In the grand tradition of Morgan Spurlock’s Super Size Me, I’ve decided to do a 30 day experiment. I’m putting away the plastic, denying my debit card, and avoiding the ATM. I’m going unbanked for a month.
In work at FAI, I am constantly reading research on increasing financial inclusion. Recently, I read The Fletcher School’s Cost of Cash report that said it is more expensive for low-income, unbanked populations to use cash but paradoxically, they rely on cash the most! This (and many other influences including Lisa Servon’s recent investigative work on cash checking services) got me thinking. What would my life be like if I couldn’t use any of my banking services? What is it like to operate purely in cash, especially in a hyper-connected, fast-paced city like New York? I hope to gain some insight into those questions and others over the next month . . .
Read MoreAs 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 . . .
Read MoreIn his recently published paper, “Accounting for the Poor,” MIT Economist Robert Townsend uses an impressive dataset to make the case for “accounting” for the economic contributions of the poor. Most interesting to me is how he analyzes this data to show the lifecycle and consumption needs of both the rural and urban poor – and shows that urban and rural lives are more intertwined than I had assumed . . .
Read MoreBuried at the bottom of Shaila Dewan's recent New York Times article on "Microcredit for Americans" is an idea that deserves much more attention:
Grameen helps its clients in another way that many experts say is more important than increasing income — it establishes good credit scores. Many poverty alleviation groups have shifted their focus from saving to credit building, because people with poor or no credit must leave large deposits for basic needs like utilities, have trouble renting decent housing, pay much higher interest rates and have a harder time finding jobs.
Nayrobi Gonzalez de Quiroz, 26, recently received her first Grameen loan but decided not to follow through with her plan to buy handbags for resale. After using about $200 to pay off a debt, she said, she decided it was safer to leave the money in the bank and make the payments from her earnings as a manicurist.
“Here, you have to have good credit,” she said. “I have a young son and I have to think about his future.
The choice by Nayrobi Gonzalez de Quiroz to not put her money in a business is familiar from other studies of how people use microcredit around the world, so it's not surprising to see it in the U.S. The more surprising idea is that microcredit may matter not because of anything having to do with any given loan and the possible returns on investment. The path of impact could run through impacts on credit scores. This is a phenomenon that is particular to the U.S. and other places where credit scores are part of the backbone of retail banking. One impact comes through the way that a better credit score makes access to banks easier, but credit scores are also used by employers in making hiring decisions, and landlords in making housing decisions. Having a better credit score is a big deal . . .
Read MoreAs 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). . .
Read MoreThe U.S. Financial Diaries is a research project tracking more than 200 low- and moderate-income households over the course of a year, collecting highly detailed data on household financial activity. New York University’s Financial Access Initiative(FAI), CFSI, and Bankable Frontier Associates (BFA) recently released the Household Profiles. This series provides an intimate look into the financial lives of six households, exploring the ways these families are making ends meet . . .
Read MoreFAI Video: Economist Dean Karlan and Timothy Ogden Discuss Microfinance and Reaching the Ultra-Poor (Transcript)
Timothy Ogden : So, Dean one of the innovations in microfinance is trying to figure out a way to reach further down the poverty ladder—with programs generally referred to it as graduation or targeting the ultra-poor.
Would you tell us something about what those programs are and the process of figuring out how they work?
Dean Karlan: Sure. So, the first thing I think that’s important to note is the broad scope of the goals . . .
Read MoreDespite a lot of excitement about global payments, we are just beginning to learn the most basic facts about them– how much money is sent by whom, to whom, where, and how. International remittances flows could reach $515 billion by the year 2015 and are slowly starting to receive the attention they deserve from policymakers. Now, a new set of Gates reports on payments in Africa and Asia shows that domestic remittances may far surpass international remittances in frequency and magnitude . . .
