Responsible Finance Forum

Research from the Field in Uganda: New Approaches in Delivering Financial Education

Oliver Schmidt
20 Apr 2018

As outlined in a workshop session at European Microfinance Week 2017, Financial Education (FE) is one of the pillars of financial inclusion. Without it, microfinance clients are not able to make informed and appropriate choices; they cannot compare the costs of financial products, understand the risks of failing to repay their own loans or of taking on someone else’s risk in cases of guarantees, or accurately assess how much credit, and what type, they actually need – if any.

FE may be important, but there are key challenges to its provision. First, the link between offering FE and achieving positive impacts are not always direct and clear. Evaluation of the outcomes of FE shows impact to be inconsistent – a function of that impact’s sensitivity to the content and delivery of the education.

Second, it is also unclear how, even if the content and delivery to achieve impact were standardised, financial education can be provided sustainably at scale. Provision of any type of training is costly. The Microfinance Centre, working with the ACCION fellowship program, has examined this issue and suggests that MFIs with a focus on customer-level outcomes would attract cheaper funding from social investors, and reap the benefits of more loyal customers and lower default rates. It remains to be studied if these incentives work for more than a limited selection of MFIs. Why? Because empirical tracking of customer-level outcomes is expensive. For the same reason, the ILO-approach of certifying FE trainers may have limited reach. This certification uses interactive learning and training materials, developed in collaboration with Microfinance Opportunities, Citigroup and Freedom for Hunger. While it ensures quality of FE training delivery, its cost might discourage MFIs from using those trainers.

New research from Uganda suggests some progress is being made on these two issues of proving impact and reducing cost. German International Cooperation (GIZ) partnered with Uganda’s Mountain of the Moon University (MMU) and the German Institute for Economic Research (DIW Berlin) to compare the impact of more typical FE training formats and the ‘Financial Literacy Ring (FLIR)’ – which is highly interactive, requiring participants to complete exercises and solve hypothetical problems about financial planning, saving, investment, credit and choice of financial institutions. The FLIR is conducted at participants’ workplaces; the more traditional format resembles a classroom lecture: it provides the same content in the same amount of time, but does not incorporate learner activities.

1,291 market vendors, 80 percent of them women, were randomly allocated between the two training formats and a control group that received no training. The study findings are encouraging for FE providers and promoters, in line with more recent literature which reports modest but significant effects of FE interventions with varying characteristics (lengths, delivery setting, etc.) These findings include:

  1. FE training, even as short as two hours as provided in this treatment group, does positively affect financial literacy. The differences between the two training formats are not statistically significant. Financial literacy is measured by a scale comprising five surveys that assess respondents’ financial knowledge, considering both whether a question was answered correctly and its difficulty.
  2. The FLIR, but not the ‘traditional’ lecture-training format, has a positive impact on investment behaviour and on savings behaviour. FLIR participants increased their average investment by US$27.71 – more than double that of those receiving the ‘traditional’ training format. FLIR participants increased their net savings by US$42.75, a 38% increase over the baseline six month earlier.
  3. Though positive trends were seen, there were no statistically robust effects of either training model in terms of behavioural change in financial planning, borrowing and understanding financial institutions.

The two models of FE provide a contrast between “active learning” and “traditional lecturing” within standardised lesson plans. The research finds that active learning has a clear positive impact on savings and investment outcomes, but weaker effects on debt-related outcomes. The outcomes suggest the active learning intervention is superior as it works via three mechanisms: increased financial literacy, self-control, and financial confidence, while lecturing only affects financial confidence.

Whereas these findings do not directly address the second issue of sustainability, the opportunity to produce significant effects with a highly condensed format – just two hours training at the worksite of the customer – is encouraging: such an intervention can be efficiently integrated into the marketing campaign of any financial institution.

The FLIR is comparable to the VisionFund approach, which has developed a set of very short training inputs that are delivered by its field staff as part of their usual routine of meeting groups. VisionFund combines visuals and stories with repetition. Like the FLIR, VisionFund’s approach draws on behavioural economic research.

