Those who work in the financial inclusion space need a deep understanding of how low income people manage their money, and there is no better guide to develop this understanding than Ignacio Mas, who recently spoke at the Africa Board Fellows seminar in Cape Town. Here are some of his insights.
Unused money is vulnerable if you are poor
You have to protect it from a lot of things – theft, friends and family, and, also, your future self… (Let’s not underestimate the threat of the future you as someone who has the most access to, and authority over, those funds.) And there is no saying how resolved you will stay toward your savings goals. One way to protect any unused money against these threats is to make it less liquid. For example, you could convert your savings into a goat. In many countries, a goat can be sold if an emergency should arise, but you certainly wouldn’t sell or trade it to make an impulse purchase. Or as the vendor I just bought holiday jam from put it: “Making jam is like forced savings for me. I spend it in the summer on jars and sugar and fruit and get it back in December for Christmas shopping money!” These are examples of self-nudges that enable clients to better stick to their goals – one of the seven behaviorally-informed practices for financial capability. These approaches create behavioral roadblocks, so that individuals are able to save with less effort.
Savings goals are fuzzy
Given the vulnerability of savings, the poor often keep their savings goals fuzzy so they don’t get too attached to the savings. Few poor people maintain savings jars labeled for specific purposes; they are more likely to put all the savings into one jar and keep ideas in mind for how they might use it – maybe school fees, maybe a motorbike, maybe a refrigerator. It is useful when savings are loosely earmarked for specific goals but available for alternative purposes that may arise. Savings can also serve as insurance in case of emergency and also a source of funding to borrow against.
Tools over products
Recognizing how vulnerable and fungible money is for the poor, financial service providers should aim to provide the poor with financial tools that put them in charge of their finances with a sense of control and empowerment. This is a departure from pushing specific financial products. For example, an education savings account that can’t be touched until the child is 18 without major fees is probably too restrictive. Maybe a financial product, such as a savings account for education, is designed specifically for a worthy objective, but, for many at the base of the pyramid, a product that pertains to just one objective isn’t practical or a good fit. An analogy Mas likes compares music CDs and iTunes. A CD is a specific product that forces buyers to spend money on a set of songs even if there is only one song they want. iTunes is a tool that allows users to buy only the songs they want, and at a fraction of the cost.
The future is imagination
In a world where business models change industries in the blink of an eye and growth can be exceedingly exponential, it is no wonder that the 2016 Financial Inclusion Banana Skins ranked strategy as the number one risk facing the inclusive finance sector. Since the future is largely unknown, the key to success (for both employees and institutions) will not necessarily be knowledge or expertise, which can become outdated in a heartbeat. To a great extent the key to future success will be imagination. Financial service providers will need expertise and understanding of how the poor use their money, and they will also need to think big to find creative tools that fit clients unique needs and empower them to better control their finances.
Since the future is largely unknown, the key to success (for both employees and institutions) will not necessarily be knowledge or expertise, which can become outdated in a heartbeat.
Tea leaf readers
As the stewards of many financial service providers, the fellows in the Africa Board Fellows program are convinced that it is a priority to get the right people on boards who can read the tea leaves in this brave new world. Bringing millennials on boards could be one way to capture the imagination and digital savvy needed to effectively serve the poor. Boards can’t continue with business as usual in a world where business is clearly not usual. You don’t want to be selling CDs when your clients want the digital equivalent of a goat.
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