This post originally appeared on the European Microfinance Platform's (e-MFP) <a href="http://www.e-mfp.eu/blog">blog</a>.

How should financial institutions approach consumer protection differently when they offer services through smartphones rather than humans?

This was the question we posed when the <a href="https://content.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign/">Smart Campaign</a> team first started revising the standards to be applied to digital financial services, especially digital credit. We're very pleased to have launched the new <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">Digital Credit Standards</a>, their accompanying <a href="http://www.smartcampaign.org/storage/documents/2019_06_19_Principles_Guidelines_FINAL2.pdf">guidance document</a>, and the forthcoming companion Handbook on Consumer Protection for Financial Inclusion (summary <a href="https://www.smartcampaign.org/storage/documents/Handbook_on_Consumer_Protection_-_Eng.pdf">here</a>). What we didn’t expect, however, was quite how profound the differences would turn out to be. We made significant changes to the standards for all seven Client Protection Principles (the principles themselves remain the same). I want to focus here on the most fundamental: Appropriate Product and Delivery Design.

When financial service providers (FSPs) consider tackling client protection, their first thought is often, “We need a code of conduct!” That reflexive response shows that FSPs traditionally view protecting clients mainly through the lens of setting and enforcing boundaries on staff behavior. And traditionally, that made sense. After all, ground zero for protecting clients occurs in the moments when they come face to face with staff. That’s when the client receives product information that is transparent (or not) and is treated (or not) with fairness and dignity. The practice of client protection has centered on defining codes of conduct, incentivizing and training staff to follow them, monitoring their adherence, and applying sanctions to breaches.
<h2>When face-to-face interaction disappears, what happens to consumer protection?</h2>
When staff aren't present, however, the client experience changes. On the one hand, the problem of rogue or substandard staff behavior disappears, which is good for clients. But so does the helpful staff person who can answer a client’s questions and guide the client to the right product. With digital services, everything the client experiences is pre-programmed and embedded into the user interface upfront, before a single client has clicked on a single screen. Everything is determined in advance, through coding and algorithms, and the sequences roll along without individual human intervention.

In this setting, protecting clients is all about good design. But product and delivery design teams in FSPs include a range of people, not all of whom are traditionally alert to client protection: the IT team, the market research and marketing teams, commercial analysts, and possibly outside software developers. Team members come from different disciplines with different training and skills, and they may not even be aware of client protection principles. These teams need guidelines to assist them in integrating protections into the interfaces they ultimately design. For example, designers need to determine whether clients are likely to understand the product information they provide in a setting where they can't easily ask questions. Those involved in market research and prototype testing need to have client protection issues in the forefront of their minds as they do their work.

To do this, they need a “code of conduct” for the design process, and that is how we think about the new standards for appropriate product and delivery design. We call the approach “protection by design,” taking a cue from the concept of privacy by design often advocated as a rubric for data privacy. Protection by design is a vastly different approach to implementing client protection from the old codes of conduct. The focus is what goes into the product, rather than how the staff member behaves with each individual. Protection by design focuses on anticipating the totality of needs of all clients and incorporates them right from the start.

And that brings up another profound difference between traditional client protection practice and the new standards. When the focus is on ensuring that the staff conducts successful interactions with each client, adherence is monitored on an ongoing basis through everyday work. With protection by design, and its focus on getting it right in advance for the whole portfolio of clients, the staff stand back and watch machines do the work. There is no daily staff feedback to tell supervisors whether client outcomes are satisfactory. Thus, in protection by design, systems and methods for monitoring client outcomes – through portfolio data and direct client surveys – become essential.
<blockquote>When the focus is on ensuring that the staff conducts successful interactions, adherence is monitored. With protection by design, the staff stand back and watch the machines do the work.</blockquote>
We're just at the start of understanding these and other implications of protection by design for the practice of client protection. The Smart Campaign looks forward to engaging with members of <a href="http://www.e-mfp.eu/">e-MFP</a> to build out and test robust tools that can enable the approach to be widely applied. We’d like to work out how to incorporate client input and testing during the design process, protocols for algorithm review and other facets of the new approach.

Beyond protection by design, the revised standards for digital financial services incorporate several other very important changes, some of which are among the hottest issues in the sector today: data privacy, data security, and the thorny question of fairness and responsibility in algorithm-based lending. The Smart Campaign will dig deeper into these issues during the coming year.

We would like to thank all those who worked with us in designing the standards, especially MFR and the members of the <a href="https://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>. It has been a community effort.

In a world that is changing very rapidly, we consider the client protection standards to be a permanent work in progress, anticipating that they will need to be adapted as new developments in financial services occur. At this stage, our hope is that the players in the financial inclusion sector will actively promote and use the new standards to ensure that the sector does right by its clients, no matter what methods it uses to deliver its services.

We invite you to review the <a href="http://www.smartcampaign.org/storage/documents/Digital_Credit_Standards_June_2019.pdf">standards</a> and send us your thoughts by commenting below.

From Human Conduct to Protection by Design: The Smart Campaign's Digital Standards

The Smart Campaign

Keeping Clients First

Appropriate Product Design and Delivery

Consumer Protection

Responsible Digital Finance

Blog Post

Barres's questions that Libra's developers should consider when innovating for the new cryptocurrency are:
<ul>
 	<li>What would data privacy agreements look like if we wanted them to be understandable, fair and with an option to opt out?</li>
 	<li>How would algorithms that did not discriminate be set up?</li>
 	<li>How might fully transparent, low-cost and high-quality products and services that truly solve problems be brought to bear?</li>
</ul>
Read the <a href="https://www.euromoney.com/article/b1g0hvpnhqmyg0/cryptocurrency-facebook39s-libra-is-this-how-we-get-to-responsible-fintech">full article in Euromoney</a>.

In Euromoney: Smart Campaign's Isabelle Barres Poses Questions About Libra

News

Today there are close to 700 million mobile money accounts registered worldwide — a number that, if it were a population, would rank as the world’s third-largest country. East Africa continues to lead in digital financial innovations as well as account usage, with two-thirds of the combined adult populations of Kenya, Rwanda, Tanzania, and Uganda actively using mobile money. With the proliferation of mobile financial services, particularly among underserved populations, it is vital that users be treated fairly and with dignity. In the momentum to define responsible digital finance and recognize providers of high-quality financial services, the industry must not forget the consumer.
<h1>Client Voices: Why We Listened</h1>
<a href="/about/what-we-do/the-smart-campaign/">The Smart Campaign</a>, a global initiative to create an environment in which financial services are delivered safely and responsibly to low-income clients, has long recognized that client perspectives are often underrepresented in consumer protection discussions. With the Client Voices Project, the Campaign questions whether the industry’s assumptions about what constitutes problematic treatment rightly reflect what clients themselves worry about.

The dual objectives of the project are to solicit input from low-income clients about what they consider good and bad treatment in their interactions with financial service providers and to assess the prevalence of consumer protection problems among these clients, using quantitative surveys. The project is designed to act as a catalyst for financial service providers, regulators, industry associations, consumer advocacy groups, and others to improve client protection in ways that are grounded in client feedback.
<h1>Major Findings</h1>
Based on a survey of over 1,200 people in three districts in Rwanda, this report delves into the experiences of individuals who use digital financial services (DFS), the main client protection issues they are concerned about, and the impact and prevalence of negative experiences. We find that mobile money enjoys a high degree of satisfaction and trust from clients in Rwanda, even though 40 percent of clients report being targeted by fraudulent schemes, which have become increasingly sophisticated.
<blockquote>Customers report wising up to scams and fraud, but with a continuous influx of new mobile money users and fraudsters who innovate quickly, the threat is real and constant. Fraud represents the greatest potential to damage customer trust and engagement with mobile money in Rwanda.</blockquote>
However, there are many ways that DFS operations and practices can be improved to better protect clients and strengthen trust. Client recourse mechanisms, for example, represent an important area for improvement: many clients shared that they feel helpless and unsure about what to do after realizing they have been duped. Additionally, for business models that rely more on the mobile interface than on human interaction, clients increasingly rely on agents for information and guidance. This presents an opportunity to provide better service, as well as a risk for poor client treatment.

We hope that providers, industry associations, support organizations, regulators, consumer protection advocates, and clients can benefit from these findings to create a stronger, more inclusive client protection ecosystem. We offer specific recommendations for many of these stakeholders.

Client Voices: Rwandans Speak on Digital Financial Services

Laterite Ltd

Mastercard Foundation

Rwanda

Sub-Saharan Africa

Agent Banking

Client Treatment

Complaint Resolution

Credit

Credit Provision

Delivery Channels

Digital Credit

Digital Financial Services

Financial Service Providers

Mobile Banking

Payments

Privacy

Telcos

Underserved Groups

Report

This <a href="https://soundcloud.com/user-273615244/frt-episode-28-digital-customer-journey">episode</a> of the "FRT" podcast focuses on how digital customer journeys are enabling financial institutions to reach underserved segments in a sustainable manner. IIF’s Conan French host Rhyne and Amin Khairy to discuss the upcoming CFI-IIF paper “Charting the Customer Journey in the Digital Age.”

Rhyne discusses the persistent challenges for digital inclusion and the importance of having a “tech-touch” balance at certain stages of the customer journey.

They also discuss the potential gain in operational efficiencies for financial institutions and the positive impact digitization has on unbanked customers and provide real-life examples of digital customer journeys in various stages: pre-onboarding, onboarding and continued use.

"We're finding that the countries that are making it easy to onboard are those with a good national ID program," Rhyne said. "Having a very clear and simple to use national ID that's easily connected electronically is probably the most important thing."

Rhyne also notes that understanding the unique financial lives of lower income segments is crucial to digitization and different from transitioning banked populations from analog to digital.

Browse more <a href="https://www.iif.com/Innovation/FRT-Podcast">FRT podcast episodes</a>.

