1. MicroDigitalFinance: A few weeks ago I wrote that small-dollar short-term loans have always been the bane of the banking industry. We're getting a new test of that. US Bank is launching an alternative to payday loans: loans are between $100 and $1000 and repaid over three months. Interest rates are well below payday lending rates, but still around 70% APR--interestingly on US Bank's page about the loan they very clearly say: "Simple Loan is a a high-cost loan and other options may be available." All of that is good news. But the loans are only available to people with a credit rating (even if it's bad), who have had bank accounts with US Bank for 6 months and direct deposit for 3 months. It will be fascinating to watch take-up, repayment rates, and outcomes--those are where banks have always struggled in this market. Here's Pew's Nick Bourke's take on the US Bank move and the potential for others, with some more regulatory action, to follow suit.
I occasionally remark on insurance being the most amazing invention of all time. It's astounding that it works at all, even in the most developed, trusting and well-regulated markets (see this attempt by one of the US's oldest life insurance providers to collapse the market); it's not surprising that it's a struggle to make it work elsewhere, in the places where households face more risk and would most benefit from access to insurance. So I'm always interested in new work on insurance innovation. Here's a new paper on a lab-in-the-field insurance experiment in Burkina Faso. The basic insight is that many potential purchasers struggle with the certain cost of an insurance premium versus the uncertain payoff. It turns out that framing the premium around an uncertain rebate if there is no payout--which makes both premium and benefit uncertain--increases take-up, especially among those that value certainty most. Yes, you probably need to read that sentence again (and then click on the link to see that even that obtuse sentence is marginally clearer than the abstract). If we want to delve into the details of insurance contract construction, there's also a new paper that delves into how liquidity constraints--a huge factor that hasn't generally gotten enough attention--affect the perceived value of insurance contracts, and how to adjust the contracts accordingly.
And finally, William Faulkner's dictum that "The past is never dead. It's not even past." applies to fintech. A new paper finds that common law countries in sub-Saharan Africa have greater penetration of Internet, telecom and electricity infrastructure, and thus much greater adoption of mobile money and FinTech. That's consistent with history of banking literature that finds common law countries do better on financial system development, financial inclusion and SME lending.
For the record, I've clarified in my own mind the difference between the MicroDigitalFinance and Household Finance categories. The former provides perspective on providers, the latter on consumers. I reserve the right to break that typology as necessary or when it suits me.
2. Household Finance: I suppose another way to distinguish between the two categories is that MicroDigitalFinance features bad news only most of the time, while Household Finance is just all bad news. At least that's the way it feels when I come across depressing studies like this: Extending the term of auto loans (e.g. from 60 months to 72 months as has become increasingly common during this low-quality credit boom) leads to consumers taking loans at a) higher interest rates, and b) paying more for the vehicle. Liquidity constraints mean consumers pay much more attention to the monthly payment and get screwed.
Viewing all posts with tag: Insurance
Week of July 23, 2018
1. Food Fights and Methods: First, over on the Economics That Really Matters blog, Paul Christian and Chris Barrett summarize their paper on US food aid and conflict. They call into question the results of an influential paper finding a causal link between US food aid and conflict. The authors follow up with a methodological note on the use of instrumental variables with panel data.
Next, the most recent issue of the American Journal of Agricultural Economics (AJAE) has a nice article, comment, and response. In the article Ore Koren finds that it is food abundance, rather than food scarcity, that causes conflict across Africa. Marshall Burke writes in a comment that the effect sizes are implausibly large and are at odds with previous research. Koren responds to these comments by offering three explanations for the "implausibly" large effect sizes.
2. Randomistas are our new Algorithmic Overlords: At the development economics section of the NBER Summer Institute, Esther Duflo delivered a lecture entitled, "Machinistas meet Randomistas: Some useful ML tools for RCT researchers". Slides from the lecture are available here, and Dina Pomeranz was live Tweeting the lecture. The paper it was based on is here. On the surface it may seem like machine learning and RCTs are interested in different parts of empirical research--the former focused on prediction and the latter focused on causal identification. Duflo highlights a couple areas where using machine learning when analyzing an RCT can be beneficial.
3. Informal Insurance: In a recent article on VoxDev, Kaivan Munshi and Mark Rosenzweig summarize some of the insights from their 2016 paper on the impact of rural informal insurance networks on rural-urban migration in India. The authors first point out that the rural-urban migration rate is relatively low in India compared to other similar countries. The explanation for this is the presence of well-functioning rural informal insurance markets. In order for these informal markets to function well, however, mechanisms must exist to prevent households from reneging on their obligations to their network. A key way this plays out is in restrictions on mobility. This raises a question: What would happen if formal insurance were introduced? Munshi and Rosenzweig run policy simulations and find formal insurance arrangements may increase rural-urban migration. Relatedly, in a new AJAE paper, Kazushi Takahashi, Chris Barrett, and Munenobu Ikegami study how the introduction of formal index insurance affects informal risk-sharing arrangements in rural Ethiopia. They find little evidence of a crowding out of informal insurance from formal insurance products.
