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> Posted by Akhand Tiwari, Bhavana Srivastava, and Vijay Ravi, MicroSave

Loyalty Programs

In today’s world, loyalty programs are a dime a dozen, with everyone from retail stores to luxury hotels offering membership for even the smallest of transactions. A publication from Smith School of Business suggests that the average Canadian household is enrolled in no less than eight loyalty programs. In this context, it is pertinent to examine if loyalty programs actually serve their intended purpose. If yes, how specifically do they impact a company’s business?

The premise of all loyalty programs is that they promote continued patronage. In a world where there is often little variation between competitors’ offerings, a well-designed loyalty program could make all the difference for your business. After all, a good loyalty program could very well decide which airline you choose for your next business trip!

We make an important distinction here – between loyalty programs and rewards. While loyalty programs aim to instill continuous engagement, the focus of rewards is on pushing specific action. Rewards are target-oriented and last only for a limited period. To illustrate this, think of offers, such as zero-processing fees, which are designed to increase adoption of a credit product, and higher interest rates on term deposits, which promote savings.

Based on MicroSave’s experience on how low-income households exhibit loyalty towards their financial service providers – we have some useful insights.

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> Posted by Brianna Nelson, Project Associate, CFI

(click for larger graphic)

The idea of customer-centricity doesn’t sound complicated. Shouldn’t every business be focused on its customers? However, even for businesses that do endorse a customer-centric approach, endorsement doesn’t necessarily translate into action. Financial service providers organize their businesses around their services. Even small tweaks to refocus the organization around the customer can require major institutional shifts.

Gerhard Coetzee, Senior Financial Sector Specialist at CGAP, recently presented at the Center for Financial Inclusion offices in Washington, D.C. on CGAP’s work on business models for customer-centricity. To assist institutions not only to prioritize but to effectively implement customer-centric products, CGAP is piloting a new tool to help financial providers better understand the complex needs of their customers.

In collaboration with LIVELABS, CGAP created the innovative Kaleido tool, a 360° customer profiling tool for designing financial services. The goal behind Kaleido is to understand and map the financial context of a household, which in turn provides valuable insights into the needs of clients. It is being piloted with Janalakshmi, an Indian financial service provider that serves over 1 million urban clients.

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> Posted by Anton Simanowitz and Katherine E. Knotts

“Customer centricity” is the new buzz in the microfinance industry. More and more financial service providers are recognizing that their success is built on the success of their clients. Customer centricity certainly means recognizing that financial inclusion is not just about more services – it’s about better services. To achieve this, financial service providers need to grapple with the complexity of clients’ financial lives, understand what appropriate design looks like, and empower clients to use those services effectively.

But is it always a “win-win”? What if clients express preferences and make choices that are not in their long-term best interests – that is, what happens when what clients need isn’t what they might want or demand? And what if responding to client needs in the most appropriate way appears to be a riskier decision from the point of view of institutional financial performance?

These tension points (and some quite radical decisions in the face of them) can be seen in the work of AMK Cambodia, highlighted in a new book The Business of Doing Good. Witness a conversation we had with a senior manager. “We will never be a leader in client service,” he proudly announced. In the competitive Cambodian market, rapid disbursement of loans that meet customer demand is an important competitive advantage. Yet AMK accepts that its own loan disbursement is slower and more time-consuming for clients, and its loan sizes are much smaller than those of its competitors. Coming from an organization that is proudly “client focused”, this statement struck an odd note.

AMK, serving more than 360,000 people, is now the largest Cambodian MFI in terms of outreach. How can an MFI that invests heavily in understanding and responding to the needs of its clients be “less customer friendly” than others? The simple answer is that a market-led solution (responding to what clients want and are prepared to pay for) might look different from responding to what clients need in order to address the underlying complexities of their lives (i.e. poverty and vulnerability).

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> Posted by Alissa Fishbane and Allison Daminger, Ideas42
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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. Read the rest of this entry »

> Posted by Elisabeth Rhyne, Managing Director, CFI

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.

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In this thoughtful and provocative blog post Ignacio Mas lays down a series of challenges for everyone working on financial inclusion. We think that the questions he’s asking need to be talked about. We’re asking three experts — on customer-centricity, on fintech start-ups, and on regulation — to respond to his provocations, and for the next three Wednesdays we’ll publish one of them.

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Have you noticed how narrow the interventions of the chorus of financial inclusion supporters have become? Academic researchers are immersed in proving whether an SMS message sent at the right time can push people to repay their loans more promptly (a.k.a. nudges), or whether someone with more savings is likely to be happier and more empowered in some way (a.k.a. impact evaluations). NGOs fund numerous papers and conferences to promote the idea of seeking early and frequent customer feedback in product design (a.k.a. human-centered design), or of looking into customer data for some clue as to what interests them and how they behave (a.k.a. big data). Donors set up round after round of tenders with subsidized funds to spur fully-grown banks and telcos to try out a new product feature (a.k.a. challenge grants), or to prop up the marketing and distribution wherewithal of selected players (a.k.a. capacity building).

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> Posted by Rafe Mazer, Financial Sector Specialist, Government & Policy, CGAP

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It’s a great time to be working on consumer protection. Even while risks change or expand in scope as new products evolve and access increases, it seems that there are just as many talented researchers and new approaches to making consumer protection work emerging. Some of the most important breakthroughs are coming from consumer and behavioral research. This includes insights into what sales staff really do and why (see, for example, this infographic on a recent World Bank/CGAP/CONDUSEF audit study in Mexico), how consumers make financial decisions—not always for purely economic reasons, and what the context of low resources or scarcity means for financial behavior.

