In recent years, hundreds of millions of people around the world have gained access to financial services for the first time. In just three years, from 2011 to 2014, 700 million people opened their first bank accounts, increasing the share of the world’s population with an account to 62 percent, the World Bank reports. This explosion in access is fueled largely by innovations in digital technology that reduce the cost of service delivery and generate better consumer data, as well as by the efforts of financial institutions and governments to reach the unbanked. Many low-income consumers around the world are now able to access affordable financial services and products without ever having to set foot in a bank.
For the banking sector, the expansion in access is an exciting business opportunity. But numbers can be deceiving—millions more have access to accounts, but account ownership is only the first step towards realizing full financial inclusion. In the United States, the FDIC’s (Federal Deposit Insurance Corporation’s) 2013 national survey estimates 20 percent of the population, or 63 million people, are “underbanked”. In developing countries, about one-third of people with access to financial services aren’t using them regularly, and 15 percent of checking and savings accounts, held by 460 million people worldwide, are dormant.
So how can banks turn increased access into a profitable market opportunity that also enhances financial inclusion for new and existing underserved consumers? For people seeking to store, borrow or transfer money (the heart of what a bank offers its customers), product design must be appropriate for consumers’ circumstances, produce value for customers, and be usable and understandable for customers. In other words, products must be designed around humans, not the other way around.
Tackling demand first, our research has shown that even the extreme poor want to borrow and save, make payments and manage risk. In other words, we should not misinterpret the 20 percent of Americans who are underbanked or the 460 million dormant accounts around the world as a lack of demand for financial services. Where banks cannot reach, informal products and cash generally dominate. For example, borrowing from moneylenders, saving in informal circles, hiding cash under a mattress and buying livestock are all widespread customs among the poor in developing and emerging economies alike. Similarly, check cashers and payday lenders fill a critical gap in rich countries, such as the US and the UK.
So if nearly everyone can save, and many do find ways to borrow in order to manage risk and make investments in their lives, then what is keeping people from using safe and formal financial products to satisfy their needs? Much of our research focuses on these questions. Thus far, we have identified various ways banks and electronic-payments providers can improve their products and services to make them work better for low-income consumers, while also protecting the bottom line.
First, financial products can be designed to better meet consumers’ cash flows and needs. One-size-fits-all products may be easier to implement at lower costs for financial institutions, but may not offer the flexibility consumers need to manage inconsistent cash flows or expenses. And there may be ways to offer some flexibility to clients without driving up costs. Indeed, tweaks to credit contracts can increase demand, reduce banks’ costs and reduce borrower stress, all without increasing default rates. In Kenya, researchers found that using water tanks as collateral for loans for farmers increased loan take-up with no effect on late payments. Another study in India found that reducing the frequency of loan repayment from weekly to monthly did not affect repayment or default rates, and it reduced the financial institutions’ costs and borrowers’ stress levels.
Second, we have learned that products can be designed to “nudge” consumers and help them meet their goals. Financial decisions are often influenced by procrastination, inertia, impulsive judgments or emotions—all of which can get in the way of rational and effective financial decision-making. Small nudges such as commitment devices, reminders and default options can help overcome these irrational tendencies and help consumers make better financial choices—often at low cost for financial-service providers.
Commitment devices voluntarily tie people’s hands to meeting a future goal—typically to save a certain amount, to follow a fixed deposit schedule, or to commit not to withdraw from their accounts until a particular date. We partnered with a bank in the Philippines and found that clients offered a commitment savings account saved 82 percent more than clients not offered such an account. Other than the commitment feature, the account was identical to a standard savings account, making it a low-cost design tweak for the bank. We have found that there is demand for commitment savings in the US, too. We partnered with a credit union in New York City and offered an interest-earning commitment savings account to low-income customers. Preliminary results have shown that more than 20 percent of those who were offered an account opened one—a high rate, by industry standards—and on average, people saved 70 percent of their goal amount.
Reminders are another low-cost way to help bring financial goals to the top of consumers’ minds, countering inattention or forgetfulness. In Uganda, sending text messages to small-business borrowers three days before loan payments were due increased on-time loan payments by 9 percent—not bad for a solution that cost less than $1 per client. In Bolivia, Peru and the Philippines, text message reminders were a cost-effective way to increase savings balances and help people meet their savings goals. I am part of a team of researchers working with banks around the world to continue testing and improving these reminders.
Perhaps the most classic “nudge” of all is to fix automatic enrollment such that the default option is what most people would want in a moment of fully informed reflection. This helps overcome inertia and procrastination to place people into what they are most likely to want, but also gives full freedom to people to change to something else, should they not want the default option. Defined contribution savings plans typically require employees to enroll and decide how much of their salary to save. A study in the United States found that changing the default so that employees must “opt-out” rather than “opt-in” to retirement plans dramatically increased participation and savings balances. When employees were automatically signed up, enrollment in the plan was 95 percent, a 35-percentage-point jump over enrollment rates among those who had to opt-in to the plan. Studies in countries as wide-ranging as Afghanistan and Denmark confirm the power of defaults on savings behavior.
Finally, even when suitable, well-designed financial products or services are available, people do not always know about them due to lack of information disclosure and transparency. Research by the World Bank and Innovations for Poverty Action, a research and policy nonprofit, has found that the quality of information provided to low-income consumers on products and services is often inadequate. In Colombia, Mexico and Peru, researchers posed as low-income consumers and visited commercial banks, lending institutions and microfinance institutions to gather information about products. Their findings were disconcerting: bank staff somehow routinely failed to voluntarily provide information to clients about avoidable fees, especially to people who appeared to lack financial knowledge, and clients were almost never offered the cheapest products. These results suggest that in addition to making products accessible and affordable, we need to find ways to ensure more appropriate disclosures and that consumers have clear and accurate information when making decisions.
As we learn more about the impact of financial products on consumer well-being and banks’ bottom lines, institutions are beginning to apply these insights to their product designs. We have begun working with JPMorgan Chase & Co to communicate what research can do to inform and inspire innovation among banks and providers of financial services, bringing together lessons from all over the world on consumer behavior and solutions to improve services for the poor.
Ultimately a simple mantra is good to remember when designing financial services for the masses: Make it easy for people to make the choices best for them. But how to implement that mantra is not always so obvious. Context matters. But that does not mean that some general principles can transcend from one location to another. Setting up tests, usually rapid-fire but also sometimes long-term, can help make that leap from abstract concept to specific product and implementation strategy.