Viewing all posts with tag: Product Design  

You Say M-Shwari, I Say Payday Loan

Over at CGAP, Julie Zollman has a terrific post on M-Shwari, the Kenyan borrowing and saving platform built on M-Pesa, examining the underlying customer needs that have led to M-Shwari’s success. Here’s a key passage:

The appeal [of M-Shwari] was the possibility of being able to borrow on demand, in real time, to stretch families’ ability to make ends meet in the short term.  M-Shwari offered liquidity bigger than credit from local shops; faster, more private, and more reliable than friends and family, and cheaper than moneylenders. Here was a product that … solved a very real financial need while also getting delivery right: being accessible, having simple rules…
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Borrower Identification vs. Product Design: Does "Who" or "What" Matter More?

Given the mixed results of recent randomized evaluations of microfinance, an open question is whether there are broad limits to the benefits of microloans or whether programs can be tailored in specific ways to maximize impact.  Two features of microfinance programs that may matter are targeting and product design.  A recent working paper by Pushkar Maitra, Sandip Mitra, Dilip Mookherjee, Alberto Motta and Sujata Visaria investigates the role of these features by studying a microfinance program they term TRAIL, or Trader Agent Intermediated Lending.

The paper compares the impacts of a traditional group-based lending microfinance model to a more innovative and targeted model in the context of smallholder farming in West Bengal.  The TRAIL model targets loans by incentivizing local traders to identify high potential borrowers for unsecured individual loans. The loans also have some innovative terms . . . 

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The Wisdom of the Group: FAI's Newest Briefing Note on Savings Groups, Research, and Product Design

Budgeting can be a daunting task for the poor. Poor families must stretch low, often-volatile income to meet basic consumption needs, and handle un­foreseen expenses. Despite these challeng­es, the poor are able to save. They often do so in small amounts for short periods of time, adding to and spending down savings frequently. But short-term saving seldom results in long-term assets—it is not a tool for building up larger sums.

The poor have an acute need for savings tools to amass lump sums of money, yet the supply of useful products often falls short, in part because formal providers face barriers to entry in this market. Savings groups are (and have been) a traditional method used by households around the world to save.  But what makes these groups effective?  What value do they provide for members? Can lessons from savings groups inform the design of products that reduce cost, reduce risk, and help consumers save?

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Financial Access 101: Intro to Savings Groups

Budgeting can be a daunting task for poor famlies - they must stretch low, often-volatile income to meet basic consumption needs, handle unforeseen expenses, and try to build savings. But banks and formal institutions often do not offer savings products to the poor because their small deposits and frequent transactions do not cover the cost of servicing accounts.  For rural populations, not having a nearby bank branch is another obstacle to formal savings.

Despite these obstacles, poor families DO save.  Savings groups are one tool that  poor access as a dependable mechanism for saving.  In the latest video from our Financial Access 101 series, we provide an introduction to savings groups, the basic models, and why they help poor families better manage their financial lives . . . 

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USFD Project Releases New Report on Informal Finance

People run their financial lives with a variety of tools. The first tools that come to mind are likely to be formal, like checking accounts and credit cards. But households often use informal tools that are harder to see from outside, like short-term loans from friends or relatives. Some people use informal financial services because they lack access—or believe they lack access—to quality products or because they do not trust formal options. It’s tempting to think that these informal tools are last resorts, or second-best solutions, but informal financial mechanisms are often combined with formal tools, and sometimes are preferred . . . 

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Studying Cash Flow Patterns to Design Better Loans in Myanmar

“If you build it, he will come.” Unfortunately, this line that worked so well in Field of Dreams is less effective in the world of social enterprise.  Simply producing and having the networks to distribute a product does not guarantee its success—to be successful, a product must address a customer need.

What better way to understand customers’ needs, wants, and limitations than to involve them in the design process? This customer-centric philosophy is also known as human-centered design (HCD).  I work with Proximity Designs, a social enterprise that sells locally manufactured solar lanterns and low-cost irrigation products to smallholder farmers in rural Myanmar.  Before we launched these products at scale, our team presented prototypes to farmers in the field. Farmers could see, hold, and operate the products and give us immediate feedback on size, color, weight, price, and wattage.

But when Proximity launched its microfinance services in 2010, we had to come up with a different approach . . . 

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High Touch or Low Touch: How to Reach New Microinsurance Customers?

How can we extend financial products and services, like microinsurance, to low-income consumers at scale? In theory, “low touch” sales and services can reach large numbers of people at low cost.  But so far, attempts to enroll new customers without active sales efforts have largely failed. As a result, “high touch” sales and distribution channels are seen as necessary to convince low-income consumers to purchase financial products, especially unfamiliar and complex ones such as microinsurance.  But these high touch channels may incur costs that the small premium revenues struggle to cover. 

