Key Principles of Designing Financial Services
• It was pointed out that reliability is important for clients from the point of view of security as well as assurance that their requirements would be met
• Sandeep and Jitendra noted that convenience is becoming a major differentiator in competitive markets and that door step services are highly valued by clients. Peter also highlighted the importance of convenience by speaking about the importance of proximity and local participation.
• Ashish Bazaari of BGFL mentioned that in the context of individual lending the product features like amount of loan, repayment terms and frequency and tenure of the loan need to be flexible to suit client requirements
• It was observed that imparting flexibility should take into consideration the viability of doing so given the costs involved. Information Technology was mentioned as one enabler which could potentially impart flexibility to products while minimising the costs.
• It was noted that structure is especially important when clients are saving with a specific purpose and a suggestion was made to develop structured products suited to client cash flow.
• There was an opinion that structure and flexibility are not complementary and that attempting to balance both in the same product might be counterproductive. The response from the forum cited the Jijenge account at Equity Bank as an example and countered that it was indeed possible to balance these seemingly contrasting principles.
• Clemence Tatin Jaleran of CIRM mentioned that the key principles remain the same even for microinsurance, though the specific regional context would also have to be studied to arrive at an ideal balance of these key principles. Premasis built upon the need for flexibility in microinsurance and mentioned that client flexibility requirements need to be studied during product development. He mentioned savings-linked insurance and stressed the need for product positioning to be clear in the minds of the customer . . . Read More
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 . . . Read More
Innovations and financial services for the poor
David Cracknell of MicroSave wondered if there have been significant changes in how people manage their money over time, and made specific references to the impact of the Mzansi accounts in South Africa. Daryl Collins noted that Portfolios researchers revisited the original South African diary households in 2009, five years after the first financial diaries on these households, to see how they might have changed their financial behavior in light of both Mzansi and the broader Financial Sector Charter that required financial services to become physically closer to poor households. Daryl provided some of their key findings, including:
• A 22% increase in take up of new banking services – most were new accounts opened by people who already had accounts, but in rural areas, the number of unbanked adults was driven down from 42% of the sample to 21%.
• Higher saving as a percent of monthly income (i.e., the amount put aside from monthly income): about 19% of income in 2004 compared with 27% of income in 2009 (perhaps reflecting a real median increase in income per capita of 8%).
• Comparisons between 2004 and 2009 of the same sample of households showed: Much higher use of bank accounts, much higher accumulation of savings in bank accounts, and slightly higher balances held in bank accounts.
Daryl concluded that this data suggests that we must expect that often changes in financial behavior come in shifts in the financial portfolio and not a wholesale abandonment of a particular device or practice, and this is likely to happen fairly slowly over time, and directed readers to the www.finmark.org.za website for more information on the study. Read More
Mechanisms to Manage Money – continued Read More
• During the course of the research, it was seen that higher dependence on informal means was seen more in urban settings than rural in spite of higher and more regular incomes due to factors like mobility of clients, lack of secure tenure etc. The challenge is to figure out how to mitigate these risks so as to ensure supply of formal financial services to these customers.
• Informal mechanisms though used widely have a risk of monetary loss associated with them and in the past experience; the losses as a percentage of savings have been significantly high.
• Chris Linder wondered about the non-financial methods the poor use to manage risk and queried as to whether there were ways in which MFIs could package non-financial risk mitigation services to the clients along with financial services. Peter cited the experience of construction savings banks in Europe and mentioned that formal financial intermediaries may indeed have a role in providing linkages between the financial and non- financial sector.
• The presence of MFIs in the geographies studied varied widely. In South Africa they were absent, in India the presence was limited and in Bangladesh they were present in most of the respondent households. Even where they were present, they were seen as one among the many options available to clients rather than as ‘The’ financial service provider.
• Some respondents mentioned Post Office savings schemes as a formal savings option available to the poor. But as evidenced by the diary households, this option was suited to relatively better off clients than the poor though the accessibility was quite good especially in rural areas. The constraint was the lack of flexibility in the product and the inability to leverage it for short-term credit requirements.
Mechanisms to Manage Money
We started off the discussion by noting that in all three countries where the research for the book was done, the households interviewed were using a mix of formal, semiformal and informal tools and both saving and borrowing so as to manage their cash flows – though there were regional differences in the amount of usage of each depending on specific characteristics of the market. Anup Singh then shared his experience from the Philippines of the poor using multiple mechanisms to manage their money and remarked that these tools are used by them for “ensuring continuity (of business and life) and for hedging risks.”
Larry Reed directed the discussion to the relative merits of formal, semi-formal and informal financial tools. The forum noted that though there were several shortcomings in informal tools, they had a lot of insights to offer the formal sector and that the formal sector could improve upon product offerings of the informal sector.
Peter van Djik queried whether borrowings and savings are considered indistinguishable by the clients . . . Read More