World Bank Study Reveals Importance of Better Product Design and Delivery

The World Bank released a new report late last week that debuts data gathered in a new index for measuring global financial inclusion, dubbed the “Global Findex.” The report gathers interview data from 70,000 respondents in 148 economies to measure how adults “save, borrow, make payments, and manage risk.” As an organization dedicated to seeing financial services used as a tool to support people living in poverty, we took special interest in rates of financial inclusion for those at the base of the economic pyramid and the reason that may or may not choose to have formal financial accounts. What emerged from the report was great insight to the importance of creating better products and services in generating greater financial inclusion.

First, this report is a great resource for deepening understanding about client needs and the barriers they face to financial inclusion. We would encourage the authors to expand in future editions on the means of making payments and managing risk. The report does not address how clients make payments, and only three paragraphs are given to the discussion on insurance.

In addition to improving our understanding of client needs and the barriers they face, the study points to how utilizing that better understanding to inform product development and delivery can help overcome those barriers. Notable to our thinking is that we found the study to say very little about how financial education could increase financial inclusion.

The scope of the study is global, so a reader has to be careful to look for the facts relevant to the comparisons of the lowest-income quintile — or other forms of disaggregation used — with those of the highest income. The study divides the respondents into the haves and the have nots: those who have or do not have an account, a line of credit, or an insurance product with a formal financial institution.

One of the interesting charts in the study reports the results of a survey in which respondents were given seven reasons to choose from to explain why they did not have an account with a formal financial institution. Respondents were allowed to name more than one reason. The study highlights the aggregate results for the developing world, but we wanted also to present the results for the lowest income quintile. Responses for low-income populations and the developing economies are such:

Barrier Named by Respondents
 Developing economies – all respondents
Lowest-income Quintile Respondents
Not enough money
Religious reasons
Family member already has account
Too expensive
Too far away
Lack of necessary documentation
Lack of trust
None of the reasons given

Observations resulting from this particular comparison reveal that the poorest in the developing world are far more likely to respond that they do not have enough money to open an account and far less likely to give as a reason for lack of access that they have a family member who already has an account. Otherwise, all developing economy respondents cited most often (1) the prohibitive expense of an account, (2) being too far from the institution, and (3) lacking necessary documentation. Lack of trust and religious reasons each had the lowest response rates. The authors note that this data does not enable them to draw conclusions about what impact would be seen if the barriers were removed. However some speculations to that effect are then presented.

Pages 17 – 19 discuss more fully each of the reasons respondents may have chosen for not having an account. Notably, none of the response options focused on a lack of understanding about financial products, unless the option “lack of trust” implies a lack of knowledge or capacity to manage a relationship with financial institutions. Problematically, however, the data show that the incidence of “lack of trust” responses increases as the respondent’s education level increases, implying that additional schooling, at least, does not reduce mistrust of formal financial institutions. Even were a lack of trust regarded as flowing from a lack of understanding, only 13% of respondents named this barrier. On the other hand, 82% of the 70,000 respondents cited reasons that more directly correlate to product design, delivery, and cost structures.

In Larry Reed’s blog post for CFI from February, he illustrates that a client’s needs had first and foremost to do with the relevance (appropriateness) of the product to her, physical accessibility of the bank (a barrier also raised in this study), security of the funds, ease of access to the funds, ability to finance large expenses, ability to pay for emergency expenses.

This study echoes Reed’s statement in several ways.

  1. The respondents, though given a set list, overwhelmingly named barriers related to design and appropriateness of a financial product, physical accessibility, and cost structure.
  2. Specifically, the data in this study and Reed’s example client share in common physical access, use of loans for emergency needs, financing children’s education, and a desire for a product appropriate to the individual.
  3. The data do not yield much information about the role of financial education but rather focus on the importance of the industry’s need to learn more about the client’s needs in order to “provide the full range of financial services they need and deliver them in a way that makes them easy to understand and utilize.” (emphasis ours)

As Reed concludes, education should begin with ourselves in the microfinance industry. We should take advantage of studies such as this one to better understand what the client says her or his needs and aspirations actually are to then design products that the client will want to purchase. In other words, financial inclusion is dependent, at least in part, on product design, delivery, and cost. By way of illustration, let us walk through what could mitigate the barriers recognized by the survey respondents:

  • If faced with the barrier “not enough money,” a potential client needs a product that either has no minimum balance or helps generate excess (savable) income.
  • If faced with the barrier that formal accounts are “too expensive,” the cost structure needs to be designed so as not to erase her savings through high fees and transaction costs.
  • Assuming the first two points are enacted, the prerequisites for opening the account need to reduce the barriers for a person in poverty who might “lack [traditional] necessary documentation.”
  • With money in the bank that isn’t being unduly eroded by fees and costs, the client needs to be able to access and manage those funds that would otherwise be “too far away” — perhaps through mobile banking technologies.

In addressing each of the above five indicators from the study (“lack of trust” and “religious reasons” omitted), 85% of respondents would have seen one or more barriers to their financial inclusion reduced by designing products to be more useful, more easily accessed, less expensive, and more easily obtained by poor clients.

In our search for implications regarding financial education strategies, for each of the responses measured we could say that financial education has an important concurrent role. Explaining the use of a well-designed savings account, its costs, and the ways it can be accessed and managed, would be of great value to a potential new account holder. As Reed’s hypothetical illustrates, a potential client might see little value in knowing about savings accounts that will not hold amounts small enough for her or which cost too much to be useful. Knowledge about those accounts will not help her to open one. However, if the financial education is about a product specific to her and the best way she can make use of it, the knowledge becomes much more useful and relevance.

By our reading, this study highlights that from the client’s perspective, reducing barriers to financial inclusion really come down to the industry’s willingness to learn from the client and thereby create products that are designed according to the particular needs of the various segments of the population living in poverty. As those employed by the microfinance industry, we should better understand what clients themselves prioritize as their needs and aspirations in order to design products that are applicable, accessible, obtainable, and affordable.

—Jesse Marsden, Manager, Research & Operations
—Sabina Rogers, Manager, Communications & Relationships

(See also the Center for Financial Inclusion’s blog post presenting initial findings.)

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