Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and Palestine – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.

In the spring of 2018, Alaa Sisalem, the general manager of Vitas Palestine, was reviewing the materials prepared for an upcoming board meeting. In the first quarter of 2018, Vitas Palestine – part of <a href="https://www.vitasgroup.com/" target="_blank" rel="noopener noreferrer">Vitas Group</a>, a holding company that operates non-bank financial services companies in the Middle East and Eastern Europe – achieved 95 percent of projected portfolio growth while maintaining a PAR 30 (loans in arrears for over 30 days) of 2.1 percent. As Sisalem looked through the growth projections for the year, he glanced outside his window at the bustling streets of Ramallah. He thought about Vitas Palestine's clients and their ability to pay in the current economic conditions, and he realized that while the financials didn't show it yet, a major storm was coming.

A few weeks earlier, in April 2018, the salaries for about 38,000 civil servants in the Gaza Strip were delayed. The following month, the Palestinian Authority (PA) <a href="https://www.reuters.com/article/us-palestinians-gaza-salaries/anger-as-palestinian-authority-cuts-gaza-salaries-and-pays-late-idUSKBN1I41LM" target="_blank" rel="noopener noreferrer">cut staff salaries</a> by 20 percent. This marked the beginning of a crisis for Vitas Palestine. The civil servant salaries were unpaid or delayed multiple times, especially in Gaza, which took a toll on the local economy. Gaza's economy was already under severe stress because of movement restrictions brought about by the conflict between Hamas and Israel. Hamas gained control of Gaza in the 2006 elections, but the PA continued to administer payroll in the region, causing tensions between Hamas and the PA.<img class="alignright wp-image-40560" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-1-4-1024x678.png" alt="chart " width="400" height="265" />

Civil servant salaries significantly impact the Palestinian economy because of the low rates of private investment and a low labor force participation rate of <a href="https://databank.worldbank.org/Palestine---Labor-Force/id/ecae3350" target="_blank" rel="noopener noreferrer">44 percent</a>. The territory has one of the highest unemployment rates in the world, with a quarter of the working-age population unemployed. The situation is even more dire in Gaza, which accounted for 29 percent of Vitas' 2018 gross loan portfolio and has an unemployment rate close to <a href="https://databank.worldbank.org/Unemployment/id/2a6c0966" target="_blank" rel="noopener noreferrer">45 percent</a>. In Gaza, 37 percent of the employed individuals worked in the public sector, and therefore, interruptions to civil servant salaries tend to have a cascading effect on consumer spending and the local economy.

The West Bank economy is more diversified than Gaza, with <a href="http://www.pcbs.gov.ps/pcbs_2012/Publications.aspx" target="_blank" rel="noopener noreferrer">16 percent</a> of all employed individuals working in the public sector. Yet, there were concerns that the crisis would seep into the West Bank after the Israeli government passed a law in 2018 that allowed unilateral deductions from the tax revenues it transfers to the PA. The deductions are equivalent to the amount paid by the PA to families of Palestinians killed or put in jail due to the conflict with Israel (about $12 million per month). The tax revenues transferred from Israel represent more than 60 percent of PA's total revenues, and the deductions would further strain PA's budget.
<h2>The Board Moves to Head Off Crisis</h2>
Vitas Palestine began in the early years of the microfinance sector as a USAID project. The incorporation of Vitas Palestine as a for-profit company in 2014 made it easier for the company to borrow from local and international lenders. This ease of access to funding contributed to the rapid growth of Vitas' loan portfolio (see graph below).

<img class="wp-image-40561 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-2-2-1024x487.png" alt="bar graph" width="600" height="285" />

But when the Vitas Palestine's board met in May 2018, the region's worsening economic conditions dominated their discussion. Following the salary interruptions in early 2018, Vitas Palestine began to experience declining portfolio quality, with a 10 percent drop in the collection rate, resulting in a PAR 30 of 6 percent for the total portfolio in May, and a PAR 30 of 16 percent in Gaza. This was a significant increase from the December 2017 PAR 30 of 1.32 percent. Vitas Palestine had a strong debt to equity ratio of 1.81 at the end of 2017, but in 2018, the declining portfolio quality led to a breach of delinquency covenants.

The board and the management agreed that Vitas needed to prepare for further challenges due to the political instability. After deliberations with management, the Vitas board advised against aggressive growth targets and counseled the management to prioritize three areas: managing liquidity, improving portfolio quality, and controlling operational costs.
<blockquote class="pullquote--right">Managing liquidity, improving portfolio quality, and controlling operational costs were three priorities for the board.</blockquote>
Sisalem had been through numerous crises at the company, ever since CHF Ryada, Vitas Palestine's predecessor, disbursed its first housing loan in 1995. As Sisalem was formulating the plan of action to tackle the salary crisis, he knew from experience that maintaining strong relationships with clients, investors, and staff would be crucial to Vitas' survival. The management team at Vitas ensured open communication with its staff and investors. The management also recognized that the front-line staff plays an essential role in deepening client relationships and continued its investment in client relationship officer training to prepare staff to handle difficult conversations with clients.

In order to control operational costs, the management team performed a detailed analysis of its expenses and identified ways to optimize operations. Their analysis showed that there was sufficient liquidity to tackle the next six to nine months without exploring drastic measures to reduce costs. Further, the loan officers' incentives were based in part on portfolio quality, and the increase in PAR 30 during the crisis led to lower incentives paid by the company. This variable component of the compensation structure led to lower staffing expenses and aided the management efforts to lower costs.

Weathering the Storm II: A Case Study of Vitas Palestine

Digital credit has emerged as a new and profitable service offering that has great potential to increase financial inclusion. Yet, if not carefully managed, digital credit also runs the risk of excluding, over-charging, and over-extending customers.

Seven years since the first digital credit product launched, the market in Kenya has grown exponentially and hosts a diverse ecosystem with more than 50 supply-side actors. The phenomenal expansion of digital credit in Kenya serves as a test-bed for the product and offers lessons for digital credit suppliers and regulators around the world.

SPTF and the Smart Campaign commissioned MicroSave Consulting (MSC) to study the dynamics of the digital credit sector on both demand and supply sides. The output of the study was a <a href="https://content.centerforfinancialinclusion.org/making-credit-truly-responsible-webinar/">comprehensive report on the current state of digital credit in Kenya</a>. It looked at the evolving challenges in digital credit and made recommendations for a more responsible and customer-centric delivery of the product.

With participation from Smart Campaign Senior Director Alexandra Rizzi, this webinar:
<ul>
 	<li>Helps participants understand the digital credit landscape in Kenya</li>
 	<li>Assesses the progress and challenges around making digital credit responsible and inclusive</li>
 	<li>Recommends steps towards a more responsible delivery of digital credit</li>
</ul>

Making Digital Credit Truly Responsible Webinar

All is not well in the country that pioneered mobile credit. A new <a href="/making-digital-credit-truly-responsible">report on digital credit in Kenya</a> from <a href="https://www.microsave.net/">MSC</a>, commissioned by <a href="/about/what-we-do/the-smart-campaign">the Smart Campaign</a> and the <a href="https://sptf.info/">SPTF</a>, shows that with continued dramatic growth rates, the sector also experiences cripplingly high default and delinquency, enabled by poor business practices and weaknesses in both the credit reporting infrastructure and regulatory jurisdiction.

Most notably, the report reveals very high rates of delinquency and default. Among active digital loans, more than a quarter are non-performing. About 2.2 million Kenyans are said to have delinquent loans. In some cases, liberal use of refinancing and rescheduling hides this level of delinquency in lender portfolios. At the same time, the report points out that about half of these non-performing loans are for amounts less than $10. These findings are broadly consistent with results cited by CGAP in 2016, which found that 50 percent of digital borrowers in Kenya repaid their loans late, and 12 percent defaulted.
<blockquote>Despite continued growth of digital credit in Kenya, high delinquency, default and interest rates persist in the market and credit bureaus haven't yet caught up with the digital age.</blockquote>
The report also details shortcomings in credit reporting, given that many digital lenders neither consult nor report to the credit reporting bureau as fully or regularly as they should. The credit reporting bureaus were clearly set up for a pre-mobile era, which suffer from issues related to inclusion of all types of lenders, frequency of uploading data (monthly, when daily is more relevant for today’s short term loans), and ease of connection among all the players in the credit reporting ecosystem. As a result, many lenders are not consistently using credit bureaus—neither ensuring that the information is updated and correct, nor fully consulting it prior to lending.