It is clear to those of us working directly in this field that FE works: it does have positive effects on financial literacy and savings and investment behaviour. However, FE is not a panacea, it is not a miracle cure, and its success depends very highly on the design of the intervention, and whether it draws on learning and behavioural theory. It seems obvious that a less learner-centred training format is less effective, and the research bears this out. However, the experiences shared here suggest that it is also less efficient. It is thus important for any MFI – or social investor – to ensure that the learner-centred concept is not watered down into a de facto traditional delivery in a short-sighted attempt at cost control, which misses the longer-term benefits of increased financial capability both for the institution as well as the clients.

Originally posted on European Microfinance Platform’s website.

Financial Inclusion Responds to the Zuckerberg Moment

Elisabeth Rhyne, Managing Director, CFI
13 Apr 2018

It’s not just social media. We need a fresh look at how financial data is protected, too.

> Posted by Elisabeth Rhyne, Managing Director, CFI

Mark Zuckerberg defended Facebook’s handling of customer data yesterday before the U.S. Senate, and many of us at Accion and the Center for Financial Inclusion were riveted. Not that the testimony was especially compelling as television spectacle, but because the issues at stake are so important both for our own lives and for our work.

I did a quick scan of the staff here in our Washington, D.C. office, and would like to share some of their thoughts.

Many of us identified with the widespread shock toward Facebook for using our data (or allowing others to use it) in ways we don’t like and without our clear consent. “It’s hard to separate the relevance for our work [in financial inclusion] from my anger at the relevance of these events for my life,” said Sonja Kelly. For Allyse McGrath, the first thought was a sense of relief that policy makers are “actually doing something about protecting our data” which she quickly amended to “at least starting to explore how to do so.” Other folks are more skeptical and wondering whether legislators will do anything once the furor dies down.

Data privacy and data security are central to the success of financial inclusion. As Smart Campaign director Isabelle Barres pointed out, the Campaign enshrined data privacy as one of the seven Client Protection Principles from the very beginning. Through the years we have seen a somewhat peripheral principle become increasingly prominent, as customer data became more digital and more abundant. “There are absolutely some data abuses, and regulators need to step in,” she said. “And perhaps there is hope that the focus on Facebook will be a trigger to force companies to think about consumer data more carefully.” More broadly, our staff are concerned that the proliferation of data collected without much regulation can lead to the kinds of aggressive push marketing we are beginning to see with digital credit delivery in some countries.

Senators asked Zuckerberg a lot of questions about Terms and Conditions (T&C). Long and legalistic, people do not read the Facebook T&Cs, and if they did, they would not likely understand them. In such a situation, does consent really exist? This problem is exactly the same in financial inclusion. On many mobile money platforms, for example, T&Cs cannot be read on the phone when the customer is actually using the service. Customers have to log on to an internet-connected computer to download the T&Cs – and we know almost none of them do. What have these customers given away? They do not know.

The solution proposed in the hearing today was to ask customers to opt-in to data sharing rather than setting sharing as the default and asking them to opt out. This choice is just as relevant for payment and credit apps as it is for Facebook. The presumption should always be in favor of privacy and the customers’ right to choose how their data is used.

Coryell Stout of the Accion Venture Lab team noted that fintech start-ups often do collect enormous amounts of data. Venture Lab vets the founders and managers of their investee companies thoroughly, with an eye toward social mission. They also review data use and management policies. They do not invest until satisfied that the data is used to benefit customers. However,  the potential for misuse exists, if data is in the hands of people with other motivations. “We know that companies are collecting a lot of data. It needs to be secure, and we need more clarity about who controls the data fintechs collect.” Governments may need to help create that clarity.

The landmark European law on data privacy, the General Data Protection Regulation, which goes into effect next month, comes down solidly on the side of consumer ownership and control of data. Yesterday’s hearings suggest that the U.S., which has until now had a much more pro-company perspective, may become somewhat more sympathetic to the European approach. Regulators in the emerging and frontier markets in which we work are just starting to come to grips with the issue, and may forge their own path, as India and China are doing.

