A Change in Behavior: Innovations in Financial Capability – An Interview with Elisabeth Rhyne

In this blog post we interview Elisabeth Rhyne, MD, Center for Financial Inclusion, Accion, and co-author of the recently published study “A Change in Behavior: Innovations in Financial Capability”.

Your paper is the result of a global search for innovative approaches to building consumer financial capability. Financial capability is not a well-known concept. What does it mean?

BRWe define financial capability as the knowledge, skills, attitudes and behaviors a person needs to make sound financial decisions that support well-being. The financial capability approach stems from the research that reveals an important gap between knowing and doing. We may know that savings is important, but we spend instead. Financial capability focuses on behavior change as well as the desired outcome: customer financial health. This approach contrasts with traditional financial education, which has generally been focused on knowledge and information transfer, often stopping short of considering whether information is acted upon.

What prompted you to carry out your scan of the financial capability landscape?

I was reading a lot of material by behavioral economists, and so I was aware of the power of their ideas. However, I didn’t see the kind of uptake in practice that I thought the ideas deserved. I wanted to understand why this wasn’t happening. I was also aware of technology developments that opened exciting new avenues for communicating with consumers, and wanted to find the innovators – organizations like Juntos, a data analytics firm which partners with financial institutions to create personalized SMS conversations containing reminders and tips for customers.

We are also grateful that JP Morgan Chase & Co. provided generous financial support.

What were your main findings?

First, financial capability building needs to happen at the right time and place, especially at the moments when financial service providers and customers interact. Education provided at other times is often ignored or forgotten. Much research finds little impact on behavior from traditional classroom-based education, partly because it is distanced from decision-making. Financial service providers have a tremendous opportunity to help customers get informed at exactly the time when they need the information for decisions. Similarly, social service organizations could provide financial capability support at specific “teachable moments” that is, when people experience life events with sizeable financial implications, like a health crisis or new job.

Second, financial capability interventions should be informed by the way real people really act. There is great learning on this from behavioral economics. To make it easier to spread that learning, we distilled seven behaviorally-informed practices that can improve the effectiveness of capability-building interventions (see box below). We’d like to see these practices used very widely.

You did a “deep dive” on financial capability innovations in India. What did you find?

There is a lot of financial capability innovation in India today, especially in the microfinance sector. For example, two of the most creative organizations using behaviorally-informed practices are Indian MFI – Janalakshmi and IFMR’s own KGFS program. These two programs integrate the “Customize It” practice deeply into their business models. KGFS field staff talk at length with customers about their financial lives and then offer advice on financial products tailored to that household’s specific situation. Janalakshmi has a similar interview tool it calls Kaleido to help customers understand their financial situation, set goals and receive ongoing counseling for achieving those goals.

We also found technology being used to deliver financial capability interventions at scale and cheaply. Indian Money, for example, provides automated advice online, backed up by a call center. While today this site addresses the middle class, innovations like Indian Money will become increasingly relevant to lower income people as smart phones and tablets spread.

On the other hand, the Indian government still relies heavily on strategies such as “financial education camps” in which massive numbers of people receive (often boring) lectures on financial products. In the drive to reach as many people as possible, effectiveness may be sacrificed. Such programs could be vastly improved if the seven behavioral practices we advocate were applied in their design and delivery.

What is the evidence base for financial capability interventions such as the ones you profile in the report?

This depends on the type of intervention. It is easier to gauge the results of interventions to increase use of a specific product or channel or increase savings, and harder to measure broad gains in financial capability. We see an urgent need for more systematic measurement and publication of results. Unfortunately, much of the data on interventions we profiled was proprietary. Providers such as Juntos claim to see significant increases in uses and account balances, but they have not made this data public. Also, many of the interventions we found were new and had not fully tested outcomes. Perhaps the best evidence will be when providers scale up from small pilots, as that will reveal that the interventions are having a significant impact.

How does the concept of financial capability intersect with customer protection?

In theory, more financially capable clients will be better able to protect themselves, so the two concepts are closely linked, and certainly they are often referred to in the same breath. In practice, however, we found very few financial capability interventions that specifically addressed how to be a safe and savvy consumer. We’d like to see a lot more. That said, financial capability building efforts could assist but not substitute for strong consumer protection standards and regulations.

Is financial capability a public good? How do you think these interventions could be best financed?