&nbsp;

IIF Podcast Features Elisabeth Rhyne Discussing the Digital Customer Journey

Human Centered Design

In the March 14 <a href="https://www.raconteur.net/finance/financial-inclusion-banked">piece</a>, Rhyne’s insights are part of a broad survey of the global financial inclusion landscape -- from barriers to financial inclusion in the developing world, to its benefits and the tools that are helping to integrate marginalized populations into the “financial mainstream.”
“In the developing world there is an issue of absolute low incomes,” Rhyne said in the feature, which appeared in the <a href="https://www.raconteur.net/future-money-2019">Future of Money</a>, a 20-page insert published in <a href="http://www.thetimes.co.uk">The Times (UK)</a> in association with <a href="https://europe.money2020.com/">Money 20/20</a>. “In regards to how much in deposits people would be providing, how large a credit they might want, these are below the threshold of feasibility for banks using traditional branch-based, teller-based models. So you couldn’t put a branch out in a rural area and expect it to be profitable.”
Rhyne uses the example of hyperinflation in Latin America to illustrate why potential customers don't have bank accounts, and concludes the article by noting that digital payments “are going to be essential” over the next decade.

<a href="https://www.raconteur.net/">Raconteur</a> is a publisher of “special-interest content and research” whose special reports are inserted into the printed version of The Times (UK). Read the full article <a href="https://www.raconteur.net/finance/financial-inclusion-banked">here</a>.

Raconteur Features Elisabeth Rhyne in “Challenges in Banking the Unbanked”

Latin America and The Caribbean

Enabling Environment

Financial Inclusion Strategy

Fintechs

Saving

&gt; Posted by Akhand Tiwari, Bhavana Srivastava, and Vijay Ravi, MicroSave
<h4><img class="alignright wp-image-24143" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/dialogue-on-business-clients-india-7.jpg" alt="" width="330" height="220" />Loyalty Programs</h4>
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 href="https://smith.queensu.ca/insight/articles/the_logic_of_loyalty">A publication from Smith School of Business</a> 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<a href="https://responsiblefinanceforum.org/wp-content/uploads/Building-Customer-Loyalty.pdf"> continued patronage</a>. In a world where there is often little variation between competitors’ offerings, a <a href="http://www.emeraldinsight.com/doi/pdfplus/10.1108/03090560810840925">well-designed loyalty program</a> 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 <a href="http://www.livemint.com/Money/L4zWiHkiKEibnL3W8w7kWM/New-banks-FDs-have-higher-interest-rates.html">higher interest rates on term deposits</a>, 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.


<h4>Loyalty Programs and Financial Service Providers</h4>
The success of any service provider depends on the quality of engagement with their customers, measured in part by customer satisfaction. The <a href="http://www3.weforum.org/docs/WEF_The_future__of_financial_services.pdf">emergence of new players</a> who offer financial services across the spectrum has increased the significance of loyalty programs in this industry. With programs offering options of cashback, <a href="http://www.investopedia.com/terms/e/equated_monthly_installment.asp">equated monthly installments</a> (EMIs) on high-value purchases, and loyalty points for using credit cards, the financial sector is no stranger to the loyalty bandwagon. However, so far, these programs have been designed to cater to the middle-class or, <a href="http://www.cgap.org/photos-videos/how-get-merchants-go-digital">more recently, to merchants</a>.

With the digital finance revolution, the industry is increasingly eager to tap into the bottom of the pyramid. It now wants to bring into the mainstream those who have been traditionally excluded. <a href="http://www.microsave.net/files/pdf/RP161_FSP_Sales_in_MM_World_Kendall_et_al.pdf">Changes in target consumer base and product-delivery methods</a> warrant a <a href="http://blog.microsave.net/customer-service-more-than-just-smiles/">new approach</a> to loyalty programs as well.
<h4>Loyalty and Low-Income Households</h4>
<img class="alignright wp-image-24136" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/quote-box-1.png" alt="" width="330" height="160" />For a financial service provider that seeks loyalty from this segment, how should the approach differ? While the focus of a loyalty program should be to promote patronage, could the program also include other dimensions? We believe that, for this client, there is a need to promote a positive mindset by demonstrating their importance to the company. There is a need to display trust, which will be reciprocated in the form of loyalty. This is critical, given the low-income market’s strong reliance on their social circle as a source of both information and influence.

Existing loyalty initiatives, like cashbacks and discounts, may not make sense when the institution is trying to promote patronage and trust.

<img class="alignleft wp-image-24139" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/quote-box-2.png" alt="" width="329" height="174" />Also, loyalty programs that offer benefits that are not obviously related to the core product (like a mobile operator offering discounts on FMCG products), may be a welcome bonus, but do not actually impact customer loyalty.

Simply put, we believe financial service providers can build customer loyalty among low-income clients by providing an important element that is <a href="http://www.microsave.net/files/pdf/the_answer_is_yes_cost_and_willingness_to_pay_in_india_2_UeUWcdIyaSo.pdf">lacking in their lives</a> – dignity.

Financial service providers may offer their customers dignity in many ways. Some initiatives that we know work well are:
<ul>
 	<li>Recognition makes customers stick around even during crisis periods because they have a sense of ‘ownership’ associated with the brand. For example, MFIs who work with base-of-pyramid segments often celebrate their customers for regular repayment. A token of appreciation in a group meeting often does wonders to their attitude towards the organization.</li>
 	<li><img class="alignright wp-image-24140" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/quote-box-3.png" alt="" width="331" height="185" />Many FSPs conduct skill-based training sessions and workshops that focus on building livelihoods. These work in two ways. Firstly, receiving an invitation to attend a training and being awarded a certificate is regarded as “being recognized”. Secondly, customers see this as skill-building, which garners social respect. Moreover, when applied well, these skills result in increased income — improving the economic conditions of the household. We have seen at Equity Bank in Kenya, for example, that customers who have attended training sessions have a stronger affinity to the organization and tend to stick with it longer than those who have not. These customers also demonstrate <a href="https://nextbillion.net/enhancing-access-to-finance-for-women-entrepreneurs-what-should-financial-institutions-do/">better behavior</a> in terms of timely repayment and regular attendance in meetings.</li>
 	<li><a href="http://bit.ly/1ltB0iU">Good customer service and a happy customer experience can go a long way to improve loyalty</a>, while poor customer service can quickly erode it. We’ve seen that <a href="http://www.microsave.net/files/pdf/No_Thrills_Dormancy_in_NFA_Accounts.pdf">a major reason for dormancy of bank accounts</a> can be a lack of respect shown by bank staff to their customers. Responsive product design and processes also improve customer experience. In Bangladesh, MFIs have <a href="http://gfdrr.org/sites/gfdrr/files/publication/Microfinance%20and%20Disasters-Preparing%20for%20the%20Worst.pdf">modified product features</a> to help their customers through cyclones and excessive rains that affect Bangladeshis every year. In its earlier days, Equity Bank used <a href="http://www.microsave.net/files/pdf/Customer_Service_Strategy.pdf">salary boards</a> to allow clients to check whether their salaries were credited to their accounts without having to wait in line to ask tellers. As <a href="http://documents.worldbank.org/curated/en/221421468147873241/pdf/909510BRI0Box30l0Inclusion0Jun02014.pdf">CGAP notes</a>, “customer-centric providers tend to fare better in the long run, as they are better at retaining customer loyalty and identifying and meeting evolving demand.” Arguments in <a href="https://assets.kpmg.com/content/dam/kpmg/au/pdf/2017/customer-first-digital-age.pdf">this thoughtful piece from KPMG Australia</a> highlight the importance of customer experience as well.</li>
</ul>
In order to create a fully functional loyalty program, these piecemeal activities should be institutionalized with clear goals and targets in sight. One might argue that cost-constraints inhibit financial service providers from focusing on these activities on a sustained basis. However, consider this: the cost of acquiring a new customer is always high – definitely higher than retaining existing customers, though the estimates vary (see the <a href="https://www.linkedin.com/pulse/what-cost-customer-acquisition-vs-retention-ian-kingwill">cost of retention vs acquisition</a> and <a href="https://hbr.org/2014/10/the-value-of-keeping-the-right-customers">this Harvard Business Review note</a>). Organizations serving the BoP face <a href="http://www.microfinanceindia.org/uploads/news_attachments/20130724120608_state-of-the-sector-report-2012.pdf">the same challenge</a>. However, the fact remains that even in trying times (such as the emergence of new, aggressive competitors, political interference, and/or macroeconomic shocks, such as the <a href="http://timesofindia.indiatimes.com/business/india-business/demonetisation-to-hit-mfis-for-q4-too/articleshow/57525277.cms">demonetization</a> exercise in India), these investments will provide the organization with the much-needed time to face new challenges.

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2017/08/23/juntos-harnesses-artificial-intelligence-to-improve-customer-engagement-for-bbva-bancomer-and-bancolombia/">Juntos Harnesses Artificial Intelligence to Improve Customer Engagement for BBVA Bancomer and Bancolombia</a>

<a href="https://cfi-blog.org/2017/07/13/not-just-a-pretty-interface-designs-must-be-easily-learned-and-used/">Not Just a Pretty Interface: Designs Must Be Easily Learned and Used</a>

<a href="https://cfi-blog.org/2016/12/05/client-centricity-at-scale-the-brac-smart-certification-journey/">Client-Centricity at Scale: The BRAC Smart Certification Journey</a>

Building Customer Loyalty at the Bottom of the Pyramid

Kenya

Philippines

Georgia Client Voice research included the perspectives of 1,000 current and former microfinance clients to identify the consumer protection impediments that persist in the country. The Smart Campaign selected Georgia as the market in Eastern Europe and Central Asia for the Client Voices project for several reasons, primarily because of the current regulatory reform at the national level. As the Consumer Protection Division becomes its own entity, operating outside of the regime of the National Bank of Georgia, this research will enrich the discussion and inform the next steps in the country’s consumer protection arena. The building blocks for a thriving industry are already set, including a credit bureau, CreditInfo. Regulators, local partners, and microfinance institutions all have a role to play to raise awareness among clients and cement customer protection in the industry.
<blockquote>Top concerns among microfinance clients in Georgia are: over-indebtedness, appropriate product design and delivery, and transparency.</blockquote>
Various research methods were implemented in the qualitative phase, including focus group discussions, individual in-depth interviews, and a photography exercise to gain a deeper and contextualized understanding of clients’ views of good and bad treatment. The quantitative sample consisted of 800 currently clients and 200 former clients, 59 percent of whom were women.