The consequences of misuse of consumers’ social media data can be significant – not just annoying ads, but election meddling and more. But the consequences of misuse of financial data can be even more direct: money lost to scams, theft and mis-selling. As we watch the public conversation play out over the broad questions of data ownership, we need to ensure that a similar conversation is moving forward to ensure that the highly sensitive data financial service providers handle – whether they are banks, microfinance institutions, telcos or fintechs – is secure and properly used.

Featured image credit: Alessio Jacona via Flickr Creative Commons

This post was originally published on CFI’s website.

6 Ways Microfinance Institutions Can Adapt to the Digital Age

Greta Bull
13 Apr 2018

Photo: Hailey Tucker, 2017 CGAP Photo Contest

FinTechs, neobanks, blockchain, super platforms, artificial intelligence – with all the exciting changes in technology creating new business models for financial inclusion, it’s easy to think that older models like microfinance have been eclipsed. But have they? There’s no doubt that microfinance institutions (MFIs) are highly motivated to serve the poor. But to continue playing that role in the long run, they need to enter the digital age by embracing new technologies and rethinking their business models.

Before joining CGAP, I worked for 10 years with MFIs in Latin America and Sub-Saharan Africa, often on implementing digital strategies. I have seen a lot of attempts by MFIs to deal with the fundamental challenges posed by digital technology, and many painful lessons learned along the way. Generally, what I have learned is that the key is to have a clear objective, start small, gain experience and grow your digital business gradually. Here’s a roadmap for getting there.

Start with a business plan

First and foremost, you need a clear idea of what you’re trying to achieve with a digital solution. I’ve seen many MFIs invest in technology or agent networks without the faintest idea why they were doing it or a business plan to guide it. Digital solutions can lower operating costs, help in acquiring customers and improve the customer experience, but it’s easy to leap into a technology solution only to discover that the costs of running it are so high that you’re losing money.

I once reviewed an MFI in Latin America that provided a hugely popular bill pay service via agents. The clients loved it, but that was the problem. For every bill that was paid, the MFI lost money because it priced the service incorrectly and didn’t think about adjacencies, like deposit collection, that might have contributed to its core business. The more popular the service got, the more money the MFI lost, with no benefit whatsoever to its main microfinance business. MFIs should clearly define their business objectives before they even think about investing in technology. Develop a business plan and cost out any solution before building it.

Agents instead of branches

Agents can help MFIs operate more efficiently and increase their customer outreach, if managed well. A recent publication from the International Finance Corporation based on its work with nine MFIs in Africa, shows the cost of handling transactions via agents is about 25 percent lower than through branches. Yet managing an agent network can still be costly, so it is important to do it carefully and build slowly. GSMA estimates that mature mobile network operations run by mobile network operators (MNOs) on average pay out 54.4 percent of total revenues in agent commissions. This is an expensive business to run. The focus should be on recruiting active agents who deliver volume rather than on boosting agent numbers. It is a classic mistake to try to grab market share by opening as many agents as possible all at once. Many big players, including banks, MNOs and MFIs, have failed by making this mistake. Agents introduce new risks for MFIs, particularly operational risks, and these should be thoroughly understood before moving into agent banking.

Invest in a flexible IT solution

IT systems, not bricks and mortar, are the biggest legacy costs of banking. You can close a branch relatively easily, but as anyone who’s been through an IT system migration knows, it’s a lot harder to switch IT systems. Most MFIs have IT systems that are cobbled together, don’t speak to each other and require work-arounds. Invest in a good IT system that has the flexibility to grow with the business into the future. There are good companies out there that can provide useful services in this area, including companies that specialize in technology solutions for MFIs.

Digitize your data going forward, not backward

Many MFIs still keep paper records. They have an incredible amount of data collecting dust on their shelves. While digitizing all of that data might be useful, it can also be overwhelming. Rather than getting bogged down with digitizing old data, MFIs should prioritize investing in data management systems that will allow them to start capturing data going forward. Figuring out how to structure the data so they are useful and finding ways to efficiently and accurately collect data electronically should be the priorities. Digitizing the old data is a bonus.