Pricing is also an issue. The market leader, M-Shwari, which accounts for about two-thirds of all digital loans, charges an annual percentage rate (APR) of 90 percent. The low-price option provided by Kenya Commercial Bank is a fairly reasonable 44 percent APR, but the high end of the price range includes providers charging APRs well into the hundreds. Granted that these are small, short term loans where interest payments are not expected to be sustained for an entire year. Nevertheless, the promise of digital to bring down prices does is not yet in sight.

Other issues noted in the report include non-transparency regarding portfolio quality, identity theft, misuse of client data, multiple borrowing and loan bicycling by clients, and client use of loan proceeds for sports betting.

The picture that emerges suggests that the still-exploding market of very small, “nano” loans needs to be brought into more orderly operation. Consumers and providers are operating in risky ways. The current state of the market is not beneficial for either.
<blockquote>Raising the bar for blacklisting customers and public awareness about defaulting on loans are among our recommendations for improving digital credit.</blockquote>
One issue specific to this nano-loan market concerns the reporting of very small non-performing loans to credit bureaus, with negative consequences, such as curtailing of access to credit, for hundreds of thousands of borrowers. MSC, the Smart Campaign and SPTF recommend that regulations be put in place such that delinquencies and defaults among loans below some fixed amount not be reported to the credit bureau (whether US$2, $5 or $10 – the report actually recommends a cutoff of 5% of the monthly per capita GDP). It also recommends that the government launch a public awareness campaign about how credit bureaus work and the consequences of default so consumers will better understand the risks involved in borrowing.

The regulators, credit reporting agencies and lenders in Kenya are aware of these concerns and working to improve the situation. A new association of digital lenders (Digital Lenders Association of Kenya) has been formed to create consumer protection standards and the central bank is exploring ways to upgrade the credit reporting ecosystem. The Smart Campaign recommends that both lenders and regulators consider adopting the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">digital credit standards</a> and <a href="https://www.smartcampaign.org/tools-a-resources/1210-handbook-on-consumer-protection-for-financial-inclusion">model regulations</a> covering issues ranging from transparency, to the fair use of algorithms, to protection of customer data.

Kenya’s unprecedented dynamism in mobile money, digital credit and financial inclusion is envied across the world. If authorities and providers can bring the participants in these sectors into a better-functioning marketplace, Kenya will benefit greatly from the innovation the country continues to spawn.

Red Flags in Kenya’s Nano-Credit Market

Digital credit has emerged as a new and profitable service offering that has a great potential to increase financial inclusion. Yet, if it is not carefully managed, digital credit runs a great risk to exclude, over-charge, and create over-indebtedness.

During the first half of 2019, The Smart Campaign and the Social Performance Task Force (SPTF) commissioned Microsave Consulting (MSC) to study the current state of digital credit in Kenya and formulated recommendations for how to make digital credit delivery safer and more customer-centric. We propose that regulations be put in place such that delinquencies and defaults among loans below some fixed amount not be reported to the credit bureau so as not to unduly burden consumers. We also call for increased public awareness campaigns about how credit bureaus work and the consequences of default so consumers will better understand the risks involved in borrowing.

More generally, the Smart Campaign recommends that both lenders and regulators consider adopting the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">digital credit standards</a> and <a href="https://www.smartcampaign.org/tools-a-resources/1210-handbook-on-consumer-protection-for-financial-inclusion">model regulations</a> covering issues ranging from transparency, to the fair use of algorithms, to protection of customer data.

Making Digital Credit Truly Responsible

WASHINGTON, DC, August 27, 2019 – The Center for Financial Inclusion at Accion (CFI) has launched an executive education program for financial service providers serving low-income communities in emerging markets. Through peer learning and exchange, the <a href="/about/what-we-do/board-leadership-for-impact-program">Board Leadership for Impact Program</a> will empower executives and board members to foster client centricity, lead digital transformation, sustain business growth and drive social impact. In partnership with the <a href="https://www.citigroup.com/citi/foundation/">Citi Foundation</a> and <a href="https://www.fmo.nl/">FMO</a>, the Dutch development bank, supporting program implementation and participant scholarships, the Board Leadership for Impact Program will offer multiple in-person workshops per year coupled with a robust virtual portal.

Derived from CFI’s five-year <a href="https://content.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a>, which fostered the growth and development of more than 300 executives and board members of financial service providers serving more than 10 million clients in Africa, the Board Leadership for Impact Program will now expand to include early stage to mature companies offering financial services to underserved customers that operate in emerging markets around the world.

“Our experience with leadership development through peer exchange will inform our efforts through this new program to cultivate a community of leaders who have the skills and the network to help their organizations thrive,“ said <a href="/bio/deborah-drake">Deborah Drake</a>, Vice President, Center for Financial Inclusion at Accion. “Tackling challenges like achieving sustainable growth or pursuing digital transformation, particularly as a mission-driven organization, takes strategic leadership at the board level.”

Through role play, simulations and facilitated discussion, participants will gain new perspectives, skills, and knowledge on topics critical to social enterprise growth and impact, including risk management, board dynamics, digital transformation and inclusive digital finance. They will join an active community of alumni of the Center for Financial Inclusion at Accion’s <a href="https://www.centerforfinancialinclusion.org/get-involved#fellow-exec-ed">executive education programs</a>.

“By developing and strengthening leadership skills that drive business growth and social impact, our partnership with the Center for Financial Inclusion at Accion will help accelerate financial inclusion and economic progress around the world,” said Florencia Spangaro, Director of Programs, Citi Foundation.

“FMO is a proud partner of Accion for over a decade and we realize that creating a lasting impact starts in the board room. Strengthening the management of financial service providers and enterprises will help ensure business longevity and commitment to underserved customers,” said Gerbrich Salverda, Capacity Development Officer at FMO.
###
About the Center for Financial Inclusion at Accion

The Center for Financial Inclusion at Accion (CFI) is an action-oriented think tank that engages and challenges the industry to better serve, protect, and empower clients. We develop insights, advocate on behalf of clients, and collaborate with stakeholders to achieve a comprehensive vision for financial inclusion. We are dedicated to enabling 3 billion people who are left out of – or poorly served by – the financial sector to improve their lives.
<a href="http://www.centerforfinancialinclusion.org/">www.centerforfinancialinclusion.org</a>
<a href="https://twitter.com/CFI_Accion">@CFI_Accion</a>
###
MEDIA CONTACT

Center for Financial Inclusion at Accion
<a href="/bio/virginia-moore">Virginia Moore</a>
<a href="mailto:vmoore@accion.org">vmoore@accion.org</a>
+1 202.393.5113

The Center for Financial Inclusion at Accion Launches Executive Education Program for Financial Service Providers to Enable Business Growth and Social Impact

This post originally appeared on the <a href="http://www.accion.org">Accion</a> website.

Too often we hear questions from some of our financial service provider clients such as, “How can we gain market share and beat out our competition?” This isn’t inherently a bad question — it’s important to think strategically about competitors. But this question focuses only on the supply side. To get the full picture, an institution should also ask, “How can we better understand the challenges that our customers face, and how can we help them tackle these issues through our services?” While many financial service providers have made considerable strides in developing customer-centric products, most could be doing more to better understand their customers’ wants, needs, behaviors, and habits.

For these institutions that lag behind in customer centricity, it is not that they are unconcerned for their customers and only worried about the bottom line, but they often perceive this to be expensive and can be reluctant to invest in market research. Instead, they rely on anecdotal customer stories from their sales force. Unfortunately, this approach to the collection of customer information often leads these institutions to misunderstand the real problems their customers face. For instance, they may miss how technology is changing customers’ preferences for accessing information and the social groups they are part of.

[caption id="attachment_34130" align="alignright" width="550"]<img class="wp-image-34130 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/01/Screen-Shot-2019-01-17-at-11.39.01-AM.png" alt="" width="550" height="448" /> A workshop participant shares her prototype travel debit card with a potential user. This product would include a digital application geared to address millennials’ need for saving as well as financial and business coaching. [/caption]

Conventional market research methods rely on focus groups and expensive customer surveys, which don’t always deliver relevant insights. In contrast, a customer-centric design methodology focuses on listening to and observing people in their daily lives and works within market and technological constraints. One particular area of focus is product touch-points. A customer-centric approach regards each touch-point as an opportunity to surprise, delight, and deliver benefits to users. When done well, this approach provides experiences that resonate with the intended customers — driving their engagement and, ultimately, growth for the institution. With a customer-centric design methodology, rapid prototyping and real-world tests with customers are used to validate (or invalidate) early designs and improve the solution.

