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This post originally appeared on the IFMR Trust Blog and is re-posted with permission.

By Bindu Ananth

I was at an excellent behavioral finance conference organized by the Michigan University’s Centre on Finance, Law & Policy last week. One of the panels on investor protection debated issues including the impacts of disclosures, choice architecture and social norms marketing on investor behavior. There was also an interesting discussion on role of advice and advisors in de-biasing investors or exacerbating weaknesses.

In the audience Q & A, in response to a question on the role of financial advice for low-income investors, one of the panelists responded that failures in the market for advice were less of an issue here since by and large, the right answer in most cases is just “save more for the future.” I found myself disagreeing with this notion strongly and one more reminder that the field of household finance has failed to examine the financial lives of low-income families in sufficient detail. In this post, I attempt to share from our KGFS work what are some of the other important aspects where advice seems to matter.

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> Posted by Virginia Moore, Communications Director, CFI

dialogue-on-business-clients-india-1-1024x683

For the last 10 years, the Global Microscope on Financial Inclusion has systematically reported what it takes to create an enabling environment for financial inclusion. The good news is that the global financial inclusion community increasingly understands what works and is designing essential reforms. But the rate of progress is gradual and uneven, and in some areas, still lacking. The latest Global Microscope takes a closer look at what it takes to create an inclusive financial sector—and where intensive effort is most needed.

The Leaderboard

Tying for first place in the global rankings are Peru and Colombia, scoring 89 (out of 100). Second place is also a tie, with two Asian countries, India and the Philippines, each scoring 78. Pakistan earns third place with a score of 63. The spreads between first, second and third place are wider than they are between any other consecutive rungs in the index, but the top-ranking countries are in fact the same as last year. Peru, Colombia, the Philippines, India and Pakistan are longtime financial inclusion institutional and regulatory leaders.

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> Posted by Camyla Fonseca, Knowledge Management Analyst, International Labour Organization

Remember when you were a kid, and your father lectured you about the value of money when you asked him to buy you the new videogame your friend just got for his birthday? You certainly don’t remember how much the videogame actually cost, but you can probably still hear your father’s voice saying money is hard to earn and shouldn’t be spent without caution. Your father may not know, but he used a teachable moment to transfer you some of his knowledge. These are instances when we are more likely to remember something because it was taught when we needed to use that information and hence were most likely to be engaged. A good teacher can leverage or perhaps even create teachable moments by adapting the lesson to the situation.

In the area of personal finance, teachable moments usually occur when someone is taking a financial decision or using a financial service. As a recent report published by the Center for Financial Inclusion notes, individuals are more likely to change their financial behavior or recall information if it is conveyed during these teachable moments. This insight has clear implications on the way financial education interventions are designed. Interactions that happen along precise moments in a financial service provider’s value chain may be more effective than traditional stand-alone classroom interventions. And, financial service providers, due to their repeated interactions with clients at crucial teachable moments, are in a unique position to contribute to financial capability efforts. Every customer touch point is a teachable moment.

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> Posted by Sonja Kelly, Director, CFI

Weather-indexed insurance is brilliant. It’s just not working.

It’s brilliant because it solves one of the basic challenges of insurance: moral hazard. Under the principle of moral hazard, having insurance tends to make an individual’s behavior riskier, increasing the likelihood that the product will be used. If I have fantastic health insurance, for example, I may be more likely to make riskier life decisions because I don’t feel the financial effects of the consequences of those decisions quite so acutely. If insurance is tied to the weather, however, nothing an individual does (unless you believe in the efficacy of a rain dance) will “trigger” the insurance.

Weather-indexed insurance is not a new phenomenon. Over the last decade we’ve heard exciting stories about weather-indexed crop microinsurance and the lifeline it offers to farmers given our world’s quickly-changing climate. Weather-indexed insurance was bundled with agricultural inputs like seeds or livestock, and the product was lauded as a way to increase the inclusion of poor people in insurance.

Amazing, right? So why, after a decade, aren’t customers buying? In India, for example, only 5 percent of farmers have taken it up where available.
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> Posted by Caitlin Sanford, Bankable Frontier Associates

A Spanish-language version of this post immediately follows the English version.

The Financial Diaries showed Mexicans are in a double bind when it comes to health. While households in the study were afflicted with diseases of tropical poverty such as tuberculosis, hepatitis, and insect-borne diseases, they also suffered from diseases commonly diagnosed in wealthier countries, like diabetes, depression, and obesity. People are unable to access the quality of healthcare they would like to deal with these diverse problems, both because of financial constraints and because it is difficult to know when expensive, higher quality care is necessary. Financial Diaries households mostly pay for medical care by borrowing from their social network. We found this to be true even though the Mexican government does provide a comprehensive and well-functioning — if variable by location — national public insurance program called Seguro Popular.

The framework of behavioral psychology provides insights as to how Diaries respondents think about the timing of paying for healthcare, and why they pay for health spending almost exclusively by borrowing from families and friends.

1.      It is difficult to assess risk under scarcity and limited information, so families wait to get care.

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> Posted by Hannah Sherman, Project Associate, CFI

fi2020_antilogo1In recent years mobile technology has played an increasingly important role in improving financial inclusion. And though Africa gets all the press, right now in Latin America mobile money services are growing faster than in any other region in the world.

There are currently 37 mobile money services operating in the 19 countries in the region, with nearly 15 million registered mobile money accounts. People in Latin America use the services somewhat differently from those in East Africa – more than 25 percent of all mobile money transactions in Latin America were third-party transactions like bill payments and merchant payments, over four times more than in East Africa, where person-to-person transfers predominate.

