A Change in Behavior: Innovations in Financial Capability

17 Apr 2016

1-coverAfter over a year of research, we at the Center are excited to launch A Change in Behavior: Innovations in Financial Capability, the result of a project funded by JPMorgan Chase & Co. which assesses the landscape of financial capability-building interventions across the globe, with a special focus on Mexico and India. Highlighting an industry trend in its early stages, the report explores innovations that focus on triggering positive customer behaviors, especially at critical decision-making moments, such as when signing up for and using financial products, or when putting money aside to meet savings goals.

We define financial capability as the combination of knowledge, skills, attitudes and behaviors a person needs to make sound financial decisions that support well-being. This definition reflects an emerging industry view that focuses attention on behavior. Financial capability focuses on behavior change as well as the customer’s end state: financial health and well-being. This school of thought contrasts with traditional financial education, which has generally been more focused on the transfer of knowledge, skills, and information.

The financial capability approach stems from the growing body of industry research which reveals an important gap between knowing and doing. When techniques informed by behavioral economics are integrated into client interventions, people are more likely to translate their knowledge into action. While traditional financial education methods still predominate, our research identified a host of exciting financial capability innovations. These interventions range from personal counseling, to mobile apps that help customers understand their finances at a glance, to soap operas that embed financial capability messages and lessons.

In our assessment of over 100 innovations, we identified seven behaviorally-informed practices that show great promise for application in financial capability-building:

1. Teachable Moments. Reach consumers when they are making financial decisions.
2. Learning by Doing. Let consumers practice using products.
3. Nudges, Reminders, and Default Options. Timely reminders and default options support good habits.
4. Rules of Thumb (Heuristics). Mental short cuts help turn learning into habit.
5. Make It Fun. Games and humor aid learning and retention.
6. Customize It. Tailor advice to an individual’s specific financial situation.
7. Make It Social. Leverage the influence of peers and culture.

As the number of first-time consumers of formal financial services expands rapidly over the next decade, it will be imperative that new consumers are able to use products actively for their own benefit. To address the huge financial capability gap, action from many stakeholders is required, including financial service providers, governments, and social service organizations that interact with clients at critical moments. The provider case for addressing financial capability rests on the risk reduction, enhanced product use, and long-run opportunity for growth that a capable clientele can bring. The policy case involves the government’s role as custodian of a safe and stable financial system that protects the vulnerable. And for the consumer, financial capability means greater confidence in using financial services in a way that promotes their ultimate outcome – financial health.

A Change in Behavior argues that a major redeployment of resources is needed to ensure that the millions of dollars spent on traditional financial education interventions yield substantial benefits. Its recommendations include enabling financial service providers to take a greater role in building financial capability; engaging social service agencies, such as hospitals that provide financial counseling to families experiencing a health shock; and strengthening governments’ focus on shared responsibility among stakeholders.

The full report and appendices, including dozens of examples of innovations in financial capability, are available online here. For your navigating ease, A Change in Behavior: Innovations in Financial Capability includes the following elements:

  • Abridged Report (18 pages)
  • Full Report (60 pages)
  • Frequently Asked Questions (FAQs) – based on discussions with experts, including roundtables in Washington, D.C., Mexico City, and New Delhi
  • Financial Capability Building Practices in Mexico
  • Financial Capability Building Practices in India
  • Catalogue of Innovations
  • Executive Summary

Improving Access and Usage of Financial Products and Services in China

Julia Arnold, Sara Willis
05 Apr 2016

MetLife Foundation’s goal is to improve financial inclusion across its footprint, which includes economically and geographically diverse markets. Ensuring that low- and moderate-income families in these markets can acquire and successfully use the products and services they need to build a better, more secure life is complex and therefore requires innovative solutions that reach different consumers in different ways.

In China, our newest approach to improving the financial health of everyday consumers is through harnessing the power of social entrepreneurs. As part of a broader global push to strengthen ventures and organizations working in the area of financial inclusion, we’ve teamed up with Verb to run a series of competitions, called Inclusion Plus. Beginning on May 19, 2016 we will invite social enterprises (nonprofit and for-profit alike) throughout China that are focused on increasing access and use of financial services among low- to moderate-income people to enter their products, services, or programs for the chance to win grant capital and mentoring from MetLife advisors.