NEUDC 2016 Special Edition
1. Mentors for Microenterprises in Kenya: Brooks, Donovan and Johnson assign high profit microentrepreneurs to mentor newer entrants. That's a particularly interesting way to potentially change the trajectories of microfirms. The mentored firms see a significant jump in profits driven by learning how to cut costs but don't maintain the gains once mentorship stops.
2. Grants and Plans for Senegalese Farmers: Ambler, de Brauw and Godlonton give $200 grants and develop a farm management plan for smallholders. The grants boost production (by more than $200), but the gains seem to fade out, though higher stock of assets remains. Farm management plans don't have a measurable impact. I find this interesting for many of the same reasons as #1: figuring out how to boost profits of small enterprises is near the top of my list of urgent program/policy questions.
3. Seasonal Migration in India: Imbert and Papp use NREGA and choices about short-term migration to better understand why the large gap in earnings between rural and urban migration doesn't lead to more seasonal migration. They estimate that more than half of the income gap is consumed with higher living costs in urban areas, with the rest due to non-economic costs--like being away from home and "hard-living", (e.g. sleeping on the street). There are some interesting policy applications for the design of rural public works/income programs and the development of migration finance and support programs.
Read MoreWeek of October 17, 2016
1. News from Rwanda: An evaluation of the use of small-scale household solar panels in Rwanda finds that there are benefits but those are small and diffuse enough that subsidies will be needed to scale adoption. At the conference itself I learned that while 89% of Rwandans are "financially included" only 6% are "adequately served" according to recent FinScope data--a healthy reminder that heavy caveats are required when setting inclusion goals. The next step is to recognize (with a nod to James Scott) that in markets with high "inlcusion," under-served is a strategy not a condition. And while this isn't news about Rwanda, I learned about it in Rwanda: MFO is conducting garment worker financial diaries in southeast Asia which should help us understand a bit more of the difference between Blattman and Dercon's results in Ethiopia and Heath and Mobarak's results in Bangladesh.
2. The Cost of Volatility: One of the common findings from financial diaries work around the world is the prevalence of income volatility, perhaps most surprisingly among US households. In the US Diaries data we see a lot of the volatility coming from variations in amount earned per week in the same job. There are lots of reasons to suspect that volatile schedules and the income volatility that flows from it is bad for households, but how bad? A new field experiment hints that it's really bad. Mas and Pallais randomize wage offers to potential staff for a national call center and find that workers aren't willing to sacrifice pay for a flexible schedule, but are willing to give up 20% of their wage to avoid having a schedule set by the employer with a week's notice.
Week of October 10, 2016
1. Digital Identity: A few weeks ago we featured a paper on the general equilibrium effects of NREGA in India, which depends on a universal ID system. Next Billion takes a look at India's digital ID system and compares it with Pakistan's program.
2. Insurance (Is Hard All Over): When you read about attempts to launch microinsurance programs for developing countries, it can often seem like insurance markets work very well in developed countries. But insurance is hard no matter where you are, and may be getting harder due to climate risks and our human failings in thinking about large but rare risks. Here's a new brief from the Penn Wharton Public Policy Institute looking at how under-insured many American homeowners are and proposing some steps to get those people to buy insurance.
3. Shocks and External Validity: Typically conversations about the external validity of an impact evaluation focus on whether a finding in one place applies to a finding in another place. Here's a new paper by Rosenzweig and Udry looking at external validity issues in the same place but in different times, specifically at how important aggregate shocks can be when impact is likely to vary over time (as with agriculture or schooling). I'm not sure how big a problem not considering time variance is, but it is a good reminder to examine assumptions when applying findings from impact evaluations.
Week of July 27, 2015
1. Mobile Money: Vodafone and MTN announced plans to allow money transfers between East and Central African customers of either provider, marking a big step toward interoperability on the continent. The Wall Street Journal
2. Financial Management: FAI affiliate Ignacio Mas analyzes common behaviors and decision-making practices that underpin the financial management strategies of poor households. Upsides
3. Digital Payments: A new blog series explores mobile merchant payments in developing markets, with a focus on the factors it will take to build out the extensive networks necessary to provide value for both merchants and customers. CGAP
Week of June 1, 2015
1. Income Volatility: Insights into employment opportunities in the "sharing economy" (and research from US Financial Diaries) provide evidence that "life is no longer a matter of having or losing a job, but of stitching together a comfortable and secure quilt from a colourful range of fabrics." The Globe and Mail
2. US Poverty: Will a new "reality" show where families facing financial hardship play a version of the dictator game, judging how "worthy" another family is to receive a share of $101,000, undermine persistent myths and prejudices about low-income households, or is it just an incredibly crass, deplorable, and exploitative gimmick? The Nation
3. Financial Inclusion: IFMR research drives home the point that no matter what "inclusion initiatives" are launched, the behavior of agents will have a huge effect on whether accounts are opened and used in India. IFMR
Week of April 27, 2015
1. Impact Investing: There's no clear definition of "impact investing," made apparent by the US Council on Foundations' annual conference and the Milken Institute Global Conference both having impact investing tracks this week populated by quite different people. Read Tim Ogden's reflections from the Council on Foundations (Part 1, Part 2 and Part 3) where the emphasis was on starting small, and Jean Case's take on Milken Institute's theme of going big.