With the aim of teaching financial service providers how to apply Accion’s user-centric design methodology, we hosted a workshop in Queretaro, Mexico, with the support of MetLife Foundation. This 2-day workshop brought together ten financial institutions, including microfinance organizations, cooperatives, and fintechs, to learn our methodology for designing and developing user-centric products, based on a deep understanding of customers’ behavior, with a high potential for adoption. Participants learned how to reframe their business challenges from a customer-perspective, conduct efficient and useful user research, and use their understanding of their customers’ financial behaviors, capabilities, needs, and desires to conceive and prototype a new product.

After designing prototypes, the participants shared their ideas with potential users and engaged in a conversation about their lives, desires, and fears. By walking the users through each touch point in the proposed customer journey, the participants empathized with the customers’ thoughts, feelings and experiences at each moment. These conversations brought up questions about the usefulness and complexity of many of the products and forced participating institutions to adjust their concepts to make their prototype more customer-centric — ultimately promoting greater adoption and supporting the <a href="https://content.centerforfinancialinclusion.org/dollar-by-dollar-or-goat-by-goat-how-financial-health-translates-across-oceans/">financial health</a> of the customer. When financial service providers watched potential users struggle with digital tools or have trouble navigating through non-intuitive wireframe mock-ups, they gained insight in designing user-centered products. The providers told us this was the most influential part of the workshop.

[caption id="attachment_34131" align="alignleft" width="488"]<img class="size-full wp-image-34131" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/01/Screen-Shot-2019-01-17-at-11.39.21-AM.png" alt="" width="488" height="346" /> One bank conceptualized a flexible product that will address customer distress in paying their hospital bills. This bank visualizes the customer experience at every touch point with the bank. The visualized product allows the customer to customize their experience by choosing where to open their account, pick the date and portion of the bill they want to pay.[/caption]

Both traditional institutions and fintechs found the user-centric design methodology useful. While many fintechs claim to be more customer-centric than incumbent financial providers, several of the fintech participants admitted that they do not have a process to ensure that their existing products evolve to match the dynamic needs of their clients. Upon reflection, many found that their services were disconnected from client realities.

The workshop participants were eager to return to their institutions to share their new product prototypes. As one attendee put it, they were looking forward to using this methodology to, “not only help us to improve our products and services, but to create a more enriching experience for our customers.”

However, participants know that the path from prototyping customer-centric products to product deployment is not an easy one. Within an organization, a willingness to embrace change and focus on customers requires a shift in mindset. As one participant said, “it will be difficult to convince others to center their focus on our clients.”

Over the next two years, with the support of MetLife Foundation, Accion will continue working with select financial service providers to ensure that they are asking more strategic questions as they apply this user-centric design methodology to develop a product, service, or experience. And we will help the institutions tackle the challenge of internal alignment and cultural change, while ensuring that designs resonate with customers, use innovations in technology, and contribute to the financial health of the low-income population in Mexico.

To Help Customers, Ask the Right Questions

“How much money do people typically imagine they should have when saving for emergency needs? Is that different from what they need for the children’s education? What kinds of conversations are field staff having?

These and similar questions are quite familiar to financial institutions trying to mobilize long-term savings from low-income clients through their field staff. In this blog post, we share the story of how mobile application usage data allowed <a href="http://www.sajidafoundation.org/">SAJIDA Foundation</a>, an <a href="https://optixproject.org/">OPTIX</a> partner from Bangladesh to gain insights into member-staff conversations without actually being there: a kind of virtual “fly on the wall”. They gained an unprecedented look into how financial planning really unfolds as they sought to tailor a term-deposit product to people’s needs.

In October 2017, <a href="https://nextbillion.net/cross-sell-done-well-how-one-finance-app-found-a-balance-between-digital-and-human-touch/">we introduced the Financial Advisory Services (FAS) mobile app</a> designed to allow field officers at SAJIDA Foundation to identify members (as SAJIDA calls its clients) with longer-term savings potential, structure conversations around life goals, and simulate scenarios to arrive at appropriate amounts and terms for the term-deposit savings account.

Built into the FAS app is the capability to collect detailed usage data, including when and where the app was used, what actions were undertaken, and what information was entered to simulate scenarios. Any interaction on the device, such as the click of a button, filling in a text field, or submitting a form, is recorded. More than 20 officers used the FAS in 2017 and undertook 11,793 actions on the app. By threading together consecutive actions, we can approximately reconstruct actual conversations.
<h3>FAS app frames conversations as intended…and then some</h3>
When starting a conversation, field officers mention most of the savings goals the FAS offers (Figure 1). Users were able to choose from a list of eight specific goals and one “other.” These goals are chosen based on qualitative research with members and staff, and appear to be a fairly accurate representation of member savings goals. “Emergency Needs” is the most common, featuring in 31 percent of the conversations. The icon “For Children” comes second, at 25 percent. “Livestock” features in only 1 percent of the conversations, leading us to question its permanence on the goal screen.

An App, a Conversation and a New Account: A Novel Approach to Term Deposits in Dhaka

The Smart Campaign is participating in the 2018 Microfinance Centre European Microfinance Week Annual Conference 2018 in Bilbao, Spain. Check out Leah Wardle, accreditation manager, The Smart Campaign, is speaking on the panel below:

Maintaining the Social Promise of Financial Inclusion in a Competitive Marketplace

October 4th, 4:15pm

Speakers:
<ul>
 	<li>Leah Wardle, <a href="https://content.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign/">The Smart Campaign</a></li>
 	<li>Cameron Goldie-Scot, Musoni Systems</li>
 	<li style="text-align: left;">Joris Crisa, MicroFinanza Rating</li>
</ul>
Description: How can existing microfinance providers best compete in the digital era? How will the social promise of microfinance continue to thrive as the industry digitizes? This workshop will explore the important roles for traditional players in the digital area—namely, to stay relevant by reaching financially excluded people with a mix of “tech and touch.” Participants will discuss how to blend customer-centricity with technology in order to reach excluded clients and maintain a strong market position.

&nbsp;

&nbsp;

&nbsp;

MCF-EMN Annual Conference

This blog from <a href="https://us.accion.org/">Accion in the U.S.</a> was originally posted on <a href="https://nextbillion.net/impact-of-small-business-lending/">NextBillion</a> and is re-published here with permission.

By Gina Harman, CEO, Accion in the U.S., and Liz Urrutia, CEO, Opportunity International

The field of microfinance arose to address a pressing problem in emerging markets: Billions of people around the globe were shut out of, or poorly served by, the financial sector. But while microfinance institutions grew rapidly around the globe, so too did economic inequality in developed countries. It was within this context that organizations like <a href="http://us.accion.org/" target="_blank" rel="noopener">Accion in the U.S.</a> and <a href="http://opportunityfund.org/" target="_blank" rel="noopener">Opportunity Fund</a> adapted the microlending model to the United States more than two decades ago, expanding access to economic opportunity for entrepreneurs who lacked the financing and resources they needed to start or grow their businesses. In the ensuing years, the mission-based lending industry has continued to expand its services across the country – <a href="https://ofn.org/sites/default/files/OFN_20_Years_Opportunity_Finance_Report.pdf" target="_blank" rel="noopener">even in times of economic recession</a>.
<h2>From Financial Inclusion to Financial Health</h2>
In the early days, progress toward our mission could be measured by portfolio numbers, such as number of loans disbursed and amount of capital deployed, as well as by evaluating how many of our clients were from traditionally underserved populations, such as people of color, women and low- to moderate-income individuals. However, we also understood that gaining access to financial services is only meaningful if that access places an individual on a path to greater financial stability and improved quality of life. In short, financial inclusion does not necessarily enable financial health.

Over time, with support from the <a href="https://microtracker.org/assets/documents/entrepreneurtracker-overview.pdf" target="_blank" rel="noopener">Aspen Institute’s EntrepreneurTracker</a> initiative, our organizations have been able to evaluate borrower outcomes such as business survival, revenue growth and job creation in the years following loan disbursement. Still, we knew that these numbers alone didn’t tell the full story. That’s why we kicked off a <a href="https://us.accion.org/impact-study/" target="_blank" rel="noopener">multi-year, mixed methods study</a> in 2015 to more fully understand the impact of our lending and advising services over a longer time horizon. This research, conducted by Harder+Company Community Research, was made possible through lead funding from the W.K. Kellogg Foundation and JPMorgan Chase &amp; Co., with additional support from S&amp;P Global.
<h2>How Are Our Clients Faring?</h2>
The results of this research revealed that, by and large, the entrepreneurs we serve are thriving, even two to three years after receiving their loan. Most businesses in the study increased sales (60 percent) and profit (57 percent). Forty percent of borrowers added employees during the study period, and entrepreneurs with employees significantly increased benefits provided to those employees. What’s more, the majority of study participants specifically attributed progress toward their business and personal goals to the services they received from Accion or Opportunity Fund.