Is it too soon to dismiss low touch methods? Can a balance be struck that provides the information, support, and “touch” level that encourages clients to buy, while keeping distribution costs in check?

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Bringing Financial Services to Illiterate Populations

Recent work from CGAP and Continuum Innovation in Pakistan calls extreme illiteracy a “hidden hurdle” to financial inclusion. When people are unable to read or understand digital transactions they are less likely to trust digital products, constraining a viable avenue for access to financial products. In many cases illiterate people have to rely on an agent to complete their transaction and many remain wary of such services. The scale of this challenge is immense: UNESCO estimates the worldwide illiterate population at almost 800 million.

Many researchers have proposed ways to make financial services, and digital financial services in particular, more accessible to illiterate people. One idea comes from Woldmariam et al., who propose a new user interface that allows mobile money users in Ethiopia to identify currency notes on screen . . . 

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How to Increase Formal Savings for the Papad-Makers of Dharavi Slum

This post by Mudita Tiwari and Deepti KC.

In Dharavi, Mumbai, the largest urban slum in Asia, groups of women make papad, crispy lentil dough wafers, for Lijjat Papad Company, one of the world’s largest papad retailers.  Lijjat requires any woman who works for the enterprise to first open a savings account, and to encourage savings, the company deposits a small proportion of the women’s earnings (2 rupees of every 32 rupees earned) directly into the savings accounts, adding a bonus during the Diwali festival . . . 

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Competition Yields 7 Pilot Mobile Money Projects

In early April we blogged about BRAC’s new Innovation Fund for Mobile Money, which solicited ideas from the public for pilot projects using mobile money technologies to deliver services.  The seven winners have now been announced, and project descriptions are on the BRAC blog as well as the Innovation Fund website.

The winners span a variety of sectors, but all seek new ways to use mobile money to serve the needs of the poor.  Here are the descriptions of the winning projects from BRAC.  We’ll report on the progress of these projects from Bangladesh, where we’re carrying out an experiment on the impact of mobile banking, this summer . . . 

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Should Your Post Office Be a Bank?

Last month brought a flurry of opinions on postal banking in response to a new proposal that the US Post Office offer financial services – including bill-pay, check cashing, even small loans – to the “financially underserved.” Reactions have ranged from enthusiastic to deeply skeptical. This post highlights two key questions that have been posed and synthesizes some of the answers offered up so far.

Would the underserved consumer actually benefit?

Some say yes. There’s evidence that the Postal Service’s financial products would be able to reach people who are “significantly poorer, older, less educated, and less likely to be employed” than those who bank at formal financial institutions according to CGAP, citing a 2013 Findex report which found that as much is true in other countries with postal banking . . . 

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Stop Saying That Customers Don't Know What They Want

Lately I've been noticing a lot of writing about innovation inanely citing Steve Jobs (“People don't know what they want until you show it to them”) and/or Henry Ford (“If I had asked people what they wanted, they would have said faster horses.”) quotations about customers not knowing what they want. An example last week, in an otherwise reasonable piece about how to measure economic progress, caused my frustration to boil over.

I think this perspective on innovation rears its head a lot when it comes to financial services for poor households which is concerning because it is 90% (at least) dead wrong.

Let’s start with the Ford quotation. First, it’s apocryphal . . . 

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The Price of (Dis)Trust

No consumer likes overdraft fees. Overdraft fees are often unexpected, expensive, and in some cases undeserved. What’s more, they can wreak financial havoc on households living on a low-income.

But the larger issue is not the fees themselves. It’s the lack of transparency surrounding them and the widespread consumer distrust that results.

Edelman is a PR firm that surveys people around the world to create an annual Trust Barometer (among other things), which gauges levels of trust in different institutions. In 2012 it found that only 41% of respondents in the U.S. trust banks – which, by the way, were at the bottom of the list right along with financial services. The year’s ratings on banks are second-worst only to 2011, when they hit a low of 25% . . . 

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Overdraft as a Product, not a Penalty?

The Taylors overdraft their checking account every two weeks, on purpose.

As described in a recent issue brief published by the U.S. Financial Diaries, the Taylor family’s income level varies significantly from month to month. Sometimes it’s not enough to cover all of their expenses. So, they opened an account at a bank with a simple overdraft fee structure: One $35 charge per overdraft, no daily fees, and an allowance of up to $500 at a time. Since the Taylors typically make only one large cash withdrawal per paycheck – the entire amount of pay – this bank would charge them at most one $35 overdraft fee each cycle, if they happen to need more cash than the amount of that week’s direct deposit.