The research finds that the majority of clients, around 66 percent, are happy with their institutions and thus stay with their institutions for a long time. Primarily, microfinance institutions’ service and treatment was ranked as matching or exceeding commercial banks. However, clients’ understanding of terms and conditions is still lacking, especially around the high risks associated with taking loans in U.S. Dollars.

Client Voices: Georgia Country Report

Bankable Frontier Associates

Europe and Central Asia

Georgia

Over-indebtedness

Transparency

I have <a href="https://alexcountshaitibook.wordpress.com/2013/10/18/a-surprising-microfinance-researcher-and-possible-implications-for-haiti/">written extensively</a> about how I believe practitioners and researchers can work most effectively together in reducing poverty, often using some of the missed opportunities for this kind of collaboration in microfinance as a point of departure. In the process, quite a few people have come to believe that I am opposed to randomized controlled trials (RCTs). Perhaps part of the issue is the tendency of many people, especially those in the media, to reduce a point of view to whether it is “for” or “against” something else.

In fact, my position has always been that RCTs have an important place in improving development policy and practice. I have, however, been uneasy with the way they have been promoted – dare I say “over-hyped”? – as a “gold standard” and also with the <a href="http://www.grameenfoundation.org/blog/reflections-latest-studies-microcredit#.ViZ3fX6rTIU">misleading assumptions and comparisons</a> some of its proponents routinely make. The limitations of RCTs are frequently minimized, as are the potential contributions of other research methodologies.

In the case of microcredit, the way RCT studies have been digested, interpreted, and acted upon has done considerable and unnecessary damage to policy and practice, even as it has increased our knowledge of some important issues. No one group bears responsibility for this damage, but too many continue to ignore or minimize it.
<h3>Enter Angus Deaton</h3>
Like many others, I have struggled at times to articulate the source of my unease. Now comes powerful commentary on RCTs and related topics by 2015 Nobel laureate economist Professor Angus Deaton in his <a href="https://medium.com/@timothyogden/experimental-conversations-angus-deaton-b2f768dffd57">interview with Tim Ogden</a> of NYU’s Financial Access Initiative.

Deaton, a Professor of Economics and International Affairs at the Woodrow Wilson School, is currently focusing on the broad topics of health, well being, and economic development. In announcing the Nobel Prize, the Royal Swedish Academy of Sciences noted his “analysis of poverty, consumption and welfare.”

In the interview, Deaton comes across as a blunt, old school economist who resists hyperbolic claims by proponents of the latest fads, especially if those fads are rebranded versions of earlier ones that were discovered to have notable strengths but also significant limitations.

I have a lot of sympathy for this type of realistic, long-term thinking. In fact, my <a href="http://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">blog post</a> about what impact investors could learn from microfinance began as a reflection on the ahistorical thinking of many impact investors who failed to appreciate their forerunners and what they accomplished and learned.

In the interview with Ogden, the overarching theme is that development and development research, besides being prone to fads, are simply hard to do well. There are no short-cuts, no silver bullets, and above all (to use a term he favors), no “magic.” Each generation seems to believe they have found the answer, and are ultimately proved wrong, in part because they missed opportunities to learn from prior generations and to replace hubris with humility and curiosity.

Certainly Grameen Foundation, for example, has learned how difficult it is to make tangible progress on leveraging the power of information technology for poverty reduction. But with sustained effort, and at times aided by RCTs, we have been able to make real headway, especially in the areas of <a href="http://www.grameenfoundation.org/what-we-do/financial-services">financial services</a>, <a href="http://www.grameenfoundation.org/what-we-do/agriculture">subsistence agriculture</a>, and <a href="https://taroworks.org/">using field data to improve decision-making</a> impacting poor clients. Other members of the <a href="http://microfinanceceoworkinggroup.org/">Microfinance CEO Working Group</a> are advancing the state of practice through similarly rigorous and painstaking approaches.

As we go about our work, Grameen Foundation staff and volunteers continuously familiarize themselves with and promote broad industry awareness of the widest possible range of research findings and methodologies, most notably in our “Measuring the Impact of Microfinance” series, which is coming out with its third installment next month. (This forthcoming publication is written by Professor Kathleen Odell of Dominican University, who also authored <a href="http://www.grameenfoundation.org/resource/measuring-impact-microfinance">the 2010 report</a>.)

To get a flavor of Deaton’s commentary, I have extracted some of the most trenchant quotes from the interview and grouped them thematically. I urge people to read <a href="https://medium.com/@timothyogden/experimental-conversations-angus-deaton-b2f768dffd57">the entire interview</a> and also the forthcoming book Experimental Conversations by Ogden that it will be part of. (I am also interviewed in the book.)
<h3>There Is No Magic</h3>
“[The randomistas believe that they] have a magic tool but they don’t yet have much of an idea of the problems with that magic tool. And there are a lot of them….  I think RCTs rarely meet the hype.”

“[The randomistas] like to argue that RCTs don’t need assumptions but they’re loaded with assumptions at least if you are going to use them for anything.”

“There is a sort of belief in magic, that RCTs are attributed with properties that they do not possess.”
<h3>Failing to Learn from History</h3>
“If you go back to the 70s and 80s and you read what was written then, people thought quite hard about how you take the result from one experiment and how it would apply somewhere else. I see too little of that in the development literature today… [My] reading of the J-PAL webpage makes me think that when they list estimates they seem to suggest you can use them pretty much anywhere. Which is pretty weird when you think about it.”

“I think [prior generations of economists] thought very hard about the strengths and limitations of RCTs, and that much of that seems to have been lost today, which is a pity.”

“I think some of it is a youth over old age sort of idea. Here’s a new tool, we can rethink the world with it.”
<h3>Beyond Its Capabilities</h3>
“…[A] reporter wrote that an RCT allows you to establish causality for sure. But that statement is absurd.”

“I think [RCT advocates] thought they were going to solve a problem which is not solvable.”

“I think that right now the literature is claiming way too much for RCTs.”
<h3>Part of A Toolbox</h3>
“RCTs are fine, but they are just one of the techniques in the armory that one would use to try to discover things. Gold standard thinking is magical thinking, … a belief that this method can do something which it can’t, the replacement of statistics with magical thinking.”

“I’m not blinkered by the craziness that if it’s not a randomized control trial I shouldn’t pay any attention to it. Which I’ve heard more times than I can count.”

“[E]xtended case studies are enormously important. Most of the great ideas in the social sciences over the last 100 years came out of case studies like [the financial diaries]. Because people are open to hearing things they didn’t necessarily plan…”

“I think [the RCT movement] will likely fade in the same way it faded 30 years ago and for much of the same reasons….  RCTs will have more of a place in the economist’s toolbox than was true twenty years ago, and as with other methods, we will have a well thought out view of when and where they are useful. More tools are always welcome, as long as we don’t think one of them is a magic tool, or that it is the only tool we need.”

To which I simply say, “Amen.”

Have you read?

<a href="http://cfi-blog.org/2015/03/20/reflections-on-the-latest-studies-on-microcredit/">Reflections on the Latest Studies on Microcredit</a>

<a href="http://cfi-blog.org/2015/06/09/considerations-for-the-pursuit-of-financial-inclusion/">Considerations for the Pursuit of Financial Inclusion – Beyond Account Access</a>

<a href="http://cfi-blog.org/2015/08/27/how-we-talk-about-microfinance-a-reply-to-dean-karlan/">How We Talk About Microfinance: A Reply to Dean Karlan</a>

Part of a Toolbox: Angus Deaton Urges Reconsideration of the Role of RCTs

Trends

&gt; Posted by Brianna Nelson, Project Associate, CFI

[caption id="attachment_17934" align="alignright" width="300"]<a href="http://www.cgap.org/blog/creating-insights-engine-customer-centric-organization"><img class="wp-image-17934 size-medium" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/04/kaleido.png?w=300" alt="" width="300" height="297" /></a> (click for larger graphic)[/caption]

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 <a href="http://www.cgap.org/blog/creating-insights-engine-customer-centric-organization" target="_blank">Kaleido tool</a>, 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 <a href="http://mastercardfdnsymposium.org/PDF/Workshop/WS3-Kaleido_360_Customer_Profiling.pdf" target="_blank">1 million</a> urban clients.

The first step in the Kaleido process is fairly straightforward – a questionnaire completed by families upon enrollment at a financial institution. These questionnaires provide the information needed to develop a visual map of a household’s financial indicators (see graphic). The data is <a href="http://www.cgap.org/sites/default/files/Other-Kaleido-Brochure-March-2014.pdf" target="_blank">synthesized</a> into five sections: composition, events, attitudes, business, and finances. By compiling the financial profile of a household, Kaleido creates a holistic overview of the needs and aspirations of the client. More information is added over time, with Kaleido serving as the foundation for identifying financial needs, and the institution designing products and delivery mechanisms to fit those needs. Clients focus their lives around events and milestones, not around loans or savings, so developing a unique and comprehensive profile of each household is a crucial step to understanding their financial needs and developing customer-centric products.

Kaleido is still in its initial stages of implementation, with Janalakshmi conducting <a href="http://www.cgap.org/blog/creating-insights-engine-customer-centric-organization" target="_blank">quantitative testing</a> on aspects of the tool and piloting it with a limited set of customers. The next phase will involve a gradual integration of Kaleido into Janalakshmi’s core operations. As the system is refined and more data is included for each client, it is expected to evolve into a comprehensive resource that can continually assess the financial progress of households and inform product design. Over time, the insights drawn from Kaleido will be based on the financial journeys of a large number of households.

We are excited to see how Kaleido’s implementation affects the shift toward customer-centricity at Janalakshmi. The next challenge will be to translate these insights into design criteria and ultimately services. And to get more institutions to take up similar efforts.

Have you read?