Despite high mobile penetration throughout the region, it becomes quickly apparent when looking at the Latin American market that there is no single approach to building financial inclusion via mobile money that will be effective across all countries. Although mobile penetration is high throughout Latin America, Pyramid Research found that there are three separate and distinct categories of countries to consider: those with an underdeveloped financial system; those with an emerging financial system; and those with a developed financial system. Each category requires a different mobile financial inclusion strategy. Given their high proportion of under- and unbanked people, countries with an underdeveloped financial system, such as Bolivia, Honduras, and Paraguay stand to benefit the most.

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> Posted by Sonja E. Kelly, Fellow, CFI

I want to let you in on a secret: the best part of the Global Microscope 2015 is a hidden gem. It’s called the Microscope Benchmarking Model (admittedly it might benefit from a better name), and it provides a user-friendly deep-dive into each country and indicator. With this tool, you can go beyond the report, with insights on questions that we may have neglected to cover in the narrative. And you can slice and dice the data to your heart’s content.

For example, where is the best place to be an insurance provider if you want to work with low-income populations? It’s India, actually, with Mexico, Peru, Colombia, Brazil, and the Philippines following. With two quick steps, the tool produced this map for me (click to enlarge):

microscope

The countries colored in red—including the Democratic Republic of Congo, Madagascar, Paraguay, and Tajikistan—are the worst places to be an insurance provider working with low-income populations.

So why is India the best?

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> Posted by the Smart Campaign

Smart CampaignToday, the Smart Campaign released for public comment new draft Client Protection Standards – which will be the basis for what we term Certification 2.0. The new standards streamline the previous Client Protection Standards, and reflect the evolving financial inclusion industry. They incorporate client risks pertaining to insurance, savings, and digital financial services. The standards operationalize where the financial inclusion industry sets the bar in terms of the minimum behaviors clients should expect from their financial service providers. Now open, the public comment period extends through November 30, 2015.

We’d love your feedback!

The new standards build off of the first set of Client Protection Standards, released in January 2013, as the basis for the introduction of Smart Certification. The standards and their corresponding indicators, which put the Client Protection Principles into practice, are used to benchmark institutions seeking Smart Certification.

Like the first iteration, the development of Certification 2.0 standards has been a highly collaborative process. Over the past 18 months, the campaign consulted a wide array of stakeholders and up to 30 experts to strengthen and update the standards and indicators.

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> Posted by Sonja E. Kelly, Fellow, CFI

Financial Inclusion 2020 Blog Series banner imageFinancial Inclusion 2020 (FI2020) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action. This blog series will spotlight financial inclusion efforts around the globe and share insights from key thought leaders in financial inclusion, with a specific focus on quality beyond access.

Tuesday marked a historic day for Peru: the country launched its National Financial Inclusion Strategy. While Peru has been lauded in the past for its environment for financial inclusion, its public-private sector partnerships, and its leadership in conversations on international banking standards, this national strategy elevates Peru’s commitment to financial inclusion to a new level. In particular, we want to celebrate the strategy’s commitments to consumer protection, financial literacy, and the inclusion of vulnerable people.

Analysis of the World Bank Global Findex this year revealed that countries that have a national strategy (not merely a commitment or stand-alone programs) for financial inclusion saw twice as much bank account access growth in the last three years compared to countries that did not have a national strategy. For Peru, this is great news, as according to the same data source, less than 30 percent of adults in the country had access to an account in 2014.

The path to financial inclusion articulated in the strategy, however, is not focused on access to accounts, making Peru an outlier among its peers that have implemented national strategies. Instead, Peru has oriented its strategy toward improving systems for accessing a range of products and promoting supportive consumer protection, financial education, and attention to the most vulnerable. The national strategy has seven different lines of action: Read the rest of this entry »

> Posted by Sonja Kelly, CFI, and Thierry van Bastelaer, Abt Associates, American University, and the Microinsurance Network

Even 10 years ago, most of us would never have thought that the words “insurance” and “low-income households in the developing world” would be heard in the same sentence. It would have been as strange as, say, hearing the words “really good coffee” and “Washington, D.C.” in the same sentence.

But times have changed. Thanks to tremendous innovation in product design, pricing, and distribution systems, insurance is increasingly affordable to low-income households that are looking for ways to protect themselves from daily risky events. We should take a few moments to stop and celebrate this development. (Pause for celebration.) Thank you.

At the same time, we should learn from the history of the broader financial inclusion field. It took many years for the majority of the field to admit that credit alone can’t meet all the financial needs of poor families. Hopefully the excitement over insurance will not similarly delay the realization that it alone can’t address all the financial protection needs of these families. A great variety of financial products is needed to address an even greater diversity of needs.

So, over a cup of really good coffee one afternoon in Washington, D.C., we sketched out a possible framework that articulates where insurance fits into the product spectrum for financial risk protection vis-a-vis savings and loans.¹

We thought of risk protection expenses along two axes: frequency and size, and plotted expenses on a 2×2 table (forgive our back-of-the-napkin scribble).

Financially inclusive products are best designed to finance risk management expenses in the top left and bottom right quadrants of the graph. High-frequency inexpensive outlays can, when accumulating over time, significantly disrupt the cash flows of low-income families. Similarly, low-frequency expensive payments can ruin years of carefully planned asset accumulation. Low-frequency and inexpensive events (bottom left) can usually be covered by cash, and high-frequency expensive events (top right) are usually beyond the reach of most financial inclusion products.

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Credit Suisse is a founding sponsor of the Center for Financial Inclusion. The Credit Suisse Group Foundation looks to its philanthropic partners to foster research, innovation and constructive dialogue in order to spread best practices and develop new solutions for financial inclusion.

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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.