risk, perhaps indicating that many clients are now able to gain access to multiple services providers. In some areas, an excess of providers may now be crowding the market.

Having just returned from the MasterCard Foundation Symposium on Financial Inclusion in Turin, the clear takeaway was that financial inclusion providers need to deeply understand their clients’ needs in order to survive. There are new providers (e.g. mobile network providers, like Safaricom in Kenya) and disruptive business models/delivery channels (e.g. crowdfunding, the mobile-based savings coach of Juntos, the mobile banking services of bKash) that are game-changing in the financial inclusion space. There are also a number of organizations (e.g. ideas42, Bankable Frontier Associates, Bankable) who are effectively using data and behavioral science to provide important insights into client segments and behavior.

Given the increased competition and diverse group of providers and products racing to serve the base of the pyramid, I predict that the service providers who will survive in the future will be those who know their clients’ needs well and have an effective (cost and time) and value-based service. These factors will help allow the best providers to reach scale in a sustainable manner. Understanding your client can’t be a peripheral business function that is done once or as an infrequent “add-on.” Knowing clients needs to be an ongoing process as their needs and wants change frequently. Business models therefore also need to be nimble and solutions-based.

The financial inclusion industry has grown up a lot, which is a good thing. It means the case has been made that the base of the pyramid is a viable client segment worth the time and effort to service. More providers/competition will ultimately lead to better and more cost effective products and services (given the necessary industry safeguards are put in place, of course). As is often true as markets develop, I think the days of MFIs actively collaborating to share client data, knowledge, and research that were longingly mentioned at the symposium are fading. Information that provides insights into client behavior or needs is quickly becoming a huge competitive advantage. I believe it will become less important whether service providers have a stated social mission and more important that they are client-centric in the very core of their business operations. May the best and most client-focused providers prevail!

Image credit: Michael Foley

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A few weeks ago J.P. Morgan made a $30 million commitment to create the Financial Solutions Lab, a move representative of the growing recognition among all financial stakeholders of the importance of financial capability.

The Financial Solutions Lab, a five-year initiative, will be managed by the Center for Financial Services Innovation (CFSI) and it seeks to bring together experts in behavioral economics, design, technology, and nonprofit services in order to develop innovative and scalable financial products and services that strengthen client financial capability and well-being. Ideo.org and ideas42 are to serve as strategic partners on the initiative. By bringing these stakeholders together, the Lab aims to identify new ways in which customers can improve credit behavior, increase savings, and build assets.

The Lab will host a series of competitions for social entrepreneurs to identify tech-enabled products and services that address customer needs. The winners of these competitions will receive capital, technical assistance, and third-party evaluation.

This effort by J.P. Morgan expands on previous initiatives from CFSI like the Financial Capability Innovation Fund, the Financial Capability Innovation Fund II, and the Financial Capability Innovators Development Lab.

Although the Financial Inclusion Lab has a U.S. focus, it is a step in the right direction for the entire industry in terms of cross-stakeholder collaboration to operationalize insights. This is, arguably, one of the biggest challenges that lies ahead in the financial capability arena. Research and insights need to be translated into functional business models that appeal to financial services providers.

To me, it is not surprising to witness such interest in innovation in the area of financial capability. Financial capability took center stage at the Financial Inclusion 2020 Global Forum in London last October as one of the main issues in achieving financial inclusion. From nonprofit organizations like Microfinance Opportunities, which focuses on financial capability development, to private financial institutions like J.P. Morgan, Citi, and MasterCard, this topic has gained significant importance. Furthermore, we are increasingly seeing governments include financial capability in their financial inclusion strategies. Here in the United States the President appointed an Advisory Council on Financial Capability. These are all good signs, but is this movement taking us where we need to go?

Now that more players in the financial inclusion field have an understanding of financial capability, its paramount importance, and the significance of mobilizing all relevant stakeholders, what are the next steps? Let’s make sure that the debate leads to active implementation of the insights generated through attractive business models. The scaled roll-out of financial capability innovations will be the true significance of the investments J.P. Morgan and others are making in idea generation.

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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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