When an Equity Bank client in Kenya was asked if she saw value in financial education, she replied without hesitation, “Yes, but I thought it was only for rich people.” Delighted with this ringing endorsement the interviewer never asked her what financial education meant for her. If she had we might have gone down a different track.
Intuitively, financial education seems like a good thing. Many experts will tell you that it or financial capability are important for achieving financial inclusion. Yet, the research tells a contrary story: financial education, building financial literacy, or financial capability interventions in developing countries have little effect on changing financial behaviors, including the uptake and usage of formal financial services. I keep asking: What am I missing in this picture? Why doesn’t it add up? With 12 years of experience in this space I would argue that there is much confusion about what financial education is, what it can do, and what we want it to do.
Financial institutions have much to gain from effective financial education, as, of course, do clients. At present, however, the field is torn between two paradigms – a money management paradigm and a product usage paradigm. Though both have merits, neither gets it quite right. I propose a more client-led perspective as a way to ensure that financial education can become more meaningful for the user.
The original advocates of financial education were primarily traditional financial educators who focused on money management basics: debt management, the importance of savings, and budgeting. Client studies identified the drivers of BoP financial behavior to be: to protect one’s scarce resources and intermittent income, and to build assets and a steadier, more secure revenue base for the household. In 2002, Microfinance Opportunities (MFO), in partnership with Freedom from Hunger (FFH), developed the Global Financial Education Program (GFEP, now known as the Financial Education Core Curriculum) with the support of Citi Foundation. It saw a role for financial education to assist the poor in addressing these challenges.
With time, the objective of financial education has shifted from better money management toward a more product-based approach that supports financial inclusion. Building financial capabilities is now seen as necessary to enable an increase in the uptake and usage of formal financial services. With the advent of digital financial services this has became even more apparent.
If we look more carefully at how clients operate and what they say they want, a third approach emerges.
A fundamental question that will set us onto this path is whether clients are satisfied with their own money management skills. Client research had demonstrated that the drivers of financial behaviors needed to be understood in the context of the instability of income flows at the base of the pyramid. Lacking few discretionary funds, poor people find planning ahead challenging. Faced with endless shocks, saving is hard and most “plan backwards“, looking where the money went and making what money they have work for them. In the early days of financial education, this finding may have led program designers to ignore the value the customer brought to the table in terms of existing skills in money management. The reigning perception was that while the poor may be expert money managers within their largely informal financial environments, these financial capabilities do not readily translate into effective use of formal financial services and practices.
However, financial diaries studies (see here and here) indicate that many low-income people feel confident in their money management skills and in their proven ability to use formal services. After all, clients readily learned the discipline of microfinance and adapted what was on offer to their particular needs.
Today, poor people express the desire to be part of the 21st century. In the current financial services environment, this tends to mean the use of electronic cards and mobile money. Both require the low-income customer to leapfrog into an unfamiliar world of banking and technology and develop trust and confidence in new types of institutions, new delivery channels, and sometimes new products. With high dormancy rates for mobile money, estimated by GSMA to be 65 percent, the question is whether building financial capabilities could lower this percentage. These challenges led to the financial capability school of thought which promotes product-linked financial education.
However, recently, a more client-led focused approach to financial education has begun to gain traction, with an emphasis on responding to the users’ needs. Themes that emerge as current client concerns include the processes involved in using the new technologies and encouraging trust and confidence in virtual banking. Many people at the base of the pyramid are concerned with safety and security, and mobile banking is often viewed as risky, which can be a constraint to usage. Countering these concerns should be in the interest of a financial service provider offering branchless banking products.
To date, the evidence suggests that there is a mismatch between what clients want, what is being offered, and how it is being delivered in the name of building financial capabilities. A few considerations that could dramatically change the financial education scene:
- Value to customer – of financial education. Basic financial management and product–led financial education remain relevant but are not always at the center of the poor consumer’s concerns. Poor people, unlike their better off counterparts, often do not see financial education as an advisory service but rather as a prerequisite for getting a loan. It is one of the costs of accessing credit, as my friend John Gitau points out. This needs to change if customers are to find value in financial education.
- Tailoring to client segments. We have tended to concentrate on one size fits all. But taking a client perspective with its problem solving and money management approach to financial education we find that a more segmented perspective is needed. The daily survival needs levels of clients prescribe different liquidity needs and therefore financial capability priorities than those needed by those with more stable income who seek to protect their gains.
- Personal counseling. Classroom training has dominated the mode of delivery of financial education. While this works for the more generic issues such as debt management, savings and budgeting, for most of us, the base of the pyramid included, money management and problem solving are very personal matters around which we want privacy. Personalized counseling, much of it focused on problem solving, has a role to play here if financial education is to have value for the customer. Ways to deliver on this need are emerging. Building on their collaboration with Microfinance Opportunities, the Tanzanian Consumer Advocacy Society offers successful individual advisory services which focus on problem solving.
- Delivery innovations. New possibilities are also suggested by interactive voice platforms such as those developed by Juntos, using SMS reminders, or embedding the communication of key messages in the work of front line staff or agents.
The low measurable impacts of financial education should not be viewed as failures but rather as a wake up call that something is amiss. This blog is intended to open up the debate and broaden the scope of financial education to one that is more client-centric. There is a role for all three types of financial education discussed here, the “basics”, product-led, and client-led problem solving. The issues raised above suggest the need for providers of financial education to be clear about what they seek as results from their investments in education. They will also want to refocus and seek answers to the questions: What do existing and potential clients think they need to know? How can we deliver it in a format that is a win-win for both financial service providers and the customer?