2. Microinsurance: Does the microinsurance industry have anything to show after 10 years of experiment, investment and excitement? Not much, according to Peter Gross. CGAP
3. Remittances: Since their initial launch two years ago, Orange and MTN's cross-border mobile money transfer services have exhibited rapid adoption rates and transfer activity in West Africa. Does this success signal potential disruption in the African remittance market or does the preexisting socioeconomic integration of the region make this a unique case? GSMA
Week of December 8, 2014
1. Poverty in the U.S.: “It’s assumed that we’re not unstable because we’re poor, we’re poor because we’re unstable. So let’s just talk about how impossible it is to keep your life from spiraling out of control when you have no financial cushion whatsoever.” Slate
2. Agricultural Loans: Forgiveness of agricultural loans has been a common occurrence in India. it's about to happen again. But who gets the benefits and what happens after? Bloomberg
3. Cash Transfers: Evidence is building for positive impact of both unconditional cash transfers and graduation models for the ultra-poor. How do you decide between the two? NextBillion
Week of November 3, 2014
1. Business Training: Previous evaluations show the effectiveness of business training programs is mixed at best. But a new paper finds (as with most things in life) it helps to have a friend. The World Bank - Development Impact
2. MFIs: Can financial service providers address domestic violence among microfinance clients? CFI
3. Savings: In India, MFIs that offer savings products have a chicken and egg problem – they struggle to attract savings because their clients don't perceive them as a savings provider. MicroSave
Week of October 6, 2014
1. Financial Inclusion: India’s vision of boosting financial inclusion by building thousands of bank branches may be inadequate if those branches actively prevent customers from purchasing low-cost products. IFMR
2. Insurance: How can small firms protect themselves against risks and continue with expansion plans even in an environment of uncertainty? The World Bank - Development Impact
3. Housing: A new study finds that relative to homeowners, renters in the U.S. comprise a financially fragile population that is burdened by debt and lacks emergency savings. FINRA
Week of September 29, 2014
1. Savings: How do you build credit without a bank account? One strategy is linking savings group activity to credit bureaus and formalizing invisible financial activitythat already occurs in many households, including those in the U.S. Financial Diaries project. Vox
2. Financial Inclusion: What explains Latin America's financial inclusion gap? Poor-quality institutions, income inequality, and low educational achievements. Center for Global Development
3. Microcredit: Smart Campaign responds to the recent debate on responsible pricing and self-regulation from the 17th Microcredit Summit in Mexico. NextBillion
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?
Read MoreWeek of September 1, 2014
1. 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 MoreWeek of June 2, 2014
1. Financial Inclusion: As part EMERGE: The Forum on Consumer Financial Service Innovation, attendees got a taste of what it is like (including how expensive it is) to be unbanked. American Banker
2. Student Debt: Despite the fact that student debt in the US passed the $1 trillion mark, new research from the NY Fed shows many borrowers are not aware of what happens if they default. Liberty Street Economics
3. Financial Services: Google created a new service that searches Gmail accounts for correspondence from creditors then sends a reminder when a bill is due with the amount owed. PYMNTS.com
Coping with Financial Shocks, Insurance is one Tool of Many
This blog post is co-written with Barbara Magnoni and Laura Budzyna.
Do clients get value from microinsurance? This was a straightforward question asked of the MILK Project over three years ago. And as the Project comes to an end, we have come up with a perhaps uninspiring answer: Sometimes. But keep reading- the inspiration is in the nuance . . .
Read MoreDeflating the Promise of Using Remittances to Cope with Financial Shocks
Over the past three years, I have been working on the Microinsurance Learning and Knowledge (MILK) Project, focusing on one specific question: Do clients obtain value from microinsurance? As the project comes to an end, I feel more and more that this is only one of the many questions that we should be asking as we think about how low-income people cope with risk and financial shocks. Insurance is one of many coping strategies; it is not always the quickest, the easiest, or the most accessible. But it is an important complement, and in some cases, can take the “bite” out of some of more difficult strategies such as selling assets, borrowing at high interest rates or drying up savings . . .
Read MoreSamantha Duncan on the Books and Papers that Influenced her Thinking on Insurance
FAI 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 MoreKnowing is Half the Battle: Unpacking Financial Literacy
The 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 MoreFrom Responsible Finance to Suitable Finance: Financial Engineering for Low-Income Households
This 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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