Product Design

product-designA principle in responsible finance is to design and deliver the right products and services that meet customer needs and preferences. Faster and innovative delivery as well as excellent customer service are fundamental to increase reach, maintain competitiveness and profitability. Importantly, financial services institutions need to diversify products to better serve their clients.

 

Credit

Lending to low-income clients has been done through several techniques over the centuries group lending, village banking, community savings programs or individual lending.  The uptake of credit products for poor households does not necessarily lead to substantial increases in income but it allows entrepreneurs to invest more in their businesses and gives households more freedom to smoothen consumption and predict cash flows.

Lending to poor customers poses a unique set of challenges to lenders: high operating costs to originate and then monitor small loans, securitizing and diversifying loan portfolios. Lending products can also be harmful to consumers. Borrowers can take up several loans from multiple institutions to cover their debt, running into the risk of over-indebtedness.

Digital credit models are also scaling up in emerging markets, giving access to credit to a much larger user base in low-income segments. Yet, digital credit products also raise several worries about transparency and disclosures as well as data security and privacy.

Lenders that adopt responsible lending practices reduce risks for both institutions and borrowers and can include practices such as simplified terms and conditions, pricing transparency, particularly on fees, flexibility in repayment schedules, pre and post communication with the customers, and improved authentication in remote areas.

Savings

Demand for savings products for low-income individuals have been growing exponentially over the past years. Savings accounts have proven to increase household and individual welfare and help families face adverse life events.

Savings accounts to low-income individuals are very costly for financial institutions to provide, particularly in remote rural areas. Technology has brought down costs dramatically as institutions can off-set high costs by cross-selling other products and yet usage and savings volumes still prove low. This is particularly true in markets where accounts have been automatically opened for low-income recipients.

In order to increase usage and commitment to savings, financial institutions need to take into consideration behavioral biases and other psychological biases towards savings, designing products to overcome such barriers. Labeled savings accounts and text reminders are successful examples of product features that increase savings commitment while maintaining high flexibility.  Research has also shown that digital savings accounts are particularly suited to women, who are inherent savers and yet face higher barriers to accessing a safe place to save due to mobility, time constraints as well as low levels of financial literacy. Digital financial services can address these savings barriers by offering accessibility, convenience, privacy and security.

Insurance

The delivery of insurance products to low-income clients, is a powerful tool to help low-income households protect themselves against risks and losses that can trap them in a vicious cycle of poverty. Microinsurance acts as a safety net and risk mitigation mechanism that can reduce the vulnerability of poor households to adverse life events. Microinsurance encompasses several products:  health, life, agricultural, disaster insurance and weather index based insurance. The uptake of micro-insurance products, however, has been traditionally low due to lack of consumer awareness and trust, prohibitive costs, liquidity constraints and the fact that often consumers struggle to understand the long term benefits of insurance products.

Consumer protection is critical to developing and distributing insurance products.  Empowering consumers so they can gain confidence and trust and be better positioned to use insurance products effectively.

The main challenge in consumer protection in microinsurance is to strike the right balance between effectively protecting the consumer and increasing access to microinsurance by promoting the development of the microinsurance market. Efforts to stimulate the market scale of microinsurance and increase access to insurance must be balanced against consumer protection needs, but in the long term there are synergies between the two. Given that effective consumer protection promotes stability, value, and trust in microinsurance, scale and access goals will also ultimately benefit from consumer protection. Regulators and supervisors, industry players, and consumers themselves all share the responsibility to develop a fair and sound microinsurance industry.

Payments | Remittances

Digital payments are currently the most popular digital financial product globally, largely because digital delivery makes it easy, cheap and convenient to transfer money. Mobile phones are indeed the cheapest challeng for poor people at process small value transactions and send money. M-PESA in Kenya started by responding to the need of Kenyan worked in cities to send money back to their families in rural areas and set the premise for a much expanded set of branchless banking services.

The success of digital payment services such as M-PESA, Tigo Pesa, Airtel Money, Easypaisa, B-Kash and others in Kenya, Tanzania, Pakistan and Bangladesh allow providers to process frequent and small value transactions in real time as well as creating the opportunity to deliver other financial services.

Digital payments are thus fundamental in supporting the flow of remittances from urban to rural cities and also across borders by reducing the cost and time of transactions. Remittances sent home by migrants their home countries totaled $436 billion in 2014 and are estimated to reach $516 billion in 2016, according to World Bank data. Leveraging mobile to send remittances across borders can dramatically change the landscape of remittance providers. However, the supporting ecosystem, including favorable regulatory systems and agile and secure domestic payments infrastructures needs to also innovate and allow for experimentation with new business models. .

There are other barriers to wider uptake and development of payment systems, including product complexity, poor user interfaces, lack of liquidity and/or reliable agent networks, and lack of interoperability in many markets.  Responsible mobile payment systems need to develop simpler, reliable and interoperable solutions giving customers maximum choice and allowing payments to scale responsibly and serve as gateway to other products and services.

SME Finance

Small businesses are essential for economic growth because they account for over 95% of businesses worldwide and provide more than half of all jobs. According to World Bank Group research, the poorer the country, the greater the share of employment provided by small and medium enterprises (SMEs). Yet 200 million businesses worldwide don’t have the financing necessary to invest and create new jobs.

SME financing remains a key constraint to SME growth and development, especially in emerging economies. Access to finance is disproportionately difficult in low income countries and banks’ ability to offer loans to SMEs decreases with the level of countries’ incomes. Other common sources of finance for SMEs such as leasing and factoring are also not yet well developed in low income countries. As reported by the International Financial Corporation (IFC), a “funding gap” of more than $2 trillion exists for small businesses in emerging markets alone.

Several initiatives, particularly the G20 Global Partnership for Financial Inclusion (GPFI), which established the SME Finance Forum in 2012, are working to improve and develop policies supporting SMEs growth and boosting investments in emerging markets.

Improvements in technology are also allowing SMEs to access business loans, build credit scores, and manage their business and cashflows needs more effectively. A new wave of Fintech products has emerged tailored to the needs of small businesses. These include marketplace (“peer-to-peer”) lending, merchant and e-commerce finance, invoice finance, online supply chain finance and online trade finance.

A global phenomenon for small businesses, FinTech has rapidly emerging new players across developed and growth markets. Some innovative business models are seen in emerging markets first and may spread to the rest of the world over subsequent years.

Several enabling factors are critical to ensure rapid growth, with the availability of data, a supportive regulatory environment, the provision of sufficient investor capital and financial education among the most relevant. While FinTech’s impact is expected to be powerful, several risk factors need to be taken into account, on the micro and macro levels. Risks include limited protection of retail investors, the potential extension of funding to unworthy borrowers, but also systemic risk following from a partly unregulated and opaque sector.