Read MoreDean Karlan on Commitment Savings Research: Video Transcript
Hi. We all have weaknesses. Sometimes it’s exercise. Sometimes it’s eating. Sometimes it’s spending money on frivolous things. This is true whether we are rich or poor, fat or slim. The challenge we all face in life is how do we make these trade-offs. How do we trade off the things we say we want to do and the things we actually do. How do we, for instance, set a plan and then fulfill that plan?
When we think about this in the savings space, it’s a very important issue, particularly for the poor, because there are a lot of things that tempt us on a daily basis. If we want to be able to accumulate savings so that we can have a nest egg for a rainy day or if we live in an agricultural setting and we want to have a nest egg so that when it’s planting season we have enough money to buy fertilizer to invest in a farm – how do we manage to get money away from ourselves and safe, in a place and committed, so that it doesn’t get spent, so that it can be used at the time of need?
Read MoreA recent report of the Gates Foundation, from their program on Financial Services for the Poor, highlights payment systems as a way of “Fighting Poverty, Profitably” – as the report says in its title. Payment systems, according to the report, “could serve as the connective tissue for bringing a broader array of financial services to the poor”.
The report brings together the existing data on payment systems to analyze how potential payments service providers could profitably extend their services to underserved populations in developing countries. They identify four cost and revenue centers – accounts, cash-in-cash-out, transfers, and what they term “adjacencies” – in their framework, and argue for revenue models built on three of the four (cash-in-cash-out, transfers, and adjacencies) to best give companies an incentive to serve the poor.
In countries that have already embraced mobile payment systems, such as Kenya, some of the most exciting action is occurring in adjacencies . . .
Read MoreMigrants send a lot of money to developing countries—several times more than foreign aid. Researchers and policymakers have seized on these very large flows and built an agenda to understand how these remittances can foster development. Indeed, you most often hear remittance flows compared to aid flows.
Something fundamental is wrong with this agenda however. Researchers tend to study remittances as if they were windfall income, like aid or oil revenue, that arrives like manna from heaven. This leads researchers toward the kind of questions you might ask about windfall income: Are remittances spent on ‘good’ things like investment and education? Do families and countries become ‘dependent’ on remittances?
Read MoreOn the Center for Financial Inclusion blog, Ignacio Mas and Beth Rhyne are discussing a central question in the evolution of electronic payments in developing countries: why aren't people using it to pay? Even in countries like Kenya with very high rates of adoption of a electronic payment platform, the vast majority of money that goes into the system come back out into physical cash in 24 to 48 hours. Ignacio makes a case that electronic payments systems need to be more integrated into other financial behaviors, like savings and credit, before they will be used for routine payments. The reason is fairly simple: unless you are storing value in the electronic system (as with a savings account) using the electronic system for a payment involves at least one extra step to turn cash into electronic form.
Beth responds that if people are receiving their income in electronic form in the first place, like benefits payments or paychecks, and the merchants they frequent take payment in electronic form then there is good reason for users to keep their money in the electronic system. Using Ignacio's same logic, cashing out involves an extra step if the inflow is electronic and the outflow can be electronic. Beth's argument is one of the reasons organizations like the Better than Cash Alliance are focused on encouraging governments to use electronic payments to pay salaries or benefits to households . . .
Read MoreFAI asked Samantha Duncan to tell us about the research papers and books that have influenced how she thinks about insurance. This is what she told us:
My thinking on insurance has evolved and been influenced by personal experiences, but also some books and papers. I am a practitioner at heart, and my earliest thinking came from spending time inside the homes of poor people across Latin America and Asia; getting to know them, their families, and how they live their lives. However, there have also been a number of research papers and books that have had a tremendous impact on my thinking and work. I’ve outlined some of the ideas that have deeply resonated with me below.
Insight 1: The risks poor people face are debilitating. There is a cycle of poverty . . .
Read MoreThe opening of the new Affordable Care Act health insurance marketplaces presents millions of Americans with a complicated financial decision. How do they value insurance? The marketplaces will primarily serve people who are not employed full time or are in low-wage jobs—and are therefore likely to be juggling tight finances already. What is the cost of paying down debt more slowly to buy insurance? The obvious intervention to help people make better financial decisions when faced with complex options is financial literacy.
