Financial Capability at the Base of the Pyramid

Financial inclusion is expanding, bringing access to financial products and services to millions of previously unbanked, low-income consumers. Managing your money also brings risks however, many of which are difficult for even experienced consumers to handle, and much more for new market entrants. As the “access to finance frontier” is pushed ever further and new and vulnerable consumers enter financial markets, it is vital that they have the knowledge, skills, attitudes, and especially behaviors to make sound financial decisions suited to their social and financial circumstances. This is known as financial capability and people who have it are more likely to avoid common pitfalls such as over-indebtedness and falling victim to frauds or even simply paying too much for products ill-suited to their needs.

What does financial capability mean at the base of the pyramid? The Russia Trust Fund for Financial Literacy and Education at the World Bank is unpacking this question through a multi-country survey initiative in Latin America, Africa, the Middle East, and Asia Pacific. I have had the pleasure of being part of this research, working with my colleague Anya Maria Mayans, and the Uruguay Central Bank on the Uruguay Financial Capability Assessment, which CGAP has also supported. In the case of Uruguay, some of the key character traits associated with being financially capable were: commitment to family, lack of selfishness, and having strong impulse control – many of the same characteristics that emerged in focus groups in other countries. Addictions to alcohol and gambling were frequently identified as significant barriers to managing one’s finances.

What do these insights tell us about how to approach financial capability at the base of the pyramid? They emphasize the complexity of this task, the role of psychological factors in achieving behavior change, and the fact that strengthening financial capability is unlikely to be the result of a neat, linear process. Information and knowledge likely don’t result in immediate behavior changes in finance any more often than they do in other areas of life, such as health, where there already is a much more extensive body of knowledge on the non-linear path of behavior change.

It’s not only what is communicated but also how it is communicated, as well as the ecosystem within which people live that together create the conditions that are more likely to lead to behavior change that can be sustained over time. Research findings from behavior change communications for health, as well as reviews of successful financial capability interventions, identify some common denominators among the more effective interventions. Some tips from these findings follow.

1. Simplify! – Less information may be more useful to consumers than detailed explanations. For example, a financial training program in the Dominican Republic that provided micro-entrepreneurs with “rules of thumb” for managing their businesses - such as using two separate cash boxes for business and personal expenditures – proved significantly more effective than a more traditional curriculum with detailed information on financial management.
2. Are you ready to listen? Consumers are more likely to be impacted by financial capability messages when they can immediately use the information, skills and insights. These are known as “teachable moments” and may be linked to a financial decision a consumer is about to take (whether to take a loan, purchase insurance, or make an investment) or may coincide with critical life events (marriage, divorce, the birth of a child, or starting a job) where one’s financial life is changing and new options or challenges are present.
3. Tell me a good story. When information is presented through storytelling and narrative, it is far more accessible and impactful than straight information delivery. This is how people have communicated information over the millennia, from religious texts or Shakespeare, or modern media. While messages provided by TV, radio and other mass media can be both negative and positive, there is an opportunity to use media purposefully for catalyzing positive social change. This is known as entertainment education and it is based upon social cognitive theory in psychology. Rigorous research has demonstrated the impact that soap operas, radio programs, and public service announcements can have on behavior, especially when the messages are frequent and sustained, and when they are linked to programs on the ground.
4. Repeat, repeat, repeat. People are more likely to adopt a new behavior when exposed to the message repeatedly. This can occur through repeated exposures in one type of media – such as through a TV or radio program that runs for weeks, months or even years, or from getting a message emphasized in a shorter period of time through multiple media platforms. Making use of multiple platforms and combining broadcast media, print media, cell phone messages or apps, and social media is known as a transmedia or 360o media strategy.
5. Stay close to the ground. Communication messages that are coordinated with programs or policies on the ground are more likely to facilitate behavior change. Sometimes this is because barriers to action are reduced. For example, a communication strategy that encourages people to save through a formal institution and that is accompanied by access to a viable, attractive, and convenient savings account product is more likely to result in increased savings than a message alone. In other instances, the broader ecosystem must be included in the behavior change strategy, through interpersonal communications (such as a community discussing the role of dowry) or through collective actions (such as working together at the community level to change government policies). There may also be times where default mechanisms for financial programs (such as automatic enrollment in retirement savings or pension accounts) are a more effective, efficient, and economical approach to behavior change than trying to overcome some consumers’ tendency to procrastinate or take a particular decision through financial education.

So how do these insights contribute to efforts to keep clients at the center of financial inclusion? Understanding the financial capability of consumers at the base of the pyramid is a critical input for financial product design and innovation, for marketing and product adoption and for effective consumer protection. Understanding the limits to rationality – and what can be taught or modeled – can also help to identify where default mechanisms and other programmatic or policy approaches may be preferable to financial education. Finally, financial capability efforts are more likely to be effective when they take into account family and community dynamics as well as an understanding of the individual consumers they are trying to reach. This includes linking to programs on the ground which can help put to use the information and skills that are being learned. 

A recent Financial Times article entitled, “Innovators don’t ignore customers” argued that the rapidly dropping share price of Netflix, a DVD rental and online film service could be explained by the fact that the company lost touch with what its customers wanted. Keeping a sharp eye on client demand is thus not only the responsible or developmental thing to do–it simply makes good business sense.