<a href="http://cfi-blog.org/2014/03/28/behavioral-approaches-to-product-innovation-at-the-base-of-the-pyramid/" target="_blank">Behavioral Approaches to Product Innovation at the Base of the Pyramid</a>

<a href="http://cfi-blog.org/2014/07/08/does-financial-inclusion-need-to-be-more-customer-centric/" target="_blank">Does Financial Inclusion Need to Be More Customer-Centric?</a>

<a href="http://cfi-blog.org/2014/10/31/fast-moving-consumer-goods-and-customer-needs-the-missing-link-between-shampoo-and-savings-accounts/" target="_blank">Fast-Moving Consumer Goods and Customer Needs: The Missing Link Between Shampoo and Savings Accounts</a>

Customer-Centricity as a Business Model: Taking the Kaleido Approach

Customer Centricity

&gt; Posted by Anton Simanowitz and Katherine E. Knotts

<img class="alignright wp-image-17579" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/03/467304.jpg" alt="" width="230" height="349" />“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, <a href="http://www.cgap.org/publications/customer-centricity-financial-inclusion">understand what appropriate design looks like</a>, and <a href="http://www.centerforfinancialinclusion.org/fi2020/roadmap-to-inclusion/financial-capability">empower clients to use those services effectively</a>.

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 <a href="http://www.thebusinessofdoinggood.co.uk/">The Business of Doing Good</a>. 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).

So if fast loan disbursement (which clients might prefer, and which AMK’s competitors are prepared to provide) means compromising the rigor of the detailed loan appraisal process that ensures they are not over-indebted and increases the likelihood of the success of a client’s investment, AMK is simply not interested. AMK recognises the importance of matching loans to client capacity to repay – not just whether they have sufficient collateral to cover them if they default. Central to this appraisal process is a visit to the client’s home, which experience has shown is critical to get an accurate understanding of the client’s situation. This visit takes time, is hard work for staff, and inconveniences its clients. Other MFIs have long abandoned this step, but AMK has made this a mandatory part of their lending process, and its “zero-tolerance” policy (with disciplinary action for client officers neglecting this) is verified through its internal audit function.

To understand what clients need, what they want, and what constraints they face, AMK invests in detailed research and client feedback, rather than assuming that it knows best. In fact this research overturned many common perceptions about rural poor people – showing for example that they had mixed economic baskets (rather than being solely reliant on agricultural income). It also highlighted that they were keenly vulnerable to shocks that affected their income (such as floods or health problems). These insights lay at the foundation of AMK’s product design, and have led to some noteworthy innovations.

Take the credit line loan, for example. It matches loan disbursement and repayments to erratic cash flows, and also cuts costs for clients by allowing them to draw down the amount of credit they need (up to a maximum), when they need it, rather than paying interest on capital that is not being used. On paper, the credit line looks like a risky product. Indeed, there were nervous glances around the boardroom table about how the organization would be able to predict its own cash flow, if clients were drawing down and repaying their loans when they chose to. And in fact in hindsight – although this looked like a case of clashing institutional and client needs - AMK has found that the seasonality of credit draw-downs and repayments are largely predictable. Clients are happy with the product – and AMK’s investors are satisfied that it’s worth supporting.

The credit line illustrates the challenge of balancing client needs with institutional risk and performance. Minimizing risk, while recognizing future benefits, has been at the core of AMK’s strategy. Whilst AMK developed a sound understanding of its clients and their needs, it has always sought to find the “sweet spot” between these needs, organizational capacity, and financial performance. As such, strategic decisions have been made about which of those needs to meet at any one point in time. These decisions were driven by the evolving internal and external context (including organizational capacity, market share, regulation, competition). For example, in the past five years, AMK has evolved from largely a credit-only provider to a multi-channel, multi-service provider (including insurance, savings, and remittances). In the case of savings, its early research revealed that clients can and did save (although not in regular amounts in a secure way), and highlighted the role that savings played in helping clients to cope with the unexpected. However, it wasn’t until regulatory barriers dropped that they were able to offer these in a way that made sense both for clients and the organization – by rolling out an agent savings model that took flexible services to where they were needed most (rural areas).

The Business of Doing Good tracks the ongoing conversation around client centricity over the past 11 years within AMK. AMK’s journey is founded upon a clear understanding of its clients’ needs, and clarity about its purpose within the lives of those clients and indeed the marketplace. As such, this book is relevant to all microfinance organizations, and those that support them to be more effective.

Learn more about the book: website: <a href="http://www.thebusinessofdoinggood.co.uk">www.thebusinessofdoinggood.co.uk</a>; Twitter: <a href="https://twitter.com/TBODGood">@TBODGood</a>

Anton Simanowitz (<a href="https://twitter.com/antowitz">@antowitz</a>) has worked for the past 20 years to support social enterprises to be more effective in delivering impact, and for those who support and invest in them to make better investment, capacity building, and policy decisions.

Katherine Knotts (<a href="https://twitter.com/katherineknotts">@katherineknotts</a>) is a writer and strategic communications specialist, who works with microfinance and other social purpose organizations to help them analyse what’s working (and what’s not), distill lessons learned, and package those lessons for other practitioners through written and film media.

Have you read?

<a href="http://cfi-blog.org/2014/07/08/does-financial-inclusion-need-to-be-more-customer-centric/" target="_blank">Does Financial Inclusion Need to Be More Customer Centric?</a>

<a href="http://cfi-blog.org/2014/11/21/cambodian-microfinance-market-records-big-growth-but-is-it-healthy/" target="_blank">Cambodian Microfinance Market Records Big Growth. But Is It Healthy?</a>

<a href="http://cfi-blog.org/2014/10/31/fast-moving-consumer-goods-and-customer-needs-the-missing-link-between-shampoo-and-savings-accounts/" target="_blank">Fast-Moving Consumer Goods and Customer Needs: The Missing Link Between Shampoo and Savings Accounts</a>

Responding to Needs and Wants in a Market-Driven Financial Institution

Cambodia

Risk Management

Alexandra Rizzi

Senior Director, Smart Campaign 

Isabelle Barrès

Vice President and Campaign Director, Smart Campaign

Tanwi Kumari

Manager, South and Southeast Asia, Smart Campaign

Alex Counts

Alissa Fishbane

Elisabeth Rhyne

Hema Bansal

Ignacio Mas

Maura Hart

Peer Stein

Sergio Guzmán

Colombia

Myanmar

Uganda

Agricultural and Rural Finance

Alternative Data

Banks

Behavioral Insights

Data Analytics

Financial Capability

Financial Technology

Microfinance

Policy, Regulation and Government Initiatives

Product Pricing

Smart Certification

Social Performance

Brigitta Nyawira

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

Brianna Nelson

Smita Aggarwal

&gt; Posted by Alissa Fishbane and Allison Daminger, Ideas42
[getty src="94882601?et=jtX0Y_cQT5J3JKDQg-JgvA&amp;socialOnLoad=off&amp;sig=4TJOthCJ6-9S1zmpdvXFFIch0zmuKWWxa6dDydwtw-M=" width="594" height="395"]

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 <a href="http://cfi-blog.org/2014/11/18/applying-behavioral-insights-inside-latin-american-financial-institutions-what-happened-at-our-workshop/#more-16644">behavioral insights workshop</a> 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.

We’ve found that many promising financial programs underperform simply because people often don’t behave the way we expect. As humans, even when we know what’s best for us, we don’t always follow through. We put off applying for a program that will help us save for retirement, or a loan to expand the family business. And when we do make it through the initial sign-up process, we often fail to save consistently or make monthly payments on time. Whatever the specific challenge may be, the result is that resources aren’t used efficiently. Because of this, neither financial organizations nor the individuals they serve see the returns they could be seeing from a product that accounts for these human tendencies.

But while behaviorally informed product design is an essential piece of the puzzle, there is much more to it, as our recent <a href="http://www.ideas42.org/publication/view/driving-positive-innovations-to-scale-in-the-financial-services-sector/">white paper</a> on scaling financial products found. Institutions have to find pathways to achieving profitability, overcoming any organizational impediments, and navigating often-complex regulatory environments. Solid design alone cannot protect a financial innovation from the many structural challenges it will face.

What’s more, it is rarely acknowledged that the people who are responsible for driving this process within financial institutions will have the same behavioral biases as their intended audience. For example, whether we are playing the role of consumer or provider in a particular setting, we all selectively interpret information; are overconfident about future outcomes; and underestimate how long it will take to get something done. These can make the structural challenges even more difficult to overcome.

At the workshop, Colombian financial inclusion professionals were eager to share lessons from their own experiences. Our resulting conversation centered on four key recommendations:
<ul>
 	<li>Have a “champion” at the top. Without an influential senior leader to protect it throughout the process, any innovation is even more vulnerable to budget cuts and internal priority shifts.</li>
 	<li>Involve representatives from many departments early on. Though the role of the sales or legal teams might not be obvious in the early stages of product development, these and other departments may flag important concerns that could derail the innovation if discovered later on. Of course, working across a dozen departments presents a myriad of challenges, and therefore an effective project leader, nominated from the top, is also needed to motivate and communicate within and across specialized teams.</li>
 	<li>Make the business case at the outset of a new project. Ensuring that a product will be economically viable at scale doesn’t just enhance profitability; it increases the likelihood that a product will be championed and supported by individuals and departments across the institution.</li>
 	<li>Plan for scale from the start. Without a clear vision of how an innovation will later be scaled, a project is likely to be derailed by lack of resources in the budget, resistance from departments not involved in the pilot, distributional hurdles that didn’t exist on a smaller scale, or simply by lack of momentum.</li>
</ul>
These insights echo findings outlined in our recent <a href="http://www.ideas42.org/new-white-paper-driving-positive-innovations-to-scale-in-the-financial-services-sector/">white paper</a>, and it was exciting to see our analysis reflected in the real-world experiences of Colombian financial institutions. The workshop in Bogota proved to be a successful exchange of ideas and practices between financial providers and behavioral experts. As ideas42 continues to build our work in the financial inclusion space, we are taking a deeper dive into examining the economics of product models from a provider perspective. Stay tuned to the CFI blog and the <a href="http://ideas42.org">ideas42 website</a> for more insights early next year.

Have you read?

