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?
Read More1. Payments: Will Apple's new payments software usher in the digital wallet revolution? The New York Times
2. Microcredit: The opening session of the 2014 Microcredit Summit dared to ask why microloan prices—and profits—are so high in Mexico. NextBillion
3. India: As of 2012, 680 million Indians lack the means to meet basic needs - more than 2.5 times the population below the official poverty line. McKinsey & Company
Read MoreThere’s a new weapon in the fight to expand financial access.
he Entrepreneurial Finance Lab, founded by faculty and students from the Harvard Kennedy School and Harvard Business School, is pioneering new personality-assessment based tools to expand credit access. Survey-based measures of personality characteristics – such as ethics, character, intelligence, attitudes and beliefs – combined with measures of business skills turn out to be powerful predictors of loan repayment in real-world settings. The Entrepreneurial Finance Lab creates alternative credit scores based on these characteristics to expand credit access in partnership with banks and microfinance institutions from around the world.
The approach originates from research in both psychology and business administration . . .
Read More1. Sustainable Development Goals: FAI affiliate Michael Clemens reacts to the inclusion of migration policy in the latest draft of the UN's SDGs... Center for Global Development
2. Immigration: ...while David Roodman evaluates the domestic economic impact of migration for receiving countries. David Roodman
3. Payments: Together with MasterCard, Nigeria began the pilot phase of its new eID program, which combines biometric-based identification with an electronic payment system. AllAfrica
Read More1. Digital Payments: "Digitizing government payments can serve as a catalyst, spurring further innovation in this space and paving the way for more involvement by private sector actors and the international community." The World Bank - Let's Talk Development
2. Postal Banking: While the US continues to debate the impact of postal banking, a new paper reviews how these services evolved in the developing world. University of Freiburg
3. Savings: Airtel Uganda, in conjunction with Grameen Foundation, has developed a service that will allow savings groups to store their group’s cash as mobile money. Grameen Foundation
Read MoreI write this from Dhaka, where I am visiting for the second time to help get our mobile banking impact evaluation in motion. I am not here alone, however, and I wanted to devote this post to introducing the truly outstanding Bangladeshi economists, research staff and organizations who are our partners in this research study.
First, we are uniquely privileged to be working with Dr. Hassan Zaman as a co-principal investigator on this study. Dr. Zaman is the chief economist of Bangladesh’s central bank, although he will soon be returning to Washington, DC to take a director-level advisory position on South Asia at the World Bank. He spent much of his career prior to Bangladesh Bank at the World Bank and earlier worked for BRAC. He has generated a body of policy and academic work that reflects a diverse mix of interests in development, including on development and finance, and will lead the World Bank’s work on poverty reduction and human development in his new role . . .
Read MoreWe write a good deal about remittances because they are a big part of the financial lives of many poor households—on the sending and receiving end. Remittances receive a lot of attention in aggregate because so much money is flowing: a reasonable estimate is that more than $600 billion is moving annually and that the vast majority of that is flowing to poor households. On Friday, I spoke with The New York Times' editorial board about some of the macro challenges of remittance systems and the role that the World Bank could play in alleviating the costs and burdens of anti-money laundering regulations. I believe there is a useful role for the World Bank and the other development banks to play in lowering the costs of remittances, and that role fits well within the banks anti-poverty missions . . .
Read More1. Savings: Will increased access to formal savings accounts in India translate to greater financial inclusion? Live Mint
2. Remittances: FAI's Timothy Ogden spoke with The New York Times' editorial board about some of the macro challenges of remittance systems and the role that the World Bank could play in alleviating the costs and burdens of anti-money laundering regulations. The New York Times
3. Financial Diaries: A financial diaries project in Kenya provides new insights into how low-income Kenyans use and think about their money. FSD Kenya
Read MoreIn an interview with FAI, economist Jenny Aker explained that effective commitment savings products are those that balance flexibility and restrictions:
“If you give someone a savings product and it completely ties their hand, they don’t want to use it. They want to have a little bit of that tying of the hand so they can’t spend that money but they don’t want to be completely divorced from access to that money.”
Much of the research on commitments focuses on savings products, which makes sense: when trying to save money, some “tying of the hands” helps. Like dieting, setting money aside requires the willpower to deny yourself something you want in the present to meet a goal in the future. To win the struggle for control between your present self and your future self, little commitment nudges can change behavior. Where product design gets tricky is in determining how restrictive the commitment should be. A study of savers in Kenya gives us one clue that it might not take much: when given the choice of letting neighbors hold the key to a savings lock box or holding the keys themselves, participants saved more when they chose the latter. Simply having the physical barrier of the box was enough to nudge them to save . . .
Read More1. Cash Transfers: Conditional cash transfers in the US encounter ridicule and skepticism, but this "foreign import" for the war on poverty has promise. Politico
2. Payday Lending: A new app allows hourly workers to immediately access wages they’ve already earned, without having to wait for their employer’s standard pay cycle or relying on payday lenders for quick cash. Wired
3. Mobile Banking: How can regulatory “best practices” in digital financial services move away from focusing on enabling participation in the market to fostering competition? Ignacio Mas outlines a few strategies. The World Bank - All About Finance
Read MoreNot long ago on this blog, Julie Siwicki explored Senator Elizabeth Warren's controversial idea that post offices begin offering checking and savings accounts, small loans, and money transfers. Would underserved consumers would actually benefit from the plan? Would expanded financial services actually help the struggling post office turn a profit? With the proposal now before Congress, FAI's managing Director Tim Ogden spoke with Next City, a non-profit that covers leaders, policies and innovations in metropolitan regions, about what it would take for postal banking to meet the needs of the unbanked . . .