This study also provided unprecedented insight into the emotional benefits of mission-based small business lending. At the end of the study, 63 percent of participants expressed that support from their lender had “a lot” of positive impact on their confidence. In follow-up interviews, entrepreneurs discussed the demoralizing effect of previous loan rejections, sharing that the approval from Accion or Opportunity Fund was a sign that someone believed in them. As one participant put it: “The biggest thing has been the confidence that I’ve gained in myself. I’m really proud of it.”

But the report also highlighted some ongoing challenges – among them, the fact that financial health remains a key need among the business owners we serve. For example, the majority of clients surveyed at the end of the study had not taken steps to prepare for a financial emergency (55 percent) and found finances to be a significant source of stress (58 percent). This was a statistically significant improvement from the beginning of the study, when only 36 percent of participants had prepared for a financial emergency and 71 percent reported significant anxiety about finances. Nevertheless, though these findings indicate that our clients are on the path to greater financial stability, they remain vulnerable to financial shocks.
<h2>Defining Success on Entrepreneurs' Terms</h2>
The multifaceted nature of the study findings illuminates the limitations of a “one-size-fits-all” definition of impact. For instance, as the mission-based lending field moves beyond measures of inclusion to focus on borrower outcomes, traditional metrics like revenue growth and job creation don’t necessarily align with entrepreneurs’ own definitions of success. That’s why the research employed a technique called cluster analysis, which revealed five distinct typologies of entrepreneurs, each with unique goals, challenges and successes.

For example, the Focused and Growing group (44 percent of the sample) sought to grow, and succeeded. By the end of the study, they had all moved into their businesses full-time, had successfully used their loans to expand their businesses, and were experiencing increased sales and profits.

In comparison, the Stable and Strategic group (12 percent of the sample) juggled multiple sources of income while carefully planning for long-term, safe business growth. They increased their financial stability over the study period, and they also reported increased quality of life.

For the Off Balance and Seasonal group (9 percent of the sample), unexpected hardships and seasonal cash flow meant that their main priority was keeping their business afloat. In follow-up interviews they expressed an appreciation for the tailored support and guidance they received from their lender to help them weather financial challenges.

Borrowers in the Retrenching group (19 percent of the sample), were most likely to have used their loan to start a new business. While most experienced business growth over the study period, very few reported taking a salary from the business. Nevertheless, they remained confident about their financial future at the end of the study and reported a significant decrease in financial stress.

For those in the Slowly Growing and Optimistic group (17 percent of the sample), key goals for business ownership included fulfilling a specific dream or becoming their own boss. Although the majority experienced increases in sales, most were not able to increase savings, and some had even drained their savings over the study period. Many of these entrepreneurs operated highly specialized businesses with unpredictable cash flows, and were looking for opportunities to diversify their offerings.

With the completion of this research, we have gained invaluable insights into the impact of our services – as defined by our clients. As our organizations look to expand access to high quality, transparent and affordable financial services, it will be crucial to continue to refine our definitions of success, and to iterate and design new products and services to best align with their needs.

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Beyond Inclusion: How Mission-Based Small Business Lenders in the U.S. Are Evolving Their Definition of Impact

<span style="float: none;background-color: transparent;color: #333333;cursor: text;font-family: Georgia,'Times New Roman','Bitstream Charter',Times,serif;font-size: 16px;font-style: normal;font-variant: normal;font-weight: 400;letter-spacing: normal;text-align: left;text-decoration: none;text-indent: 0px">Despite the rise in mobile money in Africa, and globally, the gap between supply and demand for credit in the region remains. Surprisingly, in this milieu, start-ups are at risk of accelerating the pace of over-indebtedness in Africa. The number of start-ups reaching last mile clients is rising. The driver of this is fintechs taking advantage of a business opportunity, and the prospect that if you offer clients much-needed credit at a lower cost than the alternative, they will be better off.

But is this necessarily true? Are these start-ups offering solutions to the credit needs that many small and medium African businesses have, and are clients better off with these solutions? Or is the fintech digital credit hype attracting lenders that offer credit in the wrong places – and for the wrong reasons? What is needed to ensure that digital credit is provided responsibly, for the benefit of clients?
<h4>Start-ups are at risk of accelerating over-indebtedness by supplying credit to clients without conducting appropriate repayment capacity analysis.</h4>
Some estimate that digital technologies have cut the cost of providing financial services by 80-90 percent (<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">McKinsey Global Institute, 2016, PDF</a>). Africa is taking the lead in the rise of mobile technology, and the opportunities are promising. Start-ups in this space are making big strides. Those involved in digital credit either deliver digital credit directly or enable its delivery through downstream product servicing. The number of fintechs – startups offering these services – in Africa is growing daily (<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">Mesropyan, 2016</a>).

Technology well used offers opportunities not previously available. However, two key issues need to be recognized and addressed in order to generate long-term benefits for both clients and providers.
<ol>
 	<li>Provider and client interests must be aligned. If providers profit while clients are experiencing stress in repaying, defaults will catch up with the client or the institution, and the client will no longer be able to borrow. Aligning interests requires providers to think of client benefits as well as their own, from the start.</li>
 	<li>A well-designed loan should match the ability to repay. Well-designed loans are a blessing, for example, helping a small business; yet loans that do not consider clients’ capacity to repay sets them up for failure. Even if they repay in the short term – which is often why default rates stay low – it can be at the cost of extreme hardship, making it a poor predictor of over-indebtedness. It may take some time before the debt stress of clients affects providers.</li>
</ol>
<h3>"Instant": an Opportunity and a Risk for Consumers</h3>
A key attribute digital lenders advertise is speed of access. Where traditional loans could take weeks for approval, with many requirements, this is a plus from the perspective of clients. But the automation and speed raises concerns: are decisions made too quickly, and are risks adequately measured and mitigated, especially from the clients' perspective?

Other aspects of digital credit lead to <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">new risks</a> compared with analog lending: start-to-finish digitization; the move from high to low touch processes; small credit amounts that grow; short-term loans; reliance on alternative data analytics; and decentralized support workforces.
<h3>What Could Go Wrong?</h3>
With analog credit, prevention of over-indebtedness centered on adequate repayment capacity, and on growth not taking place at the expense of quality.

In the digital context, the following major categories of risk have been identified (Center for Financial Inclusion, 2017/2018. See References):
<ul>
 	<li>Limited – if any – debt capacity analysis</li>
 	<li>Products that do not match client needs</li>
 	<li>Lack of credit reporting</li>
 	<li>Automatic renewals</li>
 	<li>Aggressive sales and marketing</li>
 	<li>Disproportionate consequences of late payments that lead to a cycle of debt.</li>
</ul>
<h4>Algorithms are institution centric, not client centric. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting.</h4>
Alternative credit scoring methods – often using elaborate algorithms that predict the probability of repayment – help to include people who have thin credit files and who would otherwise have been excluded. However, these models are a poor replacement for the repayment capacity analysis previously conducted by lenders serving vulnerable excluded populations. While the algorithm may predict whether or not an institution will be repaid, it does not consider clients' situations and needs, and therefore, the sacrifices that clients might have to make in order to repay. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting. Algorithms are institution centric, not client centric. They are meant to learn over time, becoming refined and better predictors; yet they do so at the expense of early clients who enabled the algorithm to become better fine-tuned, as they have a higher probability of defaulting and suffer dire consequences (<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Ngigi, 2016</a>).

The promise of well-tuned algorithms saving costs and managing institutional risk is unfortunately skewing attention away from client risks. Over-indebtedness needs to be reframed from a client perspective: can clients afford the loan? Even if they can repay, what sacrifices are they making? Are they at risk of not being a client ever again in the future (which would hurt both the client and the provider)?
<h3>Mitigating Over-Indebtedness in a Digital World</h3>
Over-indebtedness is a multi-stakeholder issue, and is linked to the client protection issues summarized in the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>. Prevention of over-indebtedness is a particularly tricky one, in that it requires the concerted effort of a wide range of stakeholders.