<a href="http://cfi-blog.org/2014/11/18/applying-behavioral-insights-inside-latin-american-financial-institutions-what-happened-at-our-workshop/">Applying Behavioral Insights Inside Latin American Financial Institutions: What Happened at Our Workshop</a>

<a href="http://cfi-blog.org/2014/07/03/financial-capability-stakeholders-join-j-p-morgan-in-new-solutions-lab/"> Financial Capability Stakeholders Join J.P. Morgan in New Solutions Lab</a>

<a href="http://cfi-blog.org/2014/04/10/smart-design-for-policy-and-practice-consider-bandwidth-insights-from-harvard-kennedy-schools-rethinking-financial-inclusion/">Smart Design for Policy and Practice: Consider Bandwidth – Insights from Harvard Kennedy School’s “Rethinking Financial Inclusion”</a>

Beyond Design, Behavioral Science for the Pilot and Scale of Product Innovations

Financial Inclusion 2020

<img class="alignright wp-image-16660" src="https://centerforfinancialinclusionblog.files.wordpress.com/2014/11/fin-fin-cap-cap-photo1.png" alt="" width="290" height="386" />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.

Most of the participants represented a cross-section of the financial inclusion sector in Colombia – many banks, several microfinance institutions, and the public sector Banca de las Oportunidades program were present. The financial inclusion market segment is increasingly contested territory in Colombia, and every major bank has had some experience trying to create products and channels to reach it.

To launch the conversation, we asked several experts to recount their experiences in introducing “client-centric” innovations, bringing in the work of additional organizations, this time associated with the U.S. West Coast – Stanford and Silicon Valley. Included were proponents of human centered design and Juntos Finanzas, an entrepreneurial start-up that uses data analytics to provide tailored financial capability messages to clients of financial institutions. Finally, two more homegrown experiences from the Accion Latin America network were represented – one involving savings and the other financial education for microinsurance.

Some lessons immediately popped out. In several cases, well-crafted products, designed with deep understanding of client behavior were not implemented due to snags encountered inside the implementing financial institutions. And even those that succeeded faced major challenges before gaining a secure place within their organizations. Challenges ranged from changes at the CEO level, to pressure for faster return on investment, to unsupportive frontline staff.

We thought this needed further exploration, so we posed some hypothetical products with integrated behavioral insights and asked participants in small groups to assume the roles of various actors within a financial institution. Each group’s task was to design and roll out the proposed products. It was at this point that participants began to talk over each other. The legal department and the IT department, the HR department and the finance department, the product department and the marketing department – everyone had crucial and legitimate issues, each needing solutions before the product could proceed. At that stage the behavioral experts in each group tended to step back and watch the simulated institutions battle it out internally as questions about behavioral economics took a back seat to the practicalities of implementing change inside institutions.

The overarching takeaway of the day was that no matter how inspired or close to the client, good product design is only the first step toward a successful offer. Experts who bring important new insights cannot assume that their work ends with product design. As Gerhard Coetzee <a href="http://cfi-blog.org/2014/11/14/expecting-change-where-the-odds-are-seemingly-against-it/" target="_blank" rel="noopener">wrote</a> in this blog space on the very same day as this workshop, a new product is primed for success only after thorough analysis of the inner workings of an institution and a plan is aligned with the interests of its various areas. Behavioral insights and other customer-oriented product features must make it through the “noise” within the institution, competing with all of the other things a bank must attend to in order to survive.

From my (perhaps biased) position as someone who has worked at Accion, this kind of analysis and planning is exactly the know-how Accion has built up over the years as it has worked to build healthy microfinance institutions. Accion, for its part, has not particularly embraced behavioral economics insights. So opportunities for mutual learning exist.

Many specific lessons emerged from the day’s discussion, and we would like to continue to share them with you. CFI will assemble them into a brief note within a few weeks. Please stay tuned.

Have you read?

<a href="http://cfi-blog.org/2013/11/05/kate-mckee-on-the-behavioral-economics-of-poverty-and-implications-for-financial-inclusion/" target="_blank" rel="noopener">Kate McKee: On the Behavioral Economics of Poverty and Implications for Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/03/28/behavioral-approaches-to-product-innovation-at-the-base-of-the-pyramid/" target="_blank" rel="noopener">Behavioral Approaches to Product Innovation at the Base of the Pyramid</a>

<a href="http://cfi-blog.org/2014/07/03/financial-capability-stakeholders-join-j-p-morgan-in-new-solutions-lab/" target="_blank" rel="noopener">Financial Capability Stakeholders Join J.P. Morgan in New Solutions Lab</a>

Applying Behavioral Insights Inside Latin American Financial Institutions: What Happened at Our Workshop

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.

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).

All this buzz surely is positive and the things that come out of these activities may well be part of the answer to the financial inclusion challenge. But this begs the larger question: why aren´t these rather obvious and incremental things done by interested market participants themselves? Why don´t they already experiment with customer communication modes and new product features? Why don´t they eagerly seek out impact data that can drive effective marketing and PR, or more routinely seek customer feedback to improve their products and operations? Why don´t they systematically leverage customer insight as a core asset, and why do they underinvest in novel customer promotion techniques?

In other words, why is there such an inherent innovation deficit within the very commercial ventures that we think are going to drive financial inclusion forward? Do market players really need this very granular level of handholding to get what academics, NGOs, and donors so clearly believe in?

To put it more bluntly: do we really need to continue subsidizing sustaining innovation like this? Or is the problem, rather, that there isn´t enough of a competitive push to drive them to want to innovate as a key source of market advantage? Would more competition for and within the market drive the kinds of innovations that are being promoted from the sidelines?

I think the latter. Consider the current innovation frenzy in digital financial services in the US. <a href="https://www.google.com/wallet/">Google</a>, <a href="http://www.amazon.com/Amazon-com-Amazon-Wallet-Beta/dp/B00LIBDH8M">Amazon</a>, and <a href="https://www.apple.com/iphone-6/apple-pay/">Apple</a> all want to join early mover <a href="https://www.paypal.com/ke/webapps/mpp/home">PayPal</a> in getting inside or becoming people´s electronic wallets. <a href="http://www.theguardian.com/technology/2014/oct/06/facebook-mobile-payments-messenger-app">Facebook</a> and smaller start-ups like <a href="https://www.dwolla.com/">Dwolla</a> and <a href="https://venmo.com/">Venmo</a> all want to revolutionize how money is sent online. Players like <a href="https://www.smartypig.com/">Smartypig</a>, <a href="https://www.simple.com/">Simple</a>, and <a href="https://www.moven.com/">Moven</a> want to reinvent how you deal with the money sitting in your bank account. Established players like <a href="http://www.mastercard.com/contactless/">MasterCard</a> and new ones like <a href="https://squareup.com/">Square</a> want to change how you pay for goods at the store. Not to mention, of course, the slew of <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1769124">bitcoin</a> start-ups.

Now ask yourself: why are none of these players vying for the blue space that is the billions of people who are excluded? Aren´t these companies the ones who are best placed, with their high-volume, low-cost digital platforms and viral marketing savvy, to radically transform the economics of financial service delivery? Why isn´t the chorus of financial inclusion supporters simply putting their desire for innovation at the feet of these corporate digital natives?

And let me tell you, they are right not to do so. That´s because there are three things none of these digital players want to deal with – and never will. They do not want to get a banking license that embroils them in onerous regulation. They do not want to conduct primary identity checks on their customers (Know Your Customer, or KYC), which require physical customer contact. And they do not want to touch their customers´ cash. That´s why all digital financial players, exciting as they may seem when you look at their wares online, sit parasitically on top of banks. You will not have access to their services if you do not already have a bank account: to deal with regulatory aspects, to conduct primary KYC, and to do cash in/out through them.

It follows that these digital players will not lead the charge on financial inclusion in developing countries. At most they will wait tactically in the sidelines and pick up customers as they trickle into the formal financial system. But most won´t even do that: these businesses´ DNA is all about scale and network effects, so if they can´t go for size then they may not go there at all.

Unless. Unless we give them an alternative path to delegate, or even avoid, these three things that they don´t want to do. A way into developing markets that does not make them entirely dependent on banks to first open up the space for them. Here´s how. First, give these players the opportunity to get a more lenient e-money license which does not constrain them in what services they can offer customers, but bars them from loaning out or otherwise speculating with (i.e. intermediating) customers´ funds. Second, allow them to offer an entry-level account that requires no identity checks; cap usage of that appropriately, so that more onerous KYC procedures kick in only when customers are ready to give the account more serious use. And third, delink cash in/out networks from specific account issuers, so that a breed of independent cash in/out network managers emerge with the vocation to serve all issuers, all stores, and all customers. All they should be required to have is a customer account, but not an agency contract, with each issuer. (If you are thinking that this is the standard branchless banking regulatory prescription, think again, or, better yet, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1692164">read this</a>.)

You will have noticed that these points are all about regulation. Regulation holds the key to creating a competitive environment that is more welcoming of innovative digital players. In the end, the chorus of financial inclusion supporters are getting involved in the supply of innovation simply because they want to avoid the morass that is regulatory reform. But if they truly want to make an impact on financial inclusion, they should go back to focusing on basic market enablement rather than merely filling innovation gaps.

Ignacio Mas is an independent consultant. You can learn more about his work <a href="http://www.ignaciomas.com/" target="_blank" rel="noopener">here</a>.

Have you read?

<a href="http://cfi-blog.org/2014/08/06/reality-check-three-ways-we-hype-up-financial-inclusion-break-throughs/" target="_blank" rel="noopener">Reality Check: Three Ways We Hype Up Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/07/10/what-kinds-of-regulation-promote-the-development-of-microfinance-markets/" target="_blank" rel="noopener">What Kinds of Regulation Promote the Development of Microfinance Markets?</a>

<a href="http://cfi-blog.org/2014/09/08/emerging-themes-in-responsible-digital-finance/" target="_blank" rel="noopener">Emerging Themes in Responsible Digital Finance</a>

The Great Competition and Innovation Deficit

Rafe Mazer

&gt; Posted by Rafe Mazer, Financial Sector Specialist, Government &amp; Policy, CGAP

[getty src="107953538?et=tornn0RpTmJ8kJdz_oWfzw&amp;sig=roCw9oAQ_uen6k63Ip8QktmPdCybdJpw0DEhiOCbYqU=" width="594" height="395"]

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, <a href="http://www.cgap.org/data/infographic-mystery-shopping-mexico">this infographic</a> 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 <a href="http://www.amazon.com/Scarcity-Having-Little-Means-Much/dp/0805092641">scarcity</a> 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, <a href="http://www.cgap.org/publications/applying-behavioral-insights-consumer-protection-policy">Applying Behavioral Insights in Consumer Protection Policy</a>, 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?