The Taylors use overdrafts as another household might swipe a credit card or take out a payday loan. Since their credit history eliminates the card option and they are already tied up with a payday lender, over-drafting becomes another logical – and probably more convenient – place for them to turn to stay on top of their bills. It’s clear that the family responded to and relies on their new bank's transparent behavior. They saw its fee policy, understood how they could manage it, and became a customer . . . 

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In Conversation with FAI: David McKenzie on Mental Accounting in Development Research

Imagine you enter a shoe store that is having a sale – buy any pair of shoes, get a second pair for free. Sounds like a great deal, right? Now imagine that same store had an offer to take 50% off any two pairs of shoes. Even though you are spending the exact same amount for the same two products, perhaps you react differently to the two offers. Perhaps there is something about removing “free” from the offer that might make you feel like you’re not getting as good of a deal. And how would you pay for these shoes – with cash? Credit card? Mobile wallet balance? Does it even matter? Research shows that people perceive $1 in mobile money differently than $1 in cash, and that these different perceptions DO influence spending habits.

The process of mentally separating different forms of money and assigning value to them, keeping track of potential costs and benefits to transactions, and categorizing expenses into buckets like “food” and “healthcare” is called mental accounting . . . 

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Under-savers Anonymous: A US Chapter?

As a field researcher collecting data for the US Financial Diaries project in Cincinnati, I interviewed 30 low-income families about the details of their household finances over 16 months. One question was always in my mind: What’s the difference between their financial lives and mine? And how might this comparison help design financial products for people who are struggling to make ends meet? One of the most important distinctions I identified was our vastly different abilities to save. For me, an unexpected $300 car repair might be a pain in the butt, sure – but I’m able to deal with it by dipping into my savings account. For USFD families, that same bill could throw the household into a mire of debt, stress, and embarrassment (not to mention lack of transportation).

My experience in the field lines up with data on the dismal savings rate in the US compared to other parts of the world. It speaks to the difficulty of putting aside money when very little is coming into a household in the first place, and it highlights the dearth of financial products offering effective carrots or sticks to boost Americans’ savings . . . 

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Designing for or designing with the poor?

As microfinance expands beyond loans to include products like microinsurance and commitment saving accounts, study after study show that simply offering something new is not enough to expand financial inclusion –the design of the product matters.  But how do financial institutions and practitioners start the process of creating products that are both profitable and meet the needs of the poor?

One method is human-centered design (HCD). HCD and “design thinking” were made famous by Ideo, the international design firm responsible for Apple’s first mouse. Ideo defines HDC as a “process [that] begins by examining the needs, dreams, and behaviors of the people we want to affect with our solutions.” These solutions emerge at the intersection of what people desire, is technologically feasible, and financially viable. The process has three main phases – researching, creating prototypes, and testing those prototypes (and possibly revising them based on user feedback). . . 

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Some Thoughts on Scarcity

Underlying, sometimes deeply underlying, much of the conversation about financial services for poor households is the question of how much control poor households have over their lives and how capable they are of making good choices. The Yunus theory of microcredit assumes that the poor have a great deal of control--the only thing they lack is credit. Once they have it, they can make smart, informed choices about how to use capital to improve their lives. The growing enthusiasm for cash-transfer-style programs is built on similar foundations. Paul Niehaus, one of the founders of GiveDirectly, a new charity that focuses on unconditional cash transfers for poor households in Kenya (if you don't know GiveDirectly, do listen to the This American Life story about them), often talks about a core motivation of the approach being the belief that poor households know better how to spend cash than outsiders do. . . . 

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Impact Evaluation of Compartamos Released

The long-awaited impact study of Compartamos, led by Manuela Angelucci of the University of Michigan and Dean Karlan and Johnathan Zinman of IPA, has finally been published. The research team used a randomized trial to test the impact of loans offered at 110% APR by Compartamos, the largest microlender in Mexico. After three years of data collection on a variety of factors, the results were generally positive with no evidence that the loans caused harm or significant negative effects.  Researchers found that loan recipients grew their business revenues and expenses, were happier, more trusting, had greater household decision power, and were better able to manage liquidity and risk.  However, there was little evidence that loans had an impact on building wealth like household income, business profits, or consumption.

One of the more interesting conclusions from the paper is as follows . . . 

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"How Microfinance Really Works" - Jonathan Morduch in Milken Review

It's an important moment for the microfinance movement. At a time when real progress has been made in making financial services available to the poor, questions abound about the effectiveness of microfinance as a way of helping people escape from poverty. The priveleged position microfinance has enjoyed among poverty interventions and social investment is eroding. Charting the right path forward for microfinance--and effective investments in reducing poverty--requires a closer look at how microfinance really has worked . . . 

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