Providers have a responsibility to ensure that their practices do not lead to an oversupply of credit to clients who are unable to meet their payment obligations, and digital lenders will need to adopt a more client-centric approach to understand the risks of over-indebtedness from a client perspective. Algorithms need to evolve to take this into account.

Digital lenders need to understand the risks of over-indebtedness from a client perspective, and algorithms need to evolve to take this into account. Regulation also must guide good practice for fintech digital lenders.

Because only one irresponsible lender is needed in terms of over-indebtedness to negatively affect clients, it is necessary that financial consumer protection regulation evolves to guide the practices of otherwise unscrupulous digital lenders.

Investors can, and should, use their leverage to encourage good practices by digital lenders, as they have for analog lenders. They can reward digital lenders who design and deliver appropriate products, are transparent about terms and conditions, explain to clients the risks of over-indebtedness, adopt fair and responsible practices during repayments, and help clients who cannot, but want to, repay.

Importantly, digital providers can leverage the same technology used to deliver products to educate and empower clients. Clients have rights and responsibilities. Informed consumers are better able to protect themselves and avoid becoming victims of predatory lenders.
<h3>Over-Indebtedness Is Multidimensional and Dynamic</h3>
In the interest of long-term mutual benefits for both providers and clients, providers need to move away from a uni-dimensional definition of over-indebtedness that overly emphasizes repayment as the proxy for whether or not a client is indebted, towards <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/201-over-indebtedness-of-microborrowers-in-ghana-an-empirical-study-from-a-customer-protection-perspective">client-focused definitions of over-indebtedness</a>.

Digital credit providers need to complement credit bureau data with disbursement and repayment data on digital loans so that a fuller financial picture can emerge for digital borrowers.

Over-indebtedness is not a steady state. As the lives of vulnerable clients evolve, so do their needs and challenges. A client who may have received a loan from a responsible lender in the past may suddenly not be in a position to repay. We need to develop ways to monitor whether clients are showing signs of financial stress. Responsible institutions should be able to identify this, and work with clients until it is resolved.

The role of responsible providers goes beyond providing loans to ensuring that clients are supported, if needed. <a href="https://www.microfinanceopportunities.org/">Microfinance Opportunities</a>, in collaboration with <a href="http://socialperformance.net/">Social Performance Solutions</a>, has been developing a stress assessment tool that enables providers to monitor whether borrowers are incurring stress after having received a loan. Such tools are extremely important to have a full picture of over-indebtedness, and a broader suite of tools needs to be available to responsible providers.
<h3>Fintech Protects Against Over-Indebtedness</h3>
Fintech digital credit providers need to unite and agree to collective measures to tackle the problem of over-indebtedness. This will entail defining responsible digital underwriting, leveraging technology, while learning from the past, expanding credit bureau reporting, and agreeing on common practices for the benefit of clients. Some fintechs are already taking the lead, and through the Smart Campaign’s <a href="http://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, they are working together to define and implement responsible practice. The body of evidence around risks is growing. Now is the time to define the guidelines of good practice for fintech digital lenders and identify solutions that work for clients.

References

McKinsey Global Institute, “<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">Digital Finance for All: Powering Inclusive Growth in Emerging Economies</a>,” September 2016.

Elena Mesropyan, “<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">63 Companies Shaping Africa’s FinTech Ecosystem</a>,” Fintech Ranking, December 2016.

Alexandra Rizzi, Isabelle Barrès, Elisabeth Rhyne, “<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">Tiny Loans, Big Questions</a>,” Center for Financial Inclusion at Accion.

John Owens, “<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/783">Responsible Digital Credit</a>,” Center for Financial Inclusion at Accion. Forthcoming, 2018.

George Ngigi, “<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Pain of Kenyans Blacklisted for Amounts as Small Sh100</a>,” Business Daily Africa, September 2016.

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Start-Ups and Digital Innovation: Are Fintechs in Africa Over-Indebting their Customers?

Shradha Modi

Alexandra (Alex) Rizzi

Elisabeth Rhyne

Priya  Punatar

Ashirul Amin

Gina Harman

Isabelle Barrès

Carmen Paraison

Alexis Beggs Olsen

Sonja Kelly

Allyse McGrath

Dennis Ferenzy

Philip Brown

Middle East and North Africa

West Bank and Gaza

Kenya

Sub-Saharan Africa

Mexico

Bangladesh

United States

Nigeria

Challenges and Crises

Consumer Protection

Credit

Customer Centricity

Digital Financial Services

Enabling Environment

Governance

Microfinance

Policy, Regulation and Government Initiatives

Responsible Digital Finance

Data Transparency

Fintechs

Agricultural and Rural Finance

Microfinance Institutions

Partnerships

Risk Management

Underserved Groups

Financial Capability

Financial Health

Human Centered Design

Savings

MSME/SME Finance

Small Business Owners

Tech-Touch Balance

Financial Inclusion Strategy

Fintech

Mobile Banking

Agent Banking

Brief

Webinar

Blog Post

Report

Press Release

Event

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.

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

New York, NY (February 26, 2018) — MetLife Foundation provides $5.4 million to Accion for programs in Latin America, Eastern Europe, and Asia to leverage digital solutions to enhance underserved customers' financial capabilities and engagement.

Accion and MetLife Foundation Announce Expanded Partnership to Advance Financial Inclusion

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

Nigeria has an ambitious target of <a href="http://www.chronicpovertynetwork.org/resources/2015/7/8/financial-inclusion-in-nigeria-policy-brief">including 70 percent of its population</a> in the formal financial services fold by 2020, from a baseline of <a href="http://datatopics.worldbank.org/financialinclusion/country/nigeria">44 percent with access to an account in 2014</a>. But financial inclusion involves a lot more than account access. The Center for Financial Inclusion <a href="http://www.centerforfinancialinclusion.org/about/who-we-are">defines</a> financial inclusion as a state in which all people who can use them have access to a full suite of quality financial services at affordable prices delivered by a range of providers in a competitive market with convenience, dignity and consumer protections, to financially capable clients. Protection for consumers is an important part of that definition, and I recently had the opportunity to visit Lagos to learn more about consumer protection challenges in the country. In particular, I wanted to see how <a href="http://smartcampaign.org/">Smart Certification</a> can help Nigeria reach its financial inclusion goals in a way that provides benefits to customers.

For those who aren’t familiar, Smart Certification is an independent, third-party evaluation to publicly recognize financial institutions that meet adequate standards of care in how they treat clients. In Lagos, I interviewed staff members and clients of Grooming People for Better Livelihood Centre, or Grooming Centre. Don’t be misled by the name – Grooming Center is one of Nigeria’s most established microfinance institutions. Founded in 2006 in Lagos, Grooming Centre has an impressive network of 530 branches in 23 of the country’s 36 states. To date, it has served over 5.3 million clients. The institution was awarded Smart Certification in February 2016, following a certification mission from MicroRate, one of the Smart Campaign’s licensed certfiers. Grooming Center, along with Fortis Bank, are the two financial institutions in Nigeria that have so far qualified as Smart Certified.

As I interviewed the staff close to the institution’s certification process, I learned that although client-centricity was already a core value for Grooming Centre, it sought certification to go a step further in ensuring the wellbeing of its clients. Grooming Centre described Smart Certification as eye-opening and humbling. Practices the institution had originally described as aligned with the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">client protection principles</a> and standards turned out to need improvement.

Since inception, the Smart Campaign has noted that most inclusive finance institutions operate under the impression that they are already carrying out superb client protection practices. However, the Smart Certification process typically reveals that an institution’s practices need to be strengthened in one way or another to ensure that it is treating clients fairly.

One of Grooming Centre’s governing council members, Noel Ihebuzor, emphasized the paradigm shift in staff mentality that resulted from Smart Certification. The certification process required the institution to assess in detail how its policies and operations affected clients at every step of the credit process. He noted that the certification exercise improved Grooming Centre’s conception of client protection in areas including complete disclosure and clients’ understanding of product terms and conditions. The institution had originally assumed that these product aspects were self-evident to clients.

The main beneficiary of Smart Certification and improved client-centric practices, of course, is the client. My interviews with three clients revealed their satisfaction with their interactions with Grooming Centre. The entrepreneurs favored Grooming’s interest rates compared to competitors, and they liked that their savings are reliably available, and how the staff don’t ‘stress’ clients if they fell behind on loan payments.

