Financial Capability: Not Many Answers, but Lots of Great Questions

> Posted by Susy Cheston, Senior Advisor for the Center for Financial Inclusion at Accion

This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at ACCION International.
Overheard at a party in Washington: “You should SOOO switch banks!  Did you know that my bank offers reimbursement for ATM fees?”
Outside financial inclusion circles, it’s not often that a party conversation turns to a comparison of financial services.  And even when it does, what seems like a high level of “financial capability” does not always translate into better use of financial services.  If it did, the ease with which Americans talked about the great deal they got when they re-financed their homes would not have gone hand in hand with a financial crisis triggered by flaws in our mortgage banking system.
Yet good news for financial literacy advocates:  a couple of years ago James Surowiecki reported in The New Yorker that, of subprime borrowers in the U.S. “who scored in the bottom quartile on a very basic test of calculation skills, a full twenty per cent had been foreclosed on, compared with just five per cent of those in the top quartile.”  A little financial literacy can, it seems, make a difference.
So what would it take to build true financial capability—knowledge that people act on– broadly across a whole group of people?  One thing it will take is a transformation of our view of financial education.  Let’s look at recent history.  A few brave pioneers in the industry—generally, individual MFIs—have acted out a vision of financial education.  As part of their social mission, they wanted to make sure clients knew what they were buying and could use the services well.  As part of their financial bottom line, they saw financial education as helping to sell more products, attract new clients, and retain current clients.  They began with the delivery methods they knew, often introducing classroom-style training modules targeted to microfinance clients.  It was well-intentioned, but it didn’t usually work.
Yet this world is maturing.  There have been no definitive answers to the question of how to promote financial capability, but there have been increasingly sophisticated questions.  That includes some shifts in language.  A focus on “teachable moments”and “behavior change” is replacing classroom training.  There are parallels with the way the microfinance industry has developed a larger vision and evolved its models over the past several decades.  In the same way—although in a much shorter time frame–financial education has matured from ad-hoc, limited efforts into questions of scale, sustainability, and market segmentation, along with a renewed focus on the client perspective.
Here are a few highlights from the current conversations gleaned from a session on financial capability at last fall’s SEEP annual conference, and augmented by many private discussions:

  • Scale: We have started thinking not only about reaching large numbers of clients, but also about having enough density in a given population to affect group norms. By increasing the financial literacy of a whole community, there is the potential to have a greater impact through, for instance, creating a savings culture. Further, if a client’s neighbor or savings group member or customer is also financially literate, it increases the chance that she will pass on useful tips about financial services and institutions.  (“You should SOOOO switch banks….”)
  • Sustainability: There seems to be a continuing belief that financial education will require a subsidy, and the question becomes who should pay for it? A few members of the financial inclusion community are asking what education clients are willing to pay for and how to ensure that financial education is value-added.
  • Segmentation: In keeping with the industry’s increasing focus on client needs, there is a desire for client research to help determine the appropriate kind of financial education for people with different poverty, financial capability or literacy levels, or for different geographic regions or business types (formal/informal).
  • Behavior change:  Many are asking what change we are seeking and how we will know it has been realized.  In short, what does success look like, and what are the metrics?   Related research questions focus on how to bring about that change most effectively.  What do clients need to know? How can they best learn?  How are they currently getting information?  What are the most effective methods for long-term behavior change?
  • Client perspectiveLarry Reed’s recent post on this blog poked good fun at how disconnected many financial education efforts seem from what clients really need and want.  And Monique Cohen’s subsequent post nicely put it in perspective.  Financial education, she wrote, is a “means to a means.”  The end goal is a client who is better off; financial services are a means to that end; and financial education is simply a means to that means.  Or, in the words of the Opportunities and Obstacles to Financial Inclusion report, “It’s the Clients, Stupid!”

If I were to add a sixth bullet, it would be “Providers.”  Many players are joining the party, entering the space originally created by MFIs with a social mission. This new paradigm is dizzying in its scope, including national schemes involving youth reached in public schools and strategic alliances with a variety of public and private partners.  At the upcoming G20 meetings in Mexico, financial education, along with client protection, has been designated a key focus in the financial inclusion agenda.  In the U.S., the financial crisis spurred even greater attention to financial education, especially among private sector institutions that had been heavily criticized.  Members of The Financial Services Roundtable, the association of the leading financial services companies based in the U.S., carried out 46,000 financial literacy projects in 2011 .  President Obama has declared April to be National Financial Capability Month in the U.S.—who knew?—advertised as a focus on the necessity of cultivating financial responsibility “from top to bottom—from banks and borrowers to workers and executives.”
Recently I was told about a global phone provider’s plans to provide a mobile financial planning application for the underbanked in India. The players of the app serve as financial advisors to one of several avatars, such as a woman trying to save for her daughter’s wedding.  If the player gives bad advice, no one blows up—sorry!—they just don’t achieve their financial goals.  The app also contains an interest calculator as well as basic financial information. What an opportunity to test the marriage of financial education and financial service delivery mechanisms, with key information provided at just the right time.
Hmmm….if we could get the creators of Angry Birds on the case, we might start hearing more about financial services at parties!
For more information, sign up for updates from the Financial Inclusion 2020 campaign. 
Susy Cheston is Senior Advisor for the Center for Financial Inclusion at Accion and leads the Financial Inclusion 2020 campaign. She previously served as Senior Director for Water, Sanitation & Hygiene; Agriculture; and Economic Development for World Vision. From 1992 through 2010, Susy served in various positions within Opportunity International, most recently as Senior Vice President for Policy.
Have You Read?
Financial Education: A Means to a Means
You Are Here: Finding our Place on the Roadmap to Inclusion
Who Needs Financial Education?

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