Opening a competition in China meant we needed to better understand the local financial inclusion landscape. We know that the rapid economic growth in China over the past 20 years has been the envy of the world. More surprisingly, however, is that between 2011 and 2014 China made significant strides toward financial inclusion adding around 180 million adult account holders, bringing the number of adult account holders to 79 percent of the population. According to the 2014 Global Findex, these account holders include marginalized groups such as women and poorer rural households, though the bulk of China’s unbanked population resides in rural areas, and over half of whom are women. As such, the Foundation’s focus for the Inclusion Plus competition is on ensuring the unbanked or underserved populations, such as low-wage workers, smallholder farmers, small business owners, and migrant workers have access to affordable and convenient financial services and products which focus on day-to-day financial well-being.

In addition to China’s economic growth story, its rapid decline of poverty is worth noting. Since the 1980s, China’s poverty rate has fallen from 52 percent to around 11 percent as of 2010. This incredible progress comes with the implementation of promising policies for financial inclusion such as banking reforms, policy shifts that give way to new types of financial institutions, and a focus on uptake of bank accounts. New technology-driven solutions have also begun to emerge. These changes contribute to the fact that nearly eight in ten Chinese have a bank account, according to the 2014 Global Findex.

To continue moving the needle on financial inclusion, there are three inter-related opportunities for impact in the near term.

  • Mobile Technology: With more than one billion accounts among the country’s three mobile operators (China Mobile, China Unicom, and China Telecom), China leads the world in mobile phone users. In 2015, over 675 million unique mobile phone users were added. In fact, Chinese FinTech firms now have more clients than the largest banks. China has leap-frogged many other countries in using digital/mobile payments with 416 million people using online payments systems in 2015 and 80 percent of Chinese accessing the internet via mobile phones.  Among those providing these services is Alibaba, a global e-commerce company, which offers its 300 million users a mobile payment tool called Alipay, which allows users to transfer funds or purchase goods. WeChat, a mobile communication service from the investment company Tencent, provides P2P payment services and goods purchase, as well as communication with other users. WeChat had more mobile transactions over the Chinese New Year than PayPal had during 2015. Both of these products lay a solid foundation to understand customers’ needs and behaviors to design and offer a wider range of appropriate, convenient, and affordable financial services.

Like much of the developing world, mobile solutions present an affordable means to reach China’s unbanked and underserved populations, who face obstacles to accessing quality financial services. Access to formal credit is difficult and limited; only 10 percent of adults borrowed from a bank in 2014. China’s growing FinTech industry – with accompanying regulation to support qualified lenders – holds part of the answer to two of the most marginalized groups – rural households and migrant workers.

  • Rural Inclusion: Though China has made impressive progress toward ensuring a majority of rural adults have a bank account, 234 million Chinese do not have bank accounts. Of these unbanked, 71 percent live in rural areas. Being unbanked and operating largely in cash further leaves rural low income populations vulnerable to theft, fraud, and insecurity, and unable to take advantage of the myriad benefits of being included in the formal financial sector, including the ability to borrow. Not for profits have entered this space, including Accion, Positive Planet (in corporation with Huimin, a leading Chinese grassroots MFI) and Opportunity International, introducing formal borrowing to compete with the traditional informal lending.  Accion recently launched a new management training program with CAM and CFPA to ultimately provide more than one million microfinance clients in China with better services. Scaling up similar approaches will be essential to ensuring appropriate services for the remaining clients who remain outside the formal financial system.
  • Migrant Inclusion: Internal migrant workers encounter difficulties accessing banking services due to China’s hukou system – essentially a passport for internal travel – which makes accessing employment protection, education, and health care difficult outside of one’s home area. In cities, migrants cannot always open a bank account or get a loan, and they often forego their financial accounts when moving from rural areas to urban ones because the products are not portable. Additionally, migrants’ families left behind in rural areas often find their formal social services dwindle as the populations of their villages emigrate to urban centers. In field interviews, Chinese entrepreneurs acknowledged the problem of this large population segment, yet there was no ready solution.

In addition to not-for-profit players, China’s government has made financial inclusion a focus of its five-year plan. As part of this plan, an objective of the government is to enhance financial inclusion via digital finance through conducive policies that will support growth and encourage greater innovation. Today, China has become one of the major centers for digital financial services and FinTech and is, in turn, leading the charge toward moving beyond access to customer engagement. While China is relatively well-positioned on usage of accounts, especially savings, there is an opportunity for banks, MFIs, and other providers to collectively adopt customer-centric product design and solve pain points in delivery, access, and utilization. Through our upcoming Inclusion Plus competition, we anticipate seeing even more innovations emerge, which will build on and amplify existing efforts. We look forward to seeing growth and innovation in China, and ultimately the improvements people are able to make in their lives through the use of high quality financial services.