To make the Smart Certification process work well for an institution, Grooming Centre’s staff stressed the need to secure widespread buy-in, from management to lower-level staff. Most importantly, Grooming Centre’s staff emphasized that any institution considering certification should pursue it for the right reasons, and should recognize that working to strengthen client-related practices shouldn’t end upon obtaining certification.

Government-led plans like those of Nigeria to include a large swath of the population into the formal financial sector stir a feeling of aspiration in a nation. And they should. However special attention must not only be made to increasing the number of accounts at financial institutions, but also the quality of financial services. The Smart Campaign looks forward to continuing to work with actors in Nigeria’s financial services ecosystem to bolster consumer protection, through Smart Certification and other means.

Click the video above or <a href="https://youtu.be/F4ZZwdcp2y8">here</a> to watch Grooming Centre’s certification journey. See <a href="http://www.smartcampaign.org">www.smartcampaign.org</a> for more information on Smart Certification, including the full list of Smart Certified financial institutions.

Have you read?

<a href="https://cfi-blog.org/2017/06/05/the-smart-campaign-promotes-stronger-client-protection-and-sector-collaboration-in-uganda/">The Smart Campaign Promotes Stronger Client Protection and Sector Collaboration in Uganda</a>

<a href="https://cfi-blog.org/2017/02/21/whats-the-value-of-smart-certification/">What's the Value of Smart Certification?</a>

<a href="https://cfi-blog.org/2017/05/18/protecting-consumers-in-the-digital-currency-economy/">Protecting Consumers in the Digital Currency Economy</a>

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Nigeria Needs to Include Consumer Protection in Its Ambitious Financial Inclusion Plans

If digital financial services are so convenient and affordable, why are uptake and usage rates among individuals with lower incomes so low? Monique Cohen explores the mismatch between products and money management needs.

&gt; Posted by Monique Cohen

<img class="alignright wp-image-24684" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/thumb_1b4e5caeaab54bb5bbbbf9384089e357.jpg" alt="" width="330" height="220" />This maxim governs much of our financial lives, rich or poor. Yet, we offer financial services to the unbanked and underbanked, largely ignoring it. The thinking around customer centrality as it affects financial services for the poor emphasizes appropriately responding to people’s needs and wants for financial services. But, as Kim Wilson <a href="https://cfi-blog.org/2015/07/21/the-supply-centricity-of-customer-centricity/">pointed out</a>, this is still not happening:

We have an agenda, which is this: please be our customer, have your needs, express them so long as they are about digital payments or failing that, using a bank account – a lot – and preferably, digitally. Else, we don’t give a damn. We don’t care about your archaic methods… We desperately want and need you to modernize, to become just like us. Otherwise we have no justification for all the work we do and all the money we spend.

Until now the perceived drivers of uptake of digital financial services (DFS) have been their assumed attributes of convenience, timeliness and affordability, relative to current formal and informal financial service offerings. However, with uptake and usage levels of only 30 percent for digital financial services, it is clear that this rationale falls short. Impediments to high usage continue to be overlooked.

What has to change if we wish to have more users move toward a ‘cash lite’ economy? What have we missed?

Financial products tend to be viewed through a lens of functionality. Timely access to credit can enable an entrepreneur to grow a business or meet regular financial obligations such as rent or school fees, especially when cash flow is variable. But for many poor customers, use of financial services is not about choosing Plan A, but about matching what is available to the need of the moment. These behaviors are not always optimal, neither for them nor for providers. Several years ago Equity Bank in Kenya noticed a high rate of usage of working capital loans for school fees. Similarly the encouragement to save is framed around the provision of access to savings tools, ignoring the stability and level of income needed to generate a surplus that can be put aside.

Ann Cotton, in response to financial service providers’ puzzlement with the lower-than-anticipated rates of adoption of financial products, <a href="https://www.theguardian.com/global-development/2015/feb/28/ann-cotton-educating-millions-within-africa-by-inspiring-sustainable-change">noted that</a>:

I hear, “Why do poor people make such bad decisions?” But actually their decision-making can be far more complex than that of the better-off in many ways. They’re not financially illiterate, they’re constantly weighing up choices based on the reality of poverty.

The decisions poor people make around money are complex. Theirs is a continual process of trade-offs involving the weighing of choices based on the reality of their poverty and a continual battle to stabilize and raise income while reducing vulnerability. The supply-side thinking around product design and delivery fails to reflect this complexity and ignores how the poor use financial services as money management tools. The consumer’s context is defined by an ever-changing panoply of wants, sources of revenue and the available portfolio of financial tools, formal, informal and semi-formal. Instead financial service providers address demand with a limited product range knowing that they are used for a broad array of purposes. Is it no surprise that there are mismatches between the providers’ offers and users’ needs?

The current interface between customer and provider is shaped by a structural bias in which the financial service provider knows best and expects that the customer will do as told. The formal financial services customer tends to be passive and dependent, does not exercise voice and choice and lacks protections. By contrast, in the informal financial sector users speak up and feel freer to let their demands be known. Moreover, DFS require people to leapfrog into digital financial services which combine unfamiliar technology and unwelcoming formal financial services. All present significant barriers to adoption. Surely it is time to revisit this paradigm, recognizing that the increased use of digital financial services means looking beyond the functional attributes of a product to the user’s broader money management strategies and the structural contexts in which they exercise their choices.

Moving forward calls for approaches that generate mutually satisfying results. Each party seeks value and cost advantages. The providers are looking for numbers, volume and value of transactions as potential customers transition into these new systems of financial service delivery. Touch points supported by appropriate provider incentives as well as patience, respect and simplicity of use should be priorities. For users, seeing value in digital financial services will come from learning by doing. Empowered customers will be encouraged to test financial innovations, determine how they can best use them, and share this information with their providers, friends and communities. Lastly, re-enter the regulator whose role may have to be redefined to ensure the new structures work for both sides. These are the essential elements of a new operational framework that promises that customer centrality will become a win-win proposition.

Among her many affiliations, <a href="https://www.bouldermicrofinance.org/boulder/EN/FACULTY/bio/8">Monique Cohen</a> was involved with the Boulder Institute of Microfinance’s training program from its inception through 2016, including teaching courses for over 10 years. An earlier version of this post was <a href="http://www.bouldermicrofinance.org/corner/en/i-need-cash-when-i">published</a> on the Faculty Corner of the Boulder Institute of Microfinance website, October 21, 2016.

Image credit: Accion

Have you read?

<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 Story</a>

<a href="https://cfi-blog.org/2014/03/28/behavioral-approaches-to-product-innovation-at-the-base-of-the-pyramid/">Behavioral Approaches to Product Innovation at the Base of the Pyramid</a>

<a href="https://cfi-blog.org/2013/10/16/scarcity-why-having-too-little-means-so-much/" target="_blank" rel="noopener">Scarcity: Why Having Too Little Means So Much</a>

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I Need Cash WHEN I Need It, WHERE I Need It, HOW I Need It

CFI Fellow <a href="/programs-a-projects/cfi-fellows-program/782#AlexisBio">Alexis Beggs Olsen</a> investigates Kenya’s digital financial services (DFS) landscape, the reasons why customers still desire human touch, and the innovative ways in which FSPs integrate human interfaces into their digital product offerings to better serve customers. In Uniting Tech and Touch: Why Centaur Products Are Better for Consumers and Providers, Evidence from Kenya, Alexis takes us along the customer journeys of Kenyan DFS users to illuminate the circumstances where they prefer human touch, the variations in customer preferences across demographic characteristics, and the particular pain points of low-touch digital loans, savings and insurance products.

Alexis finds that although Kenyans are comfortable conducting transactions digitally, other key aspects of the financial service customer journey are not adequately handled by digital means alone. Based on 104 in-depth qualitative interviews, Alexis discovers that Kenyans particularly want human touch for three reasons:

1. To verify the legitimacy of the FSP
2. To fully understand the product
3. To resolve problems or complaints

To address these needs, Alexis recommends “centaur” solutions—ones that combine human and digital interfaces—to provide valuable human interaction to customers where it is needed most, while improving customer acquisition and retention in the process. FSPs, their customers, and the financial inclusion community can benefit from leveraging centaur solutions that combine the best of tech and touch to convert customers who are currently uncomfortable with these digital interfaces into regular digital financial services users.