CPP 1: Appropriate product design and delivery

What works best for low-income consumers won’t always work best (or at all) for providers, and this can lead to some very anti-inclusion behaviors. Consider for example a fascinating forthcoming study in India by Amy Mowl and Camille Boudot, which showed that even when trained consumers persisted in trying to open no cost basic savings accounts, providers went to great lengths—even lying about regulations—to avoid providing these accounts. So perhaps we need to look at the growing research on sales staff incentives, have an honest conversation about just how much policy can force mass distribution of appropriate products, and focus instead on where the true nexus for consumer welfare and provider business case may lie.

CPP 2: Prevention of over-indebtedness

Here the long-term incentives may be better aligned between providers and consumers, as poor loan portfolio quality will eventually catch up to a lender in most cases. Several behavioral issues are pertinent to consumers’ falling into situations of over-indebtedness (e.g. tunneling, or temporal discounting) that providers can take into consideration when designing loan products. A basic first step is to make the cost of credit more salient upfront to consumers, by presenting the costs before consumers are about to sign for the loan, and in terms that they will understand (e.g. not a confusing percentage-based representation of APR). Additionally, understanding the context of the moment the consumer is seeking the loan—are they dealing with an emergency problem and so “tunneling” on the immediate without consideration for the long term?—means providers can design products and guidance that helps consumers consider long-term implications of a credit decision as well.

CPP 3: Transparency

Behavioral research is showing that new ways of presenting product features in ways that connect with our daily financial lives can help them to become more salient and understandable to most consumers. It is also showing us that the way information is presented—including information overload—can matter as much as the actual information itself in driving our decisions. This is also one of the easiest areas to get started on, via simple testing of new formats and terms with actual consumers.

CPP 4: Responsible pricing

The behavioral insights relevant to this principle overlap significantly with those on over-indebtedness, although with the added issue of helping to assure that providers don’t take advantage of consumers’ biases, such as lack of attention to detail, to hide costs of things such as credit life insurance in the fine print or misrepresent its value for money.

CPP 5: Fair and respectful treatment of clients

Mullainathan and Barr said it best: Many lower income people feel “that banking is not intended and should not appeal to people with lesser means…a poor client may feel reluctance, shame, and a general sense that he or she could never be an important or valued customer at a bank.” Perceptions matter for usage and client behavior. I have always been surprised in interviews with consumers—especially lower-income segments of the populations we look at—how much simple things like layout of the branch, signage, or even how they are greeted impact their decisions to seek a product, complete a transaction, or seek recourse when something goes wrong. New research methods can offer a path for providers to test all these small changes in design or behavior to figure out how they drive consumers’ behavior and feelings of being respected and treated fairly.

CPP 6: Privacy of client data

As digital footprints become a bigger element of financial inclusion, the need to protect consumers’ data becomes even more important. Here a key behavioral issue emerges: A gap between what consumers say (“I want my data protected”) and what they do (relinquishing control of their data at the slightest barrier or ticking the consent box without considering what they consented to). We therefore should not hold much hope for consumers to self-protect here, and so providers should design their data sharing policies and informed consent approaches with this gap in what we say and what we do in mind.

CPP 7: Mechanisms for complaint resolution

Improved recourse can be a win-win for consumers and providers, as it can drive long-term usage and loyalty of consumers. However, recent work by CGAP on consumer complaints behavior has drawn out some small design flaws in providers’ complaints processes that can greatly limit consumers’ ability to see a complaint through to resolution. This includes physical and procedural barriers (such as “fill out this form then come back tomorrow,” which may not be possible for consumers), limited advertising of channels, and unclear steps to escalate a complaint if the first attempt by the consumers goes nowhere. Simple solutions are emerging, such as using real-life success stories of consumers who complained and got successful resolution to create positive expectations to encourage complaints, using local authorities or new channels, such as agents or mobile banking, to move complaints initiation out of the often intimidating (and crowded) banking halls, and integrating commitment devices (such as “we will call you within three days”) to increase follow-through. We are excited to try out some new design approaches to see if we can improve systems so they make consumers more likely, and this is certainly a space where providers aligned with the Smart Campaign should be encouraged to test and innovate.

Have you read?

<a href="http://cfi-blog.org/2014/03/12/helping-consumers-understand-their-digital-data-initial-experiences-from-tanzania/" target="_blank">Helping Consumers Understand Their Digital Data: Initial Experiences from Tanzania </a>

<a href="http://cfi-blog.org/2014/03/28/behavioral-approaches-to-product-innovation-at-the-base-of-the-pyramid/" target="_blank">Behavioral Approaches to Product Innovation at the Base of the Pyramid</a>

<a href="http://cfi-blog.org/2014/01/17/contemplating-scarcity-and-its-implications-for-microfinance-and-poverty-alleviation/" target="_blank">Contemplating Scarcity and Its Implications for Microfinance and Poverty Alleviation</a>

Behavioral Research and the Client Protection Principles

&gt; Posted by Hema Bansal, India Director, the Smart Campaign

<a href="http://www.flickr.com/photos/14406301@N08/8588157743/"><img class="aligncenter wp-image-14999" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/05/8588157743_b466487693_z.jpg" alt="" width="530" height="416" /></a>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.

While it is encouraging to see MFIs mushrooming in Myanmar, licenses provided without much scrutiny and without sufficient industry regulations or self-regulation are challenges for the development of a responsible microfinance industry. Given this concern, the Responsible Finance Seminar was focused on bringing all industry stakeholders - including microfinance institutions - together to enhance the sector’s understanding of the principles of client protection and social performance management, and to kick start the process of engagement and deliberation for helping the microfinance industry in Myanmar adopt basic principles of responsible finance.

The seminar had about a hundred participants and included representatives of microfinance institutions (ACLEDA, BRAC, LOMC, BDA, CARD, and Dawn, to name a few), funders (including ADB, IFC, and LIFT), technical assistance providers (such as MicroSave and EDA), a regulator from Bangko Sentral ng Pilipinas, and representatives from CGAP, the Smart Campaign, SPTF,  UNCDF, and UNDP.

The seminar, bringing together this range of stakeholders spanning many markets, provided an opportunity to learn from the mistakes in markets like India where the microfinance crisis was partially triggered by unprecedented growth rates and the lack of safeguards in the industry. Frances Sinha, CEO of EDA India, introduced the <a href="http://cfi-blog.org/2012/09/17/banana-skins-2012-improving-mfi-governance/" target="_blank" rel="noopener">Banana Skins report series</a> on industry risk, outlining how important it is to identify potential risks in the sector on a continual basis. There needs to be strong prudential regulations established that reflect the respective risks of deposit and non-deposit-taking institutions, presenters at the seminar contended. New regulation can also address the client protection areas of transparency, fair treatment, and complaints resolution processes, noted CGAP's Eric Duflos, who is co-author of the IFC/CGAP joint report <a href="http://www.cgap.org/publications/microfinance-myanmar-sector-assessment" target="_blank" rel="noopener">Microfinance in Myanmar: Sector Assessment</a>. In markets like India, clear guidelines on transparency have made microfinance institutions effective in communicating loan pricing and terms to clients.

Other concerns for Myanmar’s industry that were raised included high price caps and its lack of credit bureaus. In Myanmar there is currently a $500 loan cap, which, considering that 70 percent of the people in the country depend on agriculture for their livelihoods, does not serve much purpose. For example, it misses the spirit of the Smart Campaign’s <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles" target="_blank" rel="noopener">Appropriate Product Design and Delivery</a> principle, which emphasizes keeping clients’ needs in mind and creating value for clients.

The role of global initiations pertaining to responsible finance was also highlighted, with presentations and interactive sessions on the Smart Campaign’s <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles" target="_blank" rel="noopener">Client Protection Principles</a> and SPTF's <a href="http://sptf.info/spstandards1" target="_blank" rel="noopener">Universal Standards of Social Performance</a>.

For the Smart Campaign, Myanmar is a unique market because unlike other countries with mature microfinance industries where we have worked, Myanmar presents a virtually new market wherein the Campaign will have the opportunity to influence changes in client protection practices from the beginning. In the short term, the Campaign envisions engagement with the industry stakeholders, transferring its knowledge and resources through <a href="http://www.smartcampaign.org/certification/assessments" target="_blank" rel="noopener">Smart Assessor Training</a>, and training for institutions on the client protection principles and on the use of Smart Campaign <a href="http://www.smartcampaign.org/tools-a-resources" target="_blank" rel="noopener">tools and resources</a>. In the longer term, the Campaign will strive to help institutions achieve <a href="http://www.smartcampaign.org/certification" target="_blank" rel="noopener">Client Protection Certification</a>, thereby creating flagship institutions to guide the sector towards the responsible treatment of its clients.

Image credit: <a href="http://www.flickr.com/photos/14406301@N08/8588157743/" target="_blank" rel="noopener">rustyproof</a>
Have you read?
<a href="http://cfi-blog.org/2013/06/10/inclusive-activity-in-myanmar/" target="_blank" rel="noopener">Inclusive Activity in Myanmar</a>
<a href="http://cfi-blog.org/2014/01/06/client-protection-is-gaining-ground-in-indian-microfinance/" target="_blank" rel="noopener">Client Protection is Gaining Ground in Indian Microfinance</a>
<a href="http://cfi-blog.org/2014/01/21/the-suitability-approach-to-client-protection-comments-on-the-mor-committee-report/" target="_blank" rel="noopener">The Sustainability Approach to Client Protection: Comments on the Mor Committee Report</a>
&nbsp;

Fostering Responsible Finance in Myanmar’s Infant Industry

&gt; Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School

<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020"><img class="alignright size-medium wp-image-8784" style="border: 0;margin-bottom: 15px" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo2.jpg?w=300" alt="" width="300" height="66" /></a>

The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020" target="_blank" rel="noopener">Financial Inclusion 2020</a> 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 <a href="https://exed.hks.harvard.edu/Programs/rfi/overview.aspx">Rethinking Financial Inclusion: Smart Design for Policy and Practice</a> 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.