Given the challenges of digitizing their own data, some MFIs have explored algorithmic scoring of unstructured third-party data, such as call records and social media feeds. I would suggest that MFIs might want to invest in using their own data well before exploring third-party data sources. MFIs’ own data are likely to be of higher quality and more predictive, and they own the data and can use the data as they wish — for credit underwriting, but also for gaining better insights into customers and understanding the impact that taking credit has on their lives. Data will be a powerful driver of financial services delivery in the future, so the sooner MFIs grasp this nettle, the better.

Be customer-centric

Really understand your customers’ needs and build your digital products and services around fulfilling them. Think of this not only in terms of what services you provide, but also how you provide them. Research shows that there is a strong link between customer satisfaction and business performance. CGAP’s Customer-Centric Guide addresses some of the core challenges and opportunities financial institutions face. Remember that one of microfinance’s comparative advantages is precisely that it is not an algorithm. MFIs are close to their customers and know their needs, and this potentially gives them a longer-term advantage over new digital rivals. Interestingly, a recent CGAP study on digital credit in Tanzania showed that two-thirds of digital credit borrowers had not reduced their use of formal loans after taking digital credit, and 60 percent of digital credit borrowers surveyed used formal loans for business purposes such as investment or payroll. Digital credit is not necessarily a substitute for microfinance.

Access digital infrastructure through partnerships

MFIs are never going to be systematically important payments players like MNOs and banks, but that does not mean they cannot leverage this digital infrastructure through partnerships. MFIs have two things that these large organizations want and need: a license and a customer base. It is worth remembering that CBA, a small corporate bank in Kenya, became the country’s largest bank by customer numbers virtually overnight thanks to its partnership with M-Pesa on M-Shwari. But it is also worth remembering that the big players are rarely going to knock down MFIs’ doors to work with them. And if they do, they will be negotiating from pure self-interest. Most MFIs are ill-equipped to handle these negotiations, so it is important to stay educated about the larger ecosystem and the technological and business trends driving it.

Microfinance has a relatively good track record of serving the poor in a socially responsible way. But it must adapt to continue serving those customers in the face of new and very different competition. To be successful, MFIs will need to tackle this challenge head on.

This blog was adapted from CGAP CEO Greta Bull’s remarks before the Customer Centricity Learning Event on February 21, 2018. This year’s event was jointly organized by the Social Performance Task Force (SPTF), CGAPDvara and LeapFrog Investments.  

The blog was originally posted on CGAP’s website

Rabobank desensitizes client data during testing phase with IBM

13 Apr 2018

Rabobank is working with IBM to use cryptographic pseudonyms on its client’s personal data to innovate and comply with new financial regulations in the EU. Desensitized data makes it easier for Rabobank to use the data for performance testing for the development of new innovative technologies and services, such as mobile apps and payment solutions.

Starting on 25 May, the General Data Protection Regulation (GDPR) seeks to create a harmonized data protection law framework across the EU and it aims to give citizens back control of their personal data, whilst imposing strict rules on those hosting, moving and ‘processing’ this data, anywhere in the world.

Rabobank is addressing GDPR compliance across a number of activities. In one project with IBM the bank has cryptographically transformed terabytes of its most sensitive client data, including names, birthdates and account numbers, into a desensitized representation – meaning, it looks and behaves like the real data, but it’s not.

“It’s critical for Rabobank to use data which is as close as possible to production during the testing phase, so when we go live, we are confident that our services will perform,” said Peter Claassen, Delivery Manager Radical Automation, Rabobank. “Being able to test and iterate using pseudonymized data is going to unleash new innovations from our team bringing even more security, innovation and convenience to our clients.”