The next step is to take these research insights and turn them into improved consumer protection policies in emerging markets. CGAP’s recent publication, Applying Behavioral Insights in Consumer Protection Policy, describes a range of current and potential ways we can bridge the research and policy fields. But what about providers? What can we take from the recent behavioral insights emerging for the Client Protection Principles?

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> Posted by Hema Bansal, India Director, the Smart Campaign

As a child growing up in India, I was always intrigued by stories from Myanmar, but disturbed by conflicts that it had witnessed. Not knowing much about the country, as an adult I still had an innate desire to visit. On May 7th and 8th, I attended the Responsible Finance Seminar, organized by Entrepreneurs du Monde (EDM), held in Myanmar’s city of Yangon. I was completely awed by the mystical peace of the city, I was also impressed by the demonstrations of support at the seminar for instilling client protection in Myanmar’s microfinance industry. It’s a great opportunity for a young market to secure responsible practices from its outset.

Myanmar, the second-largest country in Southeast Asia, remains one of its poorest. Decades of isolation have severely affected its development. In terms of financial inclusion, a large proportion of the population in Myanmar relies on informal lenders. The formal sector only serves about 20 percent of the population, largely because of the existing financial institutions’ limited capability.

In May 2011, President Thein Sein publicly recognized microfinance as a means of development by enabling local and foreign investors to establish fully privately-owned MFIs. Since the rationalization of licensing in Myanmar, around 110 MFIs have been registered. Deposit-taking institutions have been allowed to set-up shop rather easily due to low minimum capital requirements and the absence of separate prudential regulations from non-deposit-taking institutions, such as rules pertaining to reporting standards and portfolio quality management.

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> Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”

Here’s a financial inclusion puzzle for you. In marketplaces in Peru, small shop owners often take out loans from illegal and possibly dangerous lenders, gangs that operate on motorcycles. Cheaper and safer legal lending channels are available to these customers, but they don’t use them. How would you design a product that would draw these borrowers into the formal sector?

This was the question Guillermo Palomino, chairman of the microlending organization Edpyme La Cruz in Peru and advisor to several Latin American MFIs, brought to small group discussions in the Rethinking Financial Inclusion: Smart Design for Policy and Practice program offered by Harvard Kennedy School Executive Education.

The first step was to develop a clear statement of the problem: use of illegal loans may endanger customers and exposes them to high interest rates and it may also expose their communities to increased criminality. Palomino explains, “The customer has no legal contract, no real knowledge of what the interest rate is, what the penalties are, when they might be applied, or what might happen if they default with these lenders.”

However, an effective solution would involve understanding the appeal of illegal loans. The HKS group worked to define the factors contributing to the problem, both at the surface and at deeper levels.

In essence, the formal sector was not offering customers the ease they required. With the illegal lenders, Palomino explains, “You call a cell phone and a guy shows up on a motorcycle with a little bag. He’ll give you $500 and say, ‘Okay, I’ll be back next week.’” Formal loans, in contrast, require signatures, background checks, address verification, and projected cash flow. These are minor hassles for some, like the formally-employed rich, but major hurdles for the poor. As Palomino describes, “These microbusinesses don’t have people to handle paperwork, go back and forth for signatures or pick up money—because then who takes care of selling the apples or bags of rice?” In probing for underlying causes, the small groups discussed how the regulatory demands pertaining to the loan approval process also present a challenge.

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> Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”

“Know your client” is a popular phrase in conversations about financial inclusion and business in general. But where does such knowledge come from? Does it end with your client’s expressed needs and desires? Can it also incorporate behavioral research insights or consumer protections that the client may not even demand?

Shawn Cole of Harvard Business School opened the second day of “Rethinking Financial Inclusion” – a one-week program offered by Harvard Kennedy School Executive Education – with a question all providers might ask themselves when modifying existing products or developing new ones: “If you were the customer, would you go for that deal?”

Cole pointed out that products meant to “bank the unbanked” (i.e., first-time users) must be designed differently from products meant to tempt new customers away from competitors. He described the experience of First National Bank of South Africa in responding to government calls to encourage savings among the poor and draw black South Africans into the predominantly white formal banking sector. First National Bank decided to offer a lottery with large prizes to new depositors.

In debating whether a lottery would attract customers, participants cited examples from their own work, such as a mobile money account offering free insurance to savers who maintain a sufficient balance in their accounts. Recognizing that the poor are already saving, informally, the challenge is to develop products that draw them into the formal sector safely and responsibly. Another provider warned against complicated offers. “Structured products can be very esoteric.”

The concerns participants voiced fell into two categories: ones that apply to anyone (e.g. for nearly everyone a flashy new product loses its luster after the third page of terms and conditions), and ones that are specific to the poor (e.g. how do you draw people into banking, when even walking into the building itself is intimidating?). Both sets of concerns underline the need for financial capability development and customer-centered product innovation. The potential interest in formal financial products may be there, but uptake is obstructed by consumers’ lack of confidence, or poor understanding of the products’ components, or inability to surmount intimidating “barriers to entry” such as small print. Read the rest of this entry »

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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.