<a href="http://www.flickr.com/photos/28442702@N00/444409418/"><img class="aligncenter wp-image-14814" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/05/444409418_f4b28d4605_z.jpg" alt="" width="600" height="449" /></a>When it came to designing the actual product, harnessing technology-enabled mobility was a key theme. It’s to be expected that many clients favor convenience, like gang lenders arriving at their door. Agent banking can offer neighborhood convenience, minus the gangsters. To lessen the costs associated with such a model, incorporating mobile technology at consumer touch points, like data collection via phone or tablet devices for credit scoring, can increase efficiency. The group also expressed the need to work alongside regulators to allow more streamlined rules for small loans. And they acknowledged that the fundamental advantages of formal financial services, like client protection, might not be understood by first-time customers. Marketing could help here, and so could on-site agents conveying this information face-to-face.

The fourth step, how to install monitoring and evaluation into the product, was a particular challenge for several of the small groups. Given the high level of participants and their spread across the microfinance, NGO and regulatory sectors (<a href="http://www.hks.harvard.edu/centers/cid/programs/evidence-for-policy-design/news-events/rfi2" target="_blank" rel="noopener">click here</a> for a breakdown), this indicates an area for closer examination: How often is this element missing when designing products for financial inclusion? In the Peru case, participants included monitoring and evaluation practices now increasingly common among MFIs, such as tracking new and repeat customers through administrative data, quantifying market share, and conducting satisfaction surveys. Further, they proposed watching portfolio quality to evaluate streamlined credit scoring models.

So how did the course’s design steps work as a whole? To your correspondent, who sat in on several small groups throughout the week, the process was useful for the very reason it sometimes frustrated participants: each day they had to deal with a single step, rather than skipping forward toward preconceived solutions.

On the final day of the program, the small groups presented their designs to the class as a whole. In one of the grilling sessions that followed, one program participant asked if the formal lender could work with the loan gangs themselves. The presenter pointed out that this wouldn’t be feasible, since they are borderline criminal organizations, fly-by-night, and possibly armed. Yet the point was well taken that the product the group had designed was based on the model of these gangs—a successful model that could be improved with the consumer protections and lower costs that legitimacy can provide.

Rohini Pande and Asim Ijaz Khwaja of <a href="http://www.hks.harvard.edu/centers/cid/programs/evidence-for-policy-design" target="_blank" rel="noopener">Evidence for Policy Design</a> (EPoD) at Harvard Kennedy School will offer the “Rethinking Financial Inclusion: Smart Design for Policy and Practice” program again next May 10-15, 2015. Visit the <a href="https://exed.hks.harvard.edu//Programs/rfi/overview.aspx" target="_blank" rel="noopener">HKS Executive Education website</a> for details.

For more information on Financial Inclusion 2020, <a href="http://bit.ly/FI2020signup">sign up for campaign updates</a>.

V. McIntyre is a freelance writer based in London.

Image credit: <a href="http://www.flickr.com/photos/28442702@N00/444409418/" target="_blank" rel="noopener">Pierre Pouliquin</a>

Have you read?

<a href="http://cfi-blog.org/2014/04/02/day-one-at-rethinking-financial-inclusion-smart-design-for-policy-and-practice-penicillin-versus-the-magic-bullet-or-why-data-is-not-a-mere-annoyance/" target="_blank" rel="noopener">Day One at "Rethinking Financial Inclusion: Smart Design for Policy and Practice" - Penicillin Versus the Magic Bullet, or, Why Data is Not Mere Annoyance</a>

<a href="http://cfi-blog.org/2014/04/10/smart-design-for-policy-and-practice-consider-bandwidth-insights-from-harvard-kennedy-schools-rethinking-financial-inclusion/" target="_blank" rel="noopener">Smart Design for Policy and Practice: Consider Bandwidth - Insights from Harvard Kennedy School's "Rethinking Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/12/17/defining-the-path-to-financial-inclusion-in-peru/" target="_blank" rel="noopener">Defining the Path to Financial Inclusion in Peru</a>

Designing Products in the Classroom for Use in the Real World

&gt; Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School

<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020"><img class="alignright size-medium wp-image-8784" style="border: 0;margin-bottom: 15px" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo2.jpg?w=300" alt="" width="300" height="66" /></a>

The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020" target="_blank" rel="noopener">Financial Inclusion 2020</a> 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 <a href="http://www.hbs.edu/faculty/Pages/item.aspx?num=35055" target="_blank" rel="noopener">the experience of First National Bank of South Africa</a> 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.

[caption id="attachment_14593" align="alignright" width="300"]<a href="https://www.flickr.com/photos/cfi_accion/10546313713/"><img class="wp-image-14593 size-medium" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/04/10546313713_6c71ce385b_b.jpg?w=300" alt="" width="300" height="199" /></a> Sendhil Mullainathan presenting at the FI2020 Global Forum[/caption]

In an effort to clarify the principles that govern how many low-income consumers make decisions, Sendhil Mullainathan – a behavioral economist and cofounder of ideas42 – laid down some core concepts about the psychology of the poor that program participants went on to use throughout the week. Mullainathan drew on his recent book, Scarcity: Why Having Too Little Means So Much, coauthored with psychologist Eldar Shafir. Their thesis is that scarcity – whether of time, or of money – has predictable effects on the mind. While there are benefits to scarcity (say, the heightened focus we experience when working on a deadline) there are also severe costs, as considerations beyond the immediate scarcity are neglected. His experiments with both rich and poor subjects in rich and poor countries – and some even with the same subjects in periods of scarcity and plenty – reveal how in the face of poverty, the mind jettisons certain important processes.

Mullainathan cited studies that prove that, out of necessity, the poor are “money experts” – for example, less likely to be duped by misleading price structures. On the other hand, he likened the mind operating under financial scarcity to a web browser functioning more slowly when multiple windows are open, and bandwidth is taken up by multiple tasks. He called this the “bandwidth tax.” The need for cash for a medical expense today falls within the poor client’s bandwidth; the high interest a moneylender will charge tomorrow, outside. Options that are more sensible but incur costs such as travel or fine print are ignored, not out of ignorance or laziness, but out of necessity.

Financial products meant for the poor are more likely to fail if they do not take both phenomena – the increased shrewdness of the poor and their decreased bandwidth – into account. “We think in terms of financial constraints,” Mullainathan said, “but we must design products for bandwidth constraints.”

In an afternoon session, Piyush Tantia, who works with Mullainathan at ideas42, presented several real-world examples of how behavioral questions come into design, such as how to get Nigerian farmers to buy flood insurance when they have a cultural disdain for insurance companies, and how to solve cash-flow problems for Indian villagers who prefer not to have cash on hand so they can’t be asked to lend it out to friends and relatives.

Tantia shared details of how CARD Bank, an MFI in the Philippines, <a href="http://cfi-blog.org/2014/03/28/behavioral-approaches-to-product-innovation-at-the-base-of-the-pyramid/" target="_blank" rel="noopener">succeeded in getting people to actually use the savings accounts they had</a>. The bank developed a new account opening process that allowed clients to set a specific savings goal, helped them make a savings plan, and gave them calendars to visually track their progress. The result, as shown in a randomized trial, was larger opening deposits, greater likelihood to make a second deposit, and a higher balance seven weeks later.

“The behavioral aspect is the hardest part of the design process,” Tantia concluded. “People are not rational economic models.”

By the end of the day, participants were already incorporating the behavioral lexicon. They were starting to think about customers in a new and, it is hoped, more insightful way.

Rohini Pande and Asim Ijaz Khwaja of <a href="http://www.hks.harvard.edu/centers/cid/programs/evidence-for-policy-design" target="_blank" rel="noopener">Evidence for Policy Design</a> (EPoD) at Harvard Kennedy School will offer the “Rethinking Financial Inclusion: Smart Design for Policy and Practice” program again next May 10-15, 2015. Visit the <a href="https://exed.hks.harvard.edu//Programs/rfi/overview.aspx" target="_blank" rel="noopener">HKS Executive Education website</a> for details.

For more information on Financial Inclusion 2020, <a href="http://bit.ly/FI2020signup">sign up for campaign updates</a>.

V. McIntyre is a freelance writer based in London.

Image credit: <a href="https://www.flickr.com/photos/cfi_accion/10546313713/" target="_blank" rel="noopener">The Center for Financial Inclusion</a>

Have you read?

<a href="http://cfi-blog.org/2014/04/02/day-one-at-rethinking-financial-inclusion-smart-design-for-policy-and-practice-penicillin-versus-the-magic-bullet-or-why-data-is-not-a-mere-annoyance/" target="_blank" rel="noopener">Day One at "Rethinking Financial Inclusion: Smart Design for Policy and Practice" - Penicillin Versus the Magic Bullet, or, Why Data is Not Mere Annoyance</a>

<a href="http://cfi-blog.org/2014/03/28/behavioral-approaches-to-product-innovation-at-the-base-of-the-pyramid/" target="_blank" rel="noopener">Behavioral Approaches to Product Innovation at the Base of the Pyramid</a>

<a href="http://cfi-blog.org/2014/01/17/contemplating-scarcity-and-its-implications-for-microfinance-and-poverty-alleviation/" target="_blank" rel="noopener">Contemplating Scarcity and Its Implications for Microfinance and Poverty Alleviation</a>

Smart Design for Policy and Practice: Consider Bandwidth - Insights from Harvard Kennedy School’s “Rethinking Financial Inclusion”

&gt; Posted by V. McIntyre, Freelance Writer for the Harvard Kennedy School

<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020"><img class="alignright size-medium wp-image-8784" style="border: 0;margin-bottom: 15px" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo2.jpg?w=300" alt="" width="300" height="66" /></a>

The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020" target="_blank" rel="noopener">Financial Inclusion 2020</a> 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.”

On February 23, Rohini Pande opened classroom sessions of  “Rethinking Financial Inclusion” – a one-week program offered by Harvard Kennedy School Executive Education – by drawing a distinction between two models of change: the magic bullet and penicillin. The magic bullet is an unstoppable cure-all. It takes down whatever problem you set your sights on. Penicillin is the product of many cycles of experimentation, refinement, and the occasional stroke of luck. (Researchers found the best strand of the penicillin fungus on a moldy cantaloupe from an Illinois market.) Magic bullets solve problems in German folk tales, penicillin in the real world.