Unfortunately, the evidence on financial literacy is pretty dismal. David McKenzie’s study of a voluntary financial literacy program in Mexico that finds no effect is pretty representative. Earlier this year, author Helaine Olen wrote that financial literacy is “a bunch of hooey,” Jason Zweig at The Wall Street Journal cited educational programs that actually make people worse off financially, and FINRA released a study showing that financial literacy among Americans has weakened since 2009.
While financial literacy levels are linked to better financial decisions, study after study shows that financial literacy courses are ineffective . . .
Read MoreThis summer the Journal of Development Studies accepted a manuscript by Jonathan Morduch and myself laying out our critique of an influential microcredit study from the 1990s by Mark Pitt of Brown University and Shahidur Khandker of the World Bank. Our article should appear in the journal this year or next. The acceptance is milestone for Jonathan and me, for it represents a ratification of our work, and is very long in coming.
It was 15 years ago that Jonathan first laid out his doubts about Pitt and Khandker (P&K). Pitt retorted the next year. And there the dispute rested, never adjudicated by journals, until I entered the picture 6 years ago by writing a program that, for the first time, allowed an exact replication of P&K’s math.
Jonathan and I have played a sort of doubles match with Mark and Shahid . . .
Read MoreA dinner I attended on Monday night previewed the upcoming Financial Inclusion 2020 Global Summit in London. The Summit’s ultimate goal is to include 2.5 billion more people in the formal financial system by 2020. It was an interesting (off the record) conversation. Without violationg the rules of engagement, I want to focus in on a topic I raised: Who is going to pay for financial inclusion?
Providing financial services to poor households has been and will continue to be expensive. While technology (like electronic payments) and innovative approaches (like KGFS) can reduce costs, they cannot make serving poor customers cost- or profit-competitive with serving wealthier customers. The bottom line is that including 2.5 billion people in the financial system is going to cost money. Someone will have to pay.
Read MoreUnderlying, 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. . . .
Read MoreSelf-funded groups are an increasingly common way of delivering microfinance services. In India, for example, self-help groups increased their membership dramatically in Andhra Pradesh after the microfinance crisis of 2009-2010. In Africa, several international NGOs are promoting village savings and loans associations (VSLAs) as member-driven, local institutions.
Can these groups “replace” traditional microfinance, in the sense that they do not need the intervention of loan officers or professional managers? An interesting paper contributes to answering this question . . .
Read MoreThe original theory of microcredit was that it offered the opportunity for poor households to create profitable microenterprises. But there were always households left behind—those that were too poor to create a microenterprise or plausibly repay even the very small loans on offer.
One attempt to address these households, usually called the “ultra poor,” was to create an asset transfer and training program that would allow them to “graduate” into standard microcredit. BRAC’s Targeting the Ultra Poor program is perhaps the best known of these. Evaluations of TUP-style programs have been mixed – with some showing no effect and others strong effects. It seems that a major factor is local labor markets—when ultra poor households have good wage labor alternatives, asset transfers do not help much. When local labor markets are thin or non-existent, asset transfers can make a big difference . . .
Read MoreThis post is written by Bindu Ananth and Amit Shah. Bindu Ananth is President of the IFMR Trust and Amit Shah is Head of Business Intelligence at IFMR Rural Finance. They co-edited the recently published book “Financial Engineering for Low-Income Households.”
Five years ago when we set up the KGFS model of financial institutions in remote-rural India, we wanted to make a fundamental shift in the way financial services were offered to households. We wanted the organising principle to be suitability, i.e., how do we make sure that every single customer receives the portfolio of financial services that is most suitable given her needs and preferences? This is essentially what wealth managers are supposed to do for ultra-rich individuals but we wanted to do it for clients with a mean income of USD 1000 per year through staff with twelve years of formal education . . .
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