Pseudonymization enhances privacy by replacing most identifying fields within a data record by one or more artificial identifiers, or pseudonyms, i.e. replacing a real name with a fictitious one. In addition, for GDPR the data is also processed in such a way that it can no longer be attributed to a specific data subject without the use of additional information. For example, without pseudonymization knowing the date of birth, and the home address can reveal the person’s identity.

“IBM analytics software combined with our cryptographic desensitization engine achieves pseudonymization by converting the data into individual hash-based token keys which are completely impermeable today and in the future, even from a fault-tolerant quantum computer many years from now,” said Michael Osborne, cryptographer, IBM Research. “This research is now a commercial technology available to address multiple compliance legislations, cross industry, around the world.”

Rabobank and IBM Services have been running the project for the past year. Multiple key applications and platforms have been pseudonymized, including the current bank account and savings systems on mainframe, Linux, Tandem and Windows platforms.

This post was originally published on RiskTech Forum’s website

Blockchain & Distributed Ledger Technology (DLT)

13 Apr 2018

Blockchain is one type of a distributed ledger. Distributed ledgers use independent computers (referred to as nodes) to record, share and synchronize transactions in their respective electronic ledgers (instead of keeping data centralized as in a traditional ledger). Blockchain organizes data into blocks, which are chained together in an append only mode.

  • Blockchain/ DLT are the building block of “internet of value,” and enable recording of interactions and transfer “value” peer-to-peer, without a need for a centrally coordinating entity. “Value” refers to any record of ownership of asset — for example, money, securities, land titles — and also ownership of specific information like identity, health information and other personal data.

Distributed ledger technology (DLT) could fundamentally change the financial sector, making it more efficient, resilient and reliable.

  • This could address persistent challenges in the financial sector and change roles of financial sector stakeholders. DLT has the potential to transform various other sectors as well, like manufacturing, government financial management systems and clean energy.
  • Since this technology is still nascent, the World Bank Group doesn’t have general recommendations about its use for international development.  We are in dialogue with standard-setting bodies, governments, central banks and other stakeholders to monitor, research and pilot applications based on blockchain and DLT.
  • However, waiting for “perfect” DLT solutions could mean missing an opportunity to help shape it. To understand how DLT can address challenges in the financial sector requires both research and real-life applications and pilots.
  • It also requires resolving consumer protection issues, financial integrity concerns, speed of transactions, environmental footprint, legal, regulatory and technological issues that arise with the advent of new technology.
  • DLT applications will likely be incremental, and will likely first replace processes and activities that are still manual and inefficient. (Such as reference data maintenance in payment and settlement systems, trade finance, syndicated loans, and tracking provenance of agricultural products and commodities, their subsequent sale or use as financing collateral.)
  • Eventually, DLT could increase efficiency and lower remittance costs, and potentially improve access to finance for unbanked populations, who are currently outside the traditional financial system.
  • Messages based on WBG’s fintech note on Distributed Ledger Technology and Blockchain, published December 2017.

Last Updated: Apr 12, 2018

This post was originally published on The World Bank’s website

How to Build Inclusive Digital Economies

Atul Mehta, Ceyla Pazarbasioglu and Jose Luis Irigoyen
13 Apr 2018

By Atul Mehta, Director, IFC, Telecom, Media & Technology, Fintech, Venture Capital & Funds;Ceyla Pazarbasioglu, Senior Director, World Bank Group, Finance, Competitiveness and Innovation Global Practice; and Jose Luis Irigoyen, Senior Director, World Bank, Transport and Digital Development Global Practice

If we wish to create a future built on shared prosperity, digital technology will be critical.

Today, of the world’s 10 largest companies by market capitalisation, six are technology companies. And of those, only two were in the top 10 just five years ago — which gives you a sense of how quickly the global economy is being disrupted.

In fact, as technology innovation accelerates, it may be the best path to inclusive growth. Extending Internet access in developing countries to levels seen in developed countries could enhance productivity by as much as 25%, according to Deloitte. The resulting economic activity could generate USD 2.2 trillion in additional GDP and more than 140 million new jobs.

