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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 »
> Posted by Alex Counts, President and CEO, Grameen Foundation
The following post was originally published on the Grameen Foundation Insights Blog. It’s the first part of Counts’ two-part post on scarcity and its implications for microfinance and poverty alleviation. Part two can be found here.
The field of behavioral economics – the intersection of psychology and economics – is fairly new. This is a partial explanation of why its lessons have not yet been applied much to microfinance and anti-poverty programs generally. But this is clearly changing, and none-too-soon, as microfinance in particular is in need of reinvention and rebranding.
In fact, I am coming to believe that thoughtful applications of behavioral economics can be a central part of defining and realizing the idea of “responsible microfinance” that the Microfinance CEO Working Group and others are championing and also “full financial inclusion” that moves the dial on poverty.
An excellent new book titled Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir (Times Books, 2013), will make this process of leveraging the insights of behavioral economics into microfinance much easier. Drawing on decades of research, it focuses on an analysis of the phenomenon of scarcity – having too little of anything important to the human experience – and the implications of that analysis for policy and practice.
A note of caution. Lest behavioral economics becomes a new fad in international development and microfinance, or worse yet that I receive part of the blame for that, let me say something clearly. I see behavioral economics as an important lens, which is to say a powerful vantage point to look at efforts to reduce poverty and improve the human condition. Gender is another powerful lens. Race, political economy, biology, mental health, and asset building are also potentially useful lenses.
Now, let me explore a bit what the world looks like when viewed through this lens.
Understanding Poverty through the Psychology and Economics of Scarcity
The study of scarcity through the discipline of behavioral economics tells us something profoundly important. When the human mind perceives scarcity of anything important – money, time, or human contact, to cite three examples – it starts behaving in fundamentally different ways. It focuses on managing and alleviating the short-term scarcity, and in general it does that very effectively. The authors call this the “focus dividend.” Research cited in the book shows, for example, that many dimensions of performance are improved in a situation of scarcity.
> Posted by Jeffrey Riecke, Communications Assistant, CFI
The new year is welcomed the world over by resolutions from those yearning to be healthier, wealthier, and wiser. The connection between wealth and financial inclusion may be obvious. And being financially included may even make you wiser, if we consider the cognitive benefits described in Sendhil Mullainathan and Eldar Shafir’s recent book Scarcity. But it’s the link between health and inclusion that I want to talk about. According to a study of individuals in the U.S. with outstanding debt, about half of those with financial problems experience negative health effects as a result. Of the affected, about half cite stress as one of their ailments. Stress is associated with significant health problems, including increased blood pressure, gastrointestinal issues, obesity, depression, and anxiety.
Rural Thanjavur, India
Financial problems might be among the most common causes of stress in our day and age. But if you’re one of the 2.5 billion people around the world excluded from financial services, the sources of your financial stresses are likely a bit different from borrowers in the U.S., and the stakes possibly higher.
Kate McKee, Senior Advisor at CGAP, reflects on key issues raised during the FI2020 Global Forum’s panel discussion on ‘Why Financial Inclusion is More Important Than We Ever Knew,’ ending with an exciting prediction market from the panelists.
Kate McKee moderating the panel “Why Financial Inclusion is More Important Than We Ever Knew,” alongside panelist Bill Gajda
In this panel, which began with an emphasis on behavioral economics opened by Sendhil Mullainathan, co-author of the recently-published book Scarcity (reviewed on this blog by CFI’s Sonja Kelly here), who focused on how the reality of scarcity translates into a “bandwidth tax” on people who constantly live in poverty. Research by Sendhil and others has documented how the constant worry and distraction of living with too little – what Sendhil and his co-author Eldar Shafir refer to as “tunneling,” with its intense focus on making ends meet day-to-day – ultimately, affects poor people’s ability to make good decisions. Basically, this growing body of research shows that when people are in a situation of scarcity, they are not as smart, not as able to resist temptation, and are less likely to be able to make and stick to a plan, as compared to themselves in a time of less scarcity.
This scarcity framework and evidence has potentially powerful consequences for financial inclusion. The panel that followed focused on how scarcity, the bandwidth tax, and tunneling affect the relevance, uptake, and usage of financial services by lower-income people. Tine Wollebekk (Vice President of Telenor Financial Services and Board Chair of Tameer Microfinance Bank, the sponsor of Easypaisa in Pakistan) and Kamal Quadir (Managing Director of bKash in Bangladesh) reflected on the experience of these two fast-growing mobile money service deployments, including insights about customers’ underlying demands and how the mobile wallets and other services are designed to meet them, how to make the offerings intuitive and simple, and how to earn trust from customers new to formal finance. Bill Gajda (Global Head of Strategic Partnerships, Visa) rounded out the panel by bringing in findings from deep consumer research that Visa has supported in additional developing countries, as well as experience with different business models and customer interfaces including cards.
Entry products need to be ‘in the tunnel’
One of the key insights was that the entry product needs to meet a really immediate need. It needs to be ‘in the tunnel’ of what the customer is focused on to meet their day-to-day needs. Obviously mobile telephony is firmly in the tunnel virtually everywhere in the developing world. Person-to-person money transfer has also passed the “tunnel test” of rapid uptake in an increasing number of markets – Kamal noted that he felt the company had reached an important tipping point when “bKash” had become a verb commonly used across Bangladesh. Tine made the point of needing excellent execution and recruiting the right kind of agents that customers will trust, in order for customers not to have extraneous worries that would prevent them from really being able to make decisions.
> Posted by Sonja E. Kelly, Fellow, CFI
The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Since Sendhil Mullainathan is speaking at our Financial Inclusion 2020 Global Forum in two weeks, we ordered a few copies of his new book with Eldar Shafir to pass around the office. As a result, the hypotheses of Scarcity are informing our thinking both on our own habits and on financial inclusion.
The title of the session in which Mullainathan, a Professor of Economics at Harvard University, is speaking is “Why Financial Inclusion Means More Than We Ever Knew.” A mouthful, yes, and a bit mysterious. To unravel the mystery, one has to start with Mullainathan’s hypothesis that scarcity of some kind of resource—money, time, even social relationships—brings about an intense focus on the scarce resource, a focus that has negative effects on the way we think and act in areas of our lives outside that of the scarce resource. If this is true, financial inclusion is a game-changer that both prevents scarcity and alleviates its effects.
On first reading, Mullainathan and Shafir’s book seems to apply immediately to my own life. In my case, a scarcity of time means that I often adopt a focus on time and resulting tunnel vision for the task at hand. This focus has some positive effects—I produce work much faster than I would if I had more time. And it has some negative effects—I forget special events like my closest friend’s birthday (I’m sorry, Sarah! Does mentioning you in this blog post make up for it?). In essence, the authors contend that the single-minded focus that severe scarcity creates absorbs so much psychic energy, mindspace, bandwith, or whatever you may call it, that rational decision-making suffers.
This tunneling—devoting a great deal of bandwidth to a single resource—produces intense focus on the scarce resource, but also catastrophic failure on the things that get neglected to make “space” for such a focus.
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