Read MoreEconomist Jenny Aker explores the pros and cons of delivering aid via cash, voucher, or digital payment in two very different African programs . . .
Read More1. Retail Banking: Banks may continue to go digital but this doesn’t mean the brick and mortar branch is disappearing. Customers who use mobile and online banking more than once a week are over 60% more likely to be active retail-branch users than those who do not. McKinsey&Company
2. Labor Trends: The increasingly common practice of scheduling workers' shifts just before they begin can wreak havoc on the financial and personal lives of many low-wage workers, leading to income volatility and difficulty in arranging childcare. Al Jazeera America
3. Banking Transparency: "Low-income consumers want to know not just what the prices are, but in some ways, how banks’ decisions are made. Banks’ failure to communicate a rationale makes clients feel cheated...Clients who feel cheated, often feel justified in 'cheating back.'" Center for Financial Inclusion
Read MoreA recently released World Bank Policy Research Working Paper presents results of an audit study of Mexican banks, investigating whether bank employees hide the lowest cost options from potential customers in order to turn a higher profit.
Financial products can vary widely in cost while providing more or less the same services. The dispersion in prices for products that offer essentially the same benefits – checking accounts, savings accounts, loans, and index funds – is thought to at least partly reflect a lack of information on the part of consumers. Savvy and informed consumers would gravitate to the lowest cost option, and competition would then drive prices down to the same level for equivalent products.
A key potential source of information on financial product attributes and prices is bank employees. Bank employees presumably know their products, but may strategically choose not to divulge information about lower cost options . . .
Read More1. Language of Money: The nuances of financial jargon provide clarity in conversation, but exclude many. The New Yorker
2. Biometric Identification: Many countries, including India and Nigeria, continue to roll out biometric identity cards which can improve access to financial services. Alliance for Financial Inclusion
3. Islamic Microfinance: How can Sharia-compliant microfinance help bring financial tools to the 650 million Muslims living on less than $2 a day? The World Bank
Read MoreRecent 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 . . .
Read MoreWhat does financial access look like? I like to think of it as a non-prescriptive goal in two parts. First, high-quality, affordable financial services are available. Second, people are aware of the services available to them. When these conditions are met, people are free to choose whether or not to use the services, and “access” is created.
A recent working paper challenged me to probe this definition of access further. Using data from the Mexican Family Life Survey, the authors explore a) whether households are aware of a specific financial product, and b) given that awareness, if they use the product. They found, among other results, that while the availability of one type of formal loan in a given locality did predict households’ knowledge of that credit, it did not lead them to use it . . .
Read More1. Microcredit: Easing liquidity constraints of smallholder farmers during the hungry season may help break the cycle of inadequate crop yields and low-wage off-labor farm work by helping to smooth consumption (with the added bonus of raising local wages!). Jobs Knowledge Platform
2. African Financial Markets: African banks continue to expand their regional footprints, which creates an interesting policy balancing act - how to reap the benefits of financial integration while protecting systems against "cross-border contagion and fragility." The World Bank: All About Finance Blog
3. Income Distributions: Africa’s middle class doubled in the last 30 years - but the poor and rich classes grew as well, so income distributions have gone largely unchanged. The New York Times
Read MoreJust about everyone agrees that international remittances should be cheaper. If you run the numbers on international remittance flows, incomes of recipients and transaction costs, you can make a case that reducing remittance costs would be among the highest ROI interventions for raising incomes of poor households in the developing world (and given what we’re learning about the use and benefits of cash transfers, there’s good reason to believe the money would be well spent).
As this became clear over the last 10 years, the World Bank, IADB and plenty of NGOs have drawn attention to the issue—and have largely succeeded in dramatically reducing the cost of sending money home (costs do still vary widely depending on sending and receiving country). Still, most people I talk with think costs should fall even more . . .
Read MoreAs part of our ongoing effort to bring the worlds of research and practice closer together, we are experimenting with making academic work more readable and accessible by publishing and disseminating it in new formats. We’ve just released a paper by Michael Clemens and Tim Ogden on Medium, which we like so far for its clean, visually appealing, picture-heavy layout, and the way it allows readers to leave comments on specific paragraphs. Of course, in the world of the “3 minute read” this is admittedly a slightly longer haul.
The paper proposes a fundamental reframing of the research agenda on remittances, payments and development. When a household’s choice to send a migrant abroad migration is seen as an investment in human capital, and the physical location of the migrant as an asset to be acquired, then remittances are properly viewed as returns on investment rather than windfall income.
Here Michael and Tim illustrate why physical location should be viewed as an asset with an example from the ballet . . .
Read More
Editor's Note:
If you were hoping that the faiV would be a pleasant distraction from the overwhelming flow of AI-related content, sorry. For the record, the faiV had “ai” built in before Anthropic existed. And a housekeeping note: we’ve finally jumped ship from Mailchimp to NYU’s mailing platform—I guess if you’re reading this it’s been a seamless transition and if you’re not, well, you’re not. Feedback on the faiV’s content and format and delivery methods is always welcome, just drop me an email.
- Tim Ogden