At the World Bank Group, we have been putting quite a lot of thought into understanding what it takes to create a successful and inclusive digital economy, in light of our mission to end extreme poverty and boost shared prosperity. Technology can be a force for good — by promoting economic inclusion, efficiency, and innovation. But it can also cause upheaval — by displacing jobs or imperiling the security of personal and government data, and even critical infrastructure. And it can widen the digital divide — increasing the gap between those who benefit from technology and those who are excluded and risk falling further behind. That’s why technology’s risks and opportunities must be carefully managed.

We have identified key ways to do this:

1) Strengthen Digital Infrastructure: By this, we mean the system of broadband cables, mobile network operators, towers and data centres that allow everyone and anything to connect to the Internet. More than 6.4 billion connected devices existed in 2016. That number is expected to increase five to 10 times over the next four to five years.

Yet we have a fundamental challenge: Today, 4 billion people lack access to the Internet, and one out of every four countries worldwide lacks connectivity. If you include those that are connected but have not yet developed a fully digital economy, then we’re talking about 61% of the world’s population who are living “offline.”

The development and business communities must shift mindsets to consider digital infrastructure as a necessary universal resource for all. We must begin to prioritise this connectivity in much the same way we do sanitation, power or even water. All countries can and must have access to this universal resource.

2) Improve Institutions, Digital Skills, and Literacy: Technology and innovation are changing the nature of work. Some studies estimate that as many as 65% of primary school children today will work in jobs or fields that don’t exist yet. We don’t know what that future will look like, but we do know that artificial intelligence and automation will increase. Many low-skilled jobs will disappear — up to 50% of current work tasks, representing USD 15 trillion in wages, could be automated already using existing technologies. The new job world that emerges will demand digital literacy and more sophisticated skills.

Governments have a key role to play in this new world by strengthening the “analog” foundations of the digital economy. They must develop policies and regulations that enable firms to leverage digital technologies to compete and innovate — and strong cybersecurity policies and safeguards will be critical here. They must strengthen educational systems, so people can take full advantage of digital opportunities. They must build accountable institutions that respond to citizens’ needs and demands.

3) Build Digital Platforms: The ability to transact online and through mobile phones reduces the cost of serving the world’s most hard-to-reach populations. Digital platforms — through new fintech providers and products — expand access to financial services and accelerate financial inclusion, which can improve people’s lives and transform entire economies.

Global e-commerce sites are expected to surpass USD 6 trillion in trade over the next five years. In China, companies selling on Alibaba reach some 100 export destinations— more than twice the average of offline firms — and more than 4.5 million small businesses and microenterprises have found access to markets and credit on Alibaba’s Taobao Marketplace. Yet few emerging markets are showing sufficient progress in the development of digital platforms.

Electronic ID systems are also crucial. At least 1.1 billion people across the world lack reliable forms of identification, according to the World Bank. Digital IDs enable people to quickly access services such as healthcare, education and banking, and help governments and businesses deliver services more efficiently — because they know who they’re dealing with. We must find ways to improve electronic identification to facilitate the transfer of social benefits. Without it, we risk creating a new class of poor — the digital poor — who will find it extremely difficult to catch up with the rest of society.

4) Expand Entrepreneurship: Technological change will cause considerable displacement in labor markets in coming years. Manufacturing, for example, will likely continue to shrink as a source of high-paying jobs. That means entrepreneurship will be crucial for job creation. Tech startups introduce new products, adapt cutting-edge technologies to local contexts and open new markets. The result: the potential to make a major contribution to sustainable economic development.

At the World Bank Group, it is our mission to make sure that developing countries can take advantage of technological change to drive sustainable economic growth. And we are making it a priority to work with governments, investors, development partners and thought leaders to connect the world in ways that minimise the risks and maximise the benefits of technology.

Digital technology offers a rare opportunity for shared progress. It must not be squandered. Unless we build an inclusive digital economy, the digital divide will widen, leading to a more fractured world. We must jumpstart digital development — and we can do so by focusing on these foundational elements.

Originally published on the OECD – Development Matters website