Financial Safety: In the Eyes of the User and Regulator

We know that most low income people use a variety of financial instruments, both formal and informal, to manage their complex lives. When considering the safety of these options, we often take it for granted that formal instruments are safer, yet we continuously hear of those who have experienced or heard of a financial loss from a formal institution, such as a bank. The perception that a financial institution is “safe” is perhaps not only a matter of whether it is regulated or solvent, but also whether it offers consumers a consistent, reliable experience.

One might attribute some of the viral uptake of M-PESA, for example, to its easy testability. Recent research on consumer understanding in Kenya introduced us to a young man who registered for M-PESA and then went straight home to test it by sending a small amount of money to his wife, while both sat together on the couch. This started us thinking that perhaps one of the reasons why M-PESA has been so widely accepted is because people could to try it and see that it worked instantaneously, reinforcing their trust with each transaction.

How can regulators encourage financial service testing that ultimately reassures consumers? We suggest these three steps to be taken in tandem:

1. Create clear expectations: For many low income consumers this begins– but does not end – with having simple fee structures. In a recent survey of consumers in Kenya, 7% of survey respondents said that they had lost money at banks, with a third saying the bank “ate” their money with charges. This perception of money “loss” leads to a sense that banks are unpredictable. We heard that the worst culprit of these fees is the monthly “ledger” or administration fee along with dormancy fees, because these fees are automatically deducted even in the absence of any customer-initiated transaction. Likewise, any fee that requires calculation, such as the percentage of a transaction size, created the sense that the bank is trying to charge consumers more than they expect. Even if it is more expensive than what they might otherwise pay, customers appear to prefer flat fees tied to specific actions, so they know what to expect.
2. Remove barriers to frequent balance checks: The second step is to ensure that consumers are able to “test” their expectations at regular intervals. This means having confirmations and balance statements available even to the lowest balance consumers, so that consumers can see what is happening to their money in real time – via POS devices and ATMs, mobile phones, or with an agent. Making this testing free and promoting testing particularly among new customers should be economically justifiable in the long run; if clients feel comfortable with financial products, they will use them.
3. Follow through with consistent explanations to questions: The last step is to have a highly accessible way to get answers and resolve problems. Our discussions with M-PESA users revealed that they were very clear about what to do when something goes wrong (“You call customer care”). Explanations and resolutions for the most common problem—sending funds to the wrong number—were remarkably consistent across users, which appeared to reinforce a broad understanding of how the system works.

The idea is to build trust by conveying concise, repeated messages that can be confirmed across time and across users. So much in the lives of the poor is unreliable and inconsistent. Encouraging institutions to create tools that consumers can use to test financial services may provide one of the few institutions consumers can count on.