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<img class="alignnone size-large wp-image-29309" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2017/04/Technology-Inequality-Inforgraphic-330x1024.png" alt="" width="330" height="1024" />

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Uniting Tech and Touch: Why Centaur Products Are Better for Consumers and Providers - Evidence from Kenya

Around the world today, financial service providers, technology entrepreneurs and policy makers are engaged in building a financial system that reaches out to previously excluded people, such as lower income people, very small businesses, rural dwellers, and women. Although this work is carried out in the name of the consumer, all too often, scant attention is paid to the real needs and desires consumers and very small enterprise owners have.

With that in mind, here is a thought experiment. A thought experiment is an “exercise of the imagination used to investigate the nature of things.” The question for this experiment is this:

Imagine that consumers were the creators of the inclusive finance system. What would such a system look like?

What characteristics would emerge if the needs, desires and preferences of the target customers of financial inclusion were the driving force to shape their services? The observations here are drawn from consumer research conducted or commissioned by the Center for Financial Inclusion at Accion, including research in <a href="http://smartcampaign.org/tools-a-resources/1087">Peru</a>, <a href="http://smartcampaign.org/tools-a-resources/1077">Pakistan</a>, <a href="http://smartcampaign.org/tools-a-resources/1088">Georgia</a> and <a href="http://smartcampaign.org/tools-a-resources/1076">Benin</a> for the <a href="http://smartcampaign.org/tools-a-resources/1075">Client Voice project</a> of the <a href="http://smartcampaign.org/">Smart Campaign</a>, in Kenya and India for <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/807-beyond-financial-inclusion-financial-health-as-a-global-framework">our project on financial health</a>, in <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/04/financial-capability-building-practices-in-india-final.pdf">India</a> and <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/04/financial-capability-building-practices-in-mexico-final.pdf">Mexico</a> for <a href="http://www.centerforfinancialinclusion.org/fi2020/roadmap-to-inclusion/innovations-in-financial-capability">our study of financial capability</a>, and again in <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/782">Kenya</a> and <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/781">India</a> for two CFI Fellows’ projects on the role of human touch in the digital age. I offer ten propositions based on this research.

If inclusive finance were created by consumers…
<ol>
 	<li> The ultimate goal of financial inclusion would be the financial health of consumers (and their small businesses). When we talk to consumers about their financial strategies, we find everyone striving to be financially healthy. Their concepts of financial health are surprisingly similar whether they are small farmers in rural Kenya or young salaried workers in the United States. They define financial health on three dimensions:</li>
</ol>
<ul>
 	<li>Daily systems that work smoothly</li>
 	<li>The ability to protect themselves financially when shocks occur</li>
 	<li>The ability to build for the future</li>
</ul>
In a system designed by consumers, financial services would be intended specifically to assist in the pursuit of financial health.
<ol start="2">
 	<li> Products would be convenient and quick. No one wants to spend time and money traveling to a bank branch and standing in line. Mobile financial services are bringing ubiquitous 24/7 access to financial services, and this is certainly something consumers are happy about.</li>
 	<li> Products would be simple and easy to understand. They would not come with hidden terms and conditions, exclusions or confusing prices. Electronic interfaces would be easy to use. Simplicity and transparency in product design enables consumers to use products appropriately and builds trust.</li>
 	<li> Consumers could talk to a person when they need to. Our research in Kenya shows that after almost a decade of M-Pesa, consumers there are very comfortable conducting transactions digitally. But when they are considering whether to take up a new service, learning how the service works and especially when something goes wrong, they would strongly prefer to talk to a person face-to-face.</li>
 	<li> Their ‘better selves’ would be supported and strengthened. Customers want to use services in constructive ways, but sometimes temptation gets in the way or they simply forget. As behavioral economists have learned, products like commitment savings can help them maintain savings discipline. On the other hand, aggressive marketing can lure them into financial decisions they may later regret.</li>
 	<li> Their savings would be safe. This encompasses both the safety and soundness of financial institutions and appropriate risk levels for investment products.</li>
 	<li> They would have insurance to protect them when they meet crises. Research shows that health crises are the most frequent and important type of crisis that affect lower income families. Other forms of protection would include life (especially for the main income earners in a family), property, crop and accident insurance.</li>
 	<li> They would have saving and loan services that would help them achieve their most important life goals. The ‘big four’ lifetime goals that are often the core of a person’s financial life include: education for themselves and their children, business growth (for those so employed), shelter and shelter improvements, and a secure old age.</li>
 	<li> They would be protected from frauds and scams. Our research shows that low income people are continually exposed to frauds and scams. They need to be able to tell good players from bad ones, and they need to be sure that money entrusted to a good player will not be lost through security breaches.</li>
 	<li> Their interactions with formal financial services would help them gain a sense of confidence and control in their financial lives. If all the above conditions are met, consumers would gain confidence and control and would relieve the stress that often accompanies money management.</li>
</ol>
This thought experiment reveals valuable elements of a financial inclusion system that would give consumers what they need and want. Now, let’s move back to reality. How well is the global financial inclusion system performing on these ten dimensions? That depends on where you look, and perhaps on your point of view. Here is my attempt at a scorecard, reflecting both what we have heard from consumers and my own opinion.

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/scorecard1.png"><img class="wp-image-24154 aligncenter" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/scorecard1.png" alt="" width="615" height="615" /></a>

Excitement in the financial inclusion community focuses on fast and convenient access, especially for transactions and short term financial needs. However, far too little attention is paid to making the financial systems a safe place in which consumers can feel confident and that they can use to build their financial health. It would not be hard to do better in these areas. A first step is for institutions to invest more in listening to consumers and responding to what they hear.

Have you read?

<a href="https://cfi-blog.org/2017/03/29/dollar-by-dollar-or-goat-by-goat-how-financial-health-translates-across-oceans/">Dollar by Dollar or Goat by Goat: How Financial Health Translates Across Oceans</a>

<a href="https://cfi-blog.org/2016/05/06/a-change-in-behavior-innovations-in-financial-capability-an-interview-with-elisabeth-rhyne/">A Change in Behavior: Innovations in Financial Capability - An Interview with Elisabeth Rhyne</a>

<a href="https://cfi-blog.org/2016/03/31/client-voices-at-the-georgian-parliament/">"Client Voices" at the Georgian Parliament</a>

&nbsp;

&nbsp;

&nbsp;

Financial Inclusion From a Consumer Perspective

This report examines how partnerships between mainstream financial institutions (e.g., banks, insurers, and payment companies) and fintechs are addressing financial inclusion challenges and expanding access to the formal financial economy for underserved segments of the global population, particularly in emerging markets. It incorporates insights from 24 in-depth interviews with people at the frontlines of this innovation and highlights 14 partnerships focused on financial inclusion that we think exemplify best-case scenarios and good practice. Contrary to the popular narrative, financial institutions view fintechs as partners in innovation, not threats to their core business. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institutions with help from fintech partnerships.
<h2>Major Findings</h2>
Mainstream financial institutions partner with fintechs to improve product offerings, increase efficiency, and lower costs – goals with special relevance to low-income customers. By partnering with mainstream financial institutions, fintechs get to scale their technology and can access capital to grow. As a result of these partnerships, low-income customers who are left out of – or poorly served by – the financial sector have greater access to higher quality, more convenient, and less expensive financial products and services.

To facilitate productive fintech partnerships, mainstream financial institutions are organizing internally for innovation, strategically integrating systems and staff, and developing contractual agreements to ensure stability and success. Fintech partnerships enable legacy institutions to engage with and learn from new technology in low-risk, low-cost ways. They are also key to allowing incumbents to compete in a world where alternative players, like Facebook and Amazon, are threatening the central role of financial institutions in the lives of customers. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institution.

One encouraging and somewhat unexpected finding is that the partnerships between financial institutions and fintechs represent a slow but pervasive financial industry shift toward customer-centricity. Better data management and use, new digital banking products, and greater customer engagement all enable better service for underserved customer segments.
<h2>Who Should Read This Report</h2>
The primary audiences for this report are those in mainstream financial institutions who want to know how their contemporaries are engaging with innovators to pursue financial inclusion, and those in fintech companies who want to understand the way banks are likely to approach them. In addition, venture capital firms, multilaterals, and industry associations have much to learn from this research about what drives banks to partner, what gets in the way, and what comes next.
<h2>Acknowledgements</h2>
This report is part of a two-year initiative, <a href="/about/what-we-do/mainstreaming-financial-inclusion-best-practices/">Mainstreaming Financial Inclusion: Best Practices,</a> to help advance efforts of financial institutions to reach customers at the base of the economic pyramid. The initiative and this report were made possible with support from <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>.