Both providers and the general public have an interest in increasing financial capability among the population. Most financial capability interventions pursue one of three aims: building broad financial life skills, being a more savvy consumer, or being a more active and capable consumer of financial services. In my view, there is both public and private interest in all three, but the first two sit closer to the public sphere while the last one is more for providers.

As for financing, we are very encouraged by what technology can do to make interventions much cheaper and more scalable. And a central point of the paper is that if providers integrate financial capability building into existing customer touch points, costs can be covered through product revenues. We do see an important role for public expenditures to integrate financial capability building into school curriculums, and especially for interventions specific to consumer protection.

What comes next?

The financial inclusion participants who attended our roundtable on financial capability in Delhi (December 2015) were enthusiastic and eager to apply the seven behaviorally informed practices. We would love to see a network of practitioners and providers formed to carry them forward. We hope the practices will be widely spread and known globally. Ultimately, we would like to see all financial service providers learn how to support the financial capability of their customers.

Please see CFI’s financial capability page for more details. There you will find the main report, the India deep dive and a Catalogue of Innovations which describes dozens of models identified in the landscape scan. This post cannot do justice to the rich variety of innovations we found.

Seven Behaviorally-Informed Practices for Effective Financial Capability Interventions:

  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.

Exploratory Analysis of Credit and GDP Growth Rates for Tamil Nadu

By Nishanth K & Irene Baby, IFMR Finance Foundation

This post is the next in the credit depth series. While the previous post covered trends in Credit-to-GDP variable for the districts of Tamil Nadu, this post will elucidate trends related to Compounded Annual Growth Rate (CAGR, henceforth referred to as growth rate)1 of Credit, Gross State Domestic Product (GSDP) and Credit-to-GDP variables.

Figure 1 plots growth rate of bank credit outstanding for various districts on the x-axis and growth rate of Gross District Domestic Product (GDDP) for these districts on the y-axis (both in constant prices). The colour of each bubble (as given by the scale on the right hand side) indicates the district’s share in total credit outstanding in Tamil Nadu in 2011-12. The size of each bubble indicates the proportion of each district’s Gross District Domestic Product (GDDP) to Tamil Nadu’s Gross State Domestic Product (GSDP) in 2011-12.

Figure 1: Credit Growth Rate versus GDP Growth Rate of Districts at Constant Prices (2004-05 to 2011-12)

  • Observation 1: There is a catch-up effect (or convergence)2 in credit growth rate, relative to Chennai for districts like Kancheepuram, Vellore and Tiruvallur. However, because of the wide disparities at the base level, the time period for the eventual ‘catch-up’ can be substantial. To elucidate, Chennai with credit growth rate of 23% and GDDP growth rate of 7.5% constitutes more than 50% of total credit outstanding in Tamil Nadu in 2011-12 (indicated by its colour- yellow). Kancheepuram, with credit growth rate of 26%, and GDDP growth rate of 15%- almost twice as Chennai’s- still only constitutes roughly 2% to the total credit outstanding in Tamil Nadu in 2011-123.
  • Observation 2: 12 of the 32 districts, (including Perambalur, Ariyalur, Nilgiris and Dharmapuri) in Tamil Nadu contributed less than 1% each to the state’s total bank credit outstanding. However, it is also to bear in mind that the outliers in the plot: Krishnagiri (on the extreme right, top corner), Tirupur (on the extreme left, top corner) and Ariyalur (on the extreme left, bottom corner) are recently formed districts (as explained in the previous post).

Figure 2 plots the credit-to-GDP ratio for each district in Tamil Nadu in 2004-05 on the x-axis and the same variable for 2011-12 on the y-axis. The colour of the bubbles (as given by the scale on the right hand side) indicates credit-to-GDP in 2011-12.

Figure 2: District Wise Credit-to-GDP Ratio in Tamil Nadu at Current Prices (2004-05 and 2011-12)

  • Observation 3: As discussed in the previous blog post, the credit-to-GDP ratio for Tamil Nadu in 2011-12 was approximately 71.4% (current prices). As evidenced from Figure 2, this high credit depth was primarily driven by Chennai (561% in 2011-12, current prices) and Coimbatore (131% in 2011-12, current prices).

Figure 3 shows a zoomed-in version of the same figure to better understand the trends in districts besides Chennai and