Virtual Conference Day Two: Designing financial services, interest rates and market research, part 1

*On June 8th and 9th, 2010, MicroSave and FAI sponsored a virtual conference – Reimagining Microfinance around the World: Implementing Lessons from Portfolios of the Poor – to share findings from yearlong financial diaries kept by villagers and slum dwellers in Bangladesh, India, and South Africa.

Session One Summary (June 9, 2010)

Key Principles of Designing Financial Services
•    Portfolios of the Poor suggests that the four key principles to designing financial services are reliability, convenience, flexibility and structure; the importance of each of these was discussed by Stuart Rutherford. Reliability refers to attributes which make the service on time, transparent and dependable. Convenience refers to characteristics that increase the usability of the service. Flexibility is the ability of the service to accommodate the changing needs of the poor. Structure refers to features which set up a routine and nudge the client to stick to it.

•    Krishna stressed that reliability for a client in the service comes primarily from being able to trust the service provider to deliver on what it promises. Stuart agreed with Krishna that trust indeed was the key and it is essentially generated by repeatedly keeping to promises. Anup Singh quoted from his experience in the Philippines and pointed out that many a time physical appearance of the institution and other physical evidence which promotes transparency is a key factor in building trust. Madhavi discussed this in terms of client concerns about safety and security of savings.

•    Anup equated convenience with the ease of performing transactions. For him, another aspect that contributed to convenience, especially in case of savings products, was liquidity.

•    Larry Reed wondered what an ideal balance of structure and flexibility would look like. Stuart suggested that one way of getting this right was by offering separate products. It may also be balanced in the same product as done in the p9 trials in Bangladesh. Another way to do this might be the SafeSave model where a visit from the deposit collector creates a frequent opportunity rather than a regular obligation to pay.

•    Ursula pointed out the cost aspect in deciding on the pricing and the product design and mentioned a need to manage flexibility with cost effectiveness so as to be competitive. Another aspect highlighted was the need to match flexibility of savings with tenure of credit so as to ensure an effective asset liability match.

Guy Stuart contributed further thoughts on gender, building on his previous postings.

Responding to the Financial Needs
•    Responding to financial needs of clients entails ensuring reliable delivery of services, access to services to clients that help them deal with day to day needs, providing mechanisms to help them deal with crisis and providing structured products to build big balances.

•    Iyinoluwa Aboyeji from the University of Waterloo enquired on the investment habits of the poor. As evidenced in our study, around 60% of lump sums obtained were used for some sort of ‘opportunity.’ Moreover, many of the lifecycle expenses like education also could be classified as long-term investments.

•    Ruth Dueck Mbeba of MEDA stressed the importance of being client centric and in moving from financial product based thinking to financial services based thinking encompassing fostering and developing value chains, entering into partnerships and providing a wider range of services.

•    This subject also kicked off some nice discussions of various forms of informal services and how they can be built on. Jeffrey Ashe’s post showed how to think about group-based finance. Peter van Djik joined in with observations on how informal groups work in practice.

Do Interest Rates Matter?
•    Interest rates were observed to have mattered in the course of the study. But not necessarily in the way generally perceived. The clients are often willing to pay for quality services; even savings, primarily because there are very few reliable services available. Chris mentioned that even though price is important for the clients, it normally is not a differentiator in competitive markets and that the focus should be more on providing a value proposition to the clients than competing on price. The MFIs have taken a cue from this and instead of competing on the price front, they have focussed on providing more value for money by way of better customer service.

•    Sachin Bansal shared his field experience and mentioned that interest rates were climbing the charts in the priority lists of clients in more mature markets where competitive pressures exist.

•    The client need, on whether it was short term or for building lump sums was indeed relevant with regard to the importance of interest. The evidence from the diaries suggests that for short term requirements interest did not matter as much as it does in longer-term contracts.

•    Interest rates also cannot be compared across informal and formal means, since often the effective interest rates of money lenders is much lower than what appears on the face of it due to flexible repayment amounts and tenures, moreover many informal sources do not carry interest. Another interesting observation is that informal loans are often so short term in nature that interest is seen as a fee for availing the service.

Relevance of Market Research
•    Jonathan Morduch noted that market research can be deductive, where controlled trials of products are conducted to ascertain their appeal. But in the financial diaries, a more inductive and complementary approach is suggested wherein the salient requirements are ascertained by way of understanding the informal mechanisms they use and the strategies they use to patch up different services to meet their needs, and product design follows suit.

•    Calum Scott then had the first post of the day, raising interesting questions (which haven’t yet been answered) about the implications of the financial diary methodology for work in, for example, gathering national statistics, or in assessment methodology.

•    Mukul raised a point that market research in itself is not sufficient unless it gets translated into product design. He queried on whether such innovative market led product development is indeed happening in microfinance. Sandhya Suresh of ESAF also opined that market research needs to translate into product development.

•    Sandhya also pointed out that though qualitative tools are important, they need to be supported with quantitative research for the purpose of product design.