How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines

<a href="https://www.amazon.com/Portfolios-Poor-How-Worlds-Live/dp/0691148198"><img class="alignright wp-image-22480" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/12/portfolios-of-the-poor.jpg" alt="portfolios-of-the-poor" width="220" height="335" /></a>Editor’s Note: A <a href="https://cfi-blog.org/2011/08/23/five-great-books-about-microfinance-and-how-the-poor-use-money/">previous version</a> of this post has been one of the CFI blog’s all-time most popular posts. We thought we’d update it with a few more books, and put it front and center once more for readers who might be stocking their bookshelves.

From time to time, we are asked what our go-to books are for understanding financial inclusion and the financial lives of the poor. If we were to list the top three classics that should be on everyone’s shelves, we would recommend the following (feel free to put these on your gift list as we approach the holidays):
<ol>
 	<li><a href="https://www.amazon.com/Poor-Economics-Radical-Rethinking-Poverty/dp/1610390938">Poor Economics</a> by Abhijit Banerjee and Esther Duflo</li>
 	<li><a href="https://www.amazon.com/Portfolios-Poor-How-Worlds-Live/dp/0691148198">Portfolios of the Poor</a> by Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven</li>
 	<li><a href="https://www.amazon.com/Their-Money-Oxford-India-Paperbacks/dp/019565790X">The Poor and Their Money</a> by Stuart Rutherford</li>
</ol>
What we love about these titles is the insight they provide into the client perspective, a foundational element for anyone working in or supporting financial services. If financial institutions approach their engagement with customers armed with an understanding of customer needs and customer behavior, the financial services industry can be both more responsive and more responsible.

As a refresher, the first five books on the last version of our must-read list were those <a href="http://fivebooks.com/interview/stuart-rutherford-on-the-poor-and-their-money/">cited</a> by Stuart Rutherford as his top five on the subject of “The Poor and Their Money”. Rutherford has himself published some of today’s go-to references on this topic (which is why we added his titles above). Rutherford’s favorite books were chosen by him not only for their impact on his work, but also for their ability to place the client at the center of our conceptualization of microfinance. This is important because, as Rutherford himself explains, “microfinance has to find a way to adapt itself to the enormous complexity found in the lives of poor people, and not the other way around.” We continue to appreciate this sentiment, and still think the titles on his list are worth a read:

<ol>
 	<li><a href="http://www.amazon.com/Economics-Microfinance-Beatriz-Armend%C3%A1riz/dp/0262012162">The Economics of Microfinance</a> by Jonathan Morduch and Beatriz Armendáriz</li>
 	<li><a href="http://www.amazon.com/Mainstreaming-Microfinance-Lending-Began-Bolivia/dp/1565491262">Mainstreaming Microfinance: How Lending Began, Grew, and Came of Age in Bolivia</a> by Elisabeth Rhyne</li>
 	<li><a href="http://www.amazon.com/Women-Center-Grameen-Borrowers-Decade/dp/0813390001/ref=sr_1_1?s=books&amp;ie=UTF8&amp;qid=1314109837&amp;sr=1-1">Women at the Centre: Grameen Bank Borrowers After One Decade</a> by Helen Todd</li>
 	<li><a href="http://www.amazon.com/Fine-Balance-Oprahs-Book-Club/dp/140003065X/ref=sr_1_1?s=books&amp;ie=UTF8&amp;qid=1314109909&amp;sr=1-1">A Fine Balance</a> by Rohinton Mistry</li>
 	<li><a href="http://www.amazon.com/Small-Short-Unsecured-Informal-Finance/dp/0195624548/ref=sr_1_1?s=books&amp;ie=UTF8&amp;qid=1314109948&amp;sr=1-1">Small, Short and Unsecured: Informal Rural Finance in India</a> by F J A (Fritz) Bouman</li>
</ol>
Did we miss some that should be included as essential reading? Let us know in the comments if you have a favorite book that didn’t make the list. Happy reading!

Image credit: <a href="http://www.portfoliosofthepoor.com/">Princeton University Press</a>

Have you read?

<a href="https://cfi-blog.org/2011/08/23/five-great-books-about-microfinance-and-how-the-poor-use-money/">5 Great Books About Microfinance and How the Poor Use Money</a>

<a href="https://cfi-blog.org/2011/12/19/books-for-inspiring-and-educating-social-entrepreneurs-alex-counts-book-project/">Books for Inspiring and Educating Social Entrepreneurs - Alex Counts Book Project</a>

<a href="https://cfi-blog.org/2014/05/13/whats-on-financial-inclusion-2020s-bookshelves/">What's on Financial Inclusion 2020's Bookshelves?</a>

3 More Great Books on Financial Inclusion and How the Poor Use Money

&gt; Posted by Philip Brown, CFI Advisory Council Member and Managing Director Risk, Citi Inclusive Finance

<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/752-financial-services-for-all-its-all-about-strategy"><img class="alignright wp-image-21721" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/08/banana-skins-cover.png" width="275" height="353" /></a>As new opportunities for inclusive financial services continue to grow, they are accompanied by an array of risks, many of which are not fully evident today. Since 2008, the Banana Skins surveys have charted both known risks and those that have previously been overlooked or underrated. The recently released report "<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/752-financial-services-for-all-its-all-about-strategy">It's all about strategy</a>" is no exception -- it surveys a spectrum of participants and gathers their perceptions of the risk in the provision of inclusive financial services.

What does this year’s survey tell us?

Continuous progressive change in service provider business models is not new. But the accelerated pace and diversity of change, coupled with extent of the redesign and transformation process across all aspects of the business model, are shifting inclusive financial service provision. There are changes across the creation and delivery of services, business economics and processes, delivery infrastructure, such as payment systems, mobile networks and agent networks, and strategies for customer acquisition and the targeted customer base. The inclusive finance sector is no longer defined around segment-specific institutions but around the end clients, services provided and the now diverse and growing universe of service providers.

Digital transformation is a pervasive theme in this year’s Banana Skins report, which is a call to recognise the risk of not thinking strategically about all aspects of financial service provision. Across the globe, mobile applications are adding millions of clients versus thousands for established models. Both non-credit products and new forms of credit such as instant nano-credit for pre-paid mobile phone users continue to grow. Rather than viewing disrupters as a threat, one cited respondent positively describes new competitors as facilitators of market development, improving the quality of services and creating pressure to reduce interest rates.

Strategy is defined in the report as "the risk that service providers will fail to develop business models which make them relevant and competitive in a changing market place".  As a result of digital transformation, there is a shift in mindset from incremental to exponential in every aspect of the business. With exponential strategy we must accept inherent uncertainty that we may not be able to follow the initial step-by-step plan and expect success.  In order to respond to increased speed and to more and unexpected changes, we must work to improve the quality and adaptability of drivers.

The report portrays a sector experiencing a shift from commercially driven transformation to technology driven financial inclusion business. In this context, the top ten risks are seen as internal or manageable by the service provider. This diverges from the trend in previous surveys, which have portrayed a shift in risk concern from an emphasis on enterprise or entity management risk to the broader external context, such as political, credit, and macro-economic risks.

"<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/752-financial-services-for-all-its-all-about-strategy">It's all about strategy</a>" is a wake-up call for greater strategic thinking on the part of service providers. Strong governance is key: without a sound, clear-sighted strategy, institutions could face marginalisation. This speaks to a shift in mindset from the incremental to the exponential – a mindset focused on growth and inclusion in a more client-centric and ever-changing risk landscape. It implicitly recognises the ability to reach new clients, align and re-engineer processes to their needs, and embrace new digital distribution opportunities.

This message is not just for service providers – it is equally applicable to investors, regulators, and other stakeholders. It highlights the increased responsibility of boards to provide strategic direction. In doing so, the survey’s most important contribution is to continue to raise the awareness and understanding of risk, and to provoke action.

Have you read?

<a href="https://cfi-blog.org/2014/07/14/2014-banana-skins-report-reveals-overindebtedness-as-biggest-concern-in-microfinance-industry/">2014 Banana Skins Report Reveals Overindebtedness as Biggest Concern in Microfinance Industry</a>

<a href="https://cfi-blog.org/2012/09/17/banana-skins-2012-improving-mfi-governance/" target="_blank">Banana Skins 2012: Improving MFI Governance</a>

<a href="https://cfi-blog.org/2011/02/04/is-microfinance-losing-its-fairy-dust-microfinance-banana-skins-2011-holds-the-answers/" target="_blank">Is Microfinance Losing Its Fairy Dust? ‘Banana Skins 2011’ Holds the Answers</a>