Pande spoke to a group of 45 participants – leaders of government ministries, MFIs, banks, and NGOs from 29 countries (<a href="http://www.hks.harvard.edu/centers/cid/programs/evidence-for-policy-design/news-events/rfi2" target="_blank" rel="noopener">click here</a> for a breakdown). She said that the hope that microcredit could, by itself, lift very different poor populations out of poverty – a hope initially bolstered by quick spread and high repayment rates – appears to have included some magical thinking. Given microcredit’s disappointing performance according to metrics such as new business creation and development indicators, the challenge now is to put it through a penicillin-style process of trial, error, and re-trial – including testing its effects in combination with a broader range of products.

The penicillin metaphor allowed Pande to place early emphasis on the value of evidence-driven (re)design in policy, a theme that would be frequently revisited throughout the week. By citing the rising use of rigorous evaluations as a policy instrument, she turned the moral of the cautionary tale from a statement about microcredit specifically to a much more general maxim: “Don’t trust the quick and easy result.”

The other products that the “Rethinking Financial Inclusion” program promised to focus on, such as savings and insurance facilities and new payments mechanisms, must also be put through the same process of experimentation and evaluation, Pande said.

“Design really matters,” Asim Ijaz Khwaja said. “This week we will be designing products for the real world.” Khwaja co-led the program with Pande, and in his first lecture he spoke about the wealth-generating potential of bringing together two groups – the people with money and the people with ideas – if the obstacles between them can be overcome (e.g., through small and medium enterprise lending). He cited psychometric testing as a screening tool for small loan providers (a tool he and coauthors described in a <a href="http://cfi-blog.org/2013/11/25/screening-for-a-job-screening-for-a-loan-same-or-different/" target="_blank" rel="noopener">recent CFI Blog post</a>) not only as an exciting new product, but also as an example of how the design process helped surmount obstacles.

[vimeo 72052706 w=500 h=283]

The fundamental insight of “Rethinking Financial Inclusion” was an understanding of the process any such new product should go through – a cycle that uses evidence and theory at each stage from design, to implementation, to redesign.

Participants were presented with an opportunity to engage in that process: they were split into groups and assigned a real-life financial inclusion problem that group members had submitted in advance. Projects ranged from designing a regulatory framework for mobile banking in Zimbabwe, to drawing micro borrowers away from illegal lenders in Peru, to relieving cash flow constraints for smallholder farmers in Indonesia.

For the next three weeks, we will be posting blog entries that focus on the themes treated in “Rethinking Financial Inclusion.” Next week’s post will be on Know Your Client requirements, the next post will focus on developing design with a focus on savings products and new technologies, and the final post will focus on smart design and analytics. Throughout, we will trace how ideas from guest lecturers and teaching cases made their ways into the groups’ final projects. As Khwaja counseled students on the first afternoon, “Make sure there is data feeding back in, and be fully cognizant that you will make changes based on that data. It shouldn’t be a mere annoyance, it should be the purpose.”

Rohini Pande and Asim Ijaz Khwaja of <a href="http://www.hks.harvard.edu/centers/cid/programs/evidence-for-policy-design" target="_blank" rel="noopener">Evidence for Policy Design</a> (EPoD) at Harvard Kennedy School will offer the “Rethinking Financial Inclusion: Smart Design for Policy and Practice” program again next May 10-15, 2015. Visit the <a href="https://exed.hks.harvard.edu//Programs/rfi/overview.aspx" target="_blank" rel="noopener">HKS Executive Education website</a> for details.

For more information on Financial Inclusion 2020, <a href="http://bit.ly/FI2020signup">sign up for campaign updates</a>.

V. McIntyre is a freelance writer based in London.

Video credit: <a href="https://exed.hks.harvard.edu//Programs/rfi/overview.aspx" target="_blank" rel="noopener">Harvard Kennedy School</a>

Have you read?

<a href="http://cfi-blog.org/2013/07/19/designing-microfinance-for-the-borrowers-well-being/" target="_blank" rel="noopener">Designing Microfinance for the Borrower's Well-Being</a>

<a href="http://cfi-blog.org/2013/11/25/screening-for-a-job-screening-for-a-loan-same-or-different/" target="_blank" rel="noopener">Screening for a Job; Screening for a Loan - Same or Different?</a>

<a href="http://cfi-blog.org/2013/10/29/mark-hookey-on-data-analytics-and-product-design/" target="_blank" rel="noopener">Mark Hookey: On Data Analytics and Product Design</a>

Day One at “Rethinking Financial Inclusion: Smart Design for Policy and Practice” - Penicillin Versus the Magic Bullet, or, Why Data is Not a Mere Annoyance

The Smart Campaign conducted a study on the client protection practices of 12 microfinance institutions in Latin America and the Caribbean (LAC). This study looked at an assortment of organizations such as NGOs, banks, and credit unions in different countries, analyzing their client protection performance from the point of view of practitioners, offering recommendations to improve their client protection practices. The findings in this Study of Practices in LAC are intended to help stakeholders reflect on the current state of practice among microfinance institutions in LAC and how performance gaps can be addressed.

Overall, the MFIs studied in the report performed well in the principles of Preventing Over-Indebtedness, Responsible Pricing, and Ethical Staff Behavior, but there is (sometimes significant) room for improvement in the principles of Transparency, Appropriate Collections, and Mechanisms for Complaint Resolution. This report revealed that client protection performance is not easily generalized and improvement in certain principles is needed to meet the standards laid out.

We believe that reaching the Campaign’s standards of care in client protection across all seven principles is a possible objective for most organizations to achieve, provided enough time and dedication. Ultimately implementing the principles will strengthen institutions and improve client well-being.

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Study of Client Protection Practices in Latin America and the Caribbean (Spanish)

The Smart Campaign conducted a study on the client protection practices of 12 microfinance institutions in Latin America and the Caribbean (LAC). This study looked at an assortment of organizations such as NGOs, banks, and credit unions in different countries, analyzing their client protection performance from the point of view of practitioners, offering recommendations to improve their client protection practices. The findings in this Study of Practices in LAC are intended to help stakeholders reflect on the current state of practice among microfinance institutions in LAC and how performance gaps can be addressed.

Overall, the MFIs studied in the report performed well in the principles of Preventing Over-Indebtedness, Responsible Pricing, and Ethical Staff Behavior, but there is (sometimes significant) room for improvement in the principles of Transparency, Appropriate Collections, and Mechanisms for Complaint Resolution. This report revealed that client protection performance is not easily generalized and improvement in certain principles is needed to meet the standards laid out.

We believe that reaching the Campaign’s standards of care in client protection across all seven principles is a possible objective for most organizations to achieve, provided enough time and dedication. Ultimately implementing the principles will strengthen institutions and improve client well-being.

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Study of Client Protection Practices in Latin America and the Caribbean (English)

Jeffrey Riecke

&gt; Posted by Jeffrey Riecke, Communications Assistant, CFI

<a href="http://www.tech360magazine.com/2013/01/uganda-new-mobile-service-could-boost_16.html" target="_blank" rel="attachment wp-att-11005"><img class="alignright wp-image-11005" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/04/2011-06-22-cell.jpg" width="300" /></a>It’s well acknowledged that in designing financial products, service providers should connect with prospective clients and their needs. Though the extent to which this actually happens remains a cause for concern. That’s a big part of why AgriLife, a new mobile-based financial services platform for smallholder farmers, intrigues me.

AgriLife is open-ended, built as a platform with integration points through which providers can “plug in” and deliver their services. These include financial services providers, mobile network operators, and a variety of agricultural players. On the client side, the farmers use the services available through AgriLife – like crop insurance, input payments, and savings accounts – and in turn provide information through the platform on their own farming activities. Farmers can provide information on their crops – what they’re producing, how much, and what they’re yielding. This user data is collected and analyzed by the providers and used to better shape their offered services. Over time, the user information amasses to establish a farmer’s production capabilities. These production capabilities can be used by farmers to access credit through AgriLife’s associated services. Additionally, the resulting electronic transaction records for many of these farmers helps them build a credit history that can be used, via AgriLife services or otherwise, for financing throughout the value chain.

AgriLife recently launched in Uganda. One of its early adopters is the Farmers Centre, a farmer-centric agribusiness in Northern Uganda, and its thousands of affiliated farmers. These individuals often travel long distances to the Centre’s warehouses to purchase inputs and aggregate their produce for processing and selling. Previously, these transactions had been done on paper with data stored on a single computer. AgriLife makes it possible for these processes to be done much quicker and, as it’s cloud-based, more securely. With more robust records on their farmers, the Centre is able to make informed recommendations on what farmers should plant and which inputs they should obtain, and make informed linkages between farmers and buyers.

AgriLife was developed by MobiPay, a Kenya-based IT company. MercyCorps is supporting the expansion of the platform throughout Uganda, facilitating connections with service providers. MobiPay anticipates AgriLife will serve 100,000 farmers by the end of the year. A recent <a href="http://dalberg.com/documents/Catalyzing_Smallholder_Ag_Finance.pdf">report from Dalberg</a>, a development consulting firm, characterizes a big and currently unmet opportunity in agricultural financing for the world’s 450 million smallholder farmers. The report asserts that with increased financing, farmers can improve their products and yields, and feasibly double their incomes.

Image credit: <a href="http://www.tech360magazine.com/2013/01/uganda-new-mobile-service-could-boost_16.html" target="_blank">tech360 magazine</a><a href="http://janchipchase.com/2010/08/mobile-money-afghanistan/" target="_blank">
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Have you read?

<a href="http://cfi-blog.org/2013/04/16/silos-no-more-financial-inclusion-for-the-whole-value-chain/" target="_blank">Silos No More: Financial Inclusion for the Whole Value Chain</a>

<a href="http://cfi-blog.org/2012/10/17/mobile-money-services-are-ripe-for-growth-in-uganda/" target="_blank">Mobile Money Services Are Ripe for Growth in Uganda</a>

<a href="http://cfi-blog.org/2012/06/05/sowing-sustainable-finance-making-rural-inclusion-a-priority/" target="_blank">Sowing Sustainable Finance: Making Rural Inclusion a Priority</a>

New Mobile Platform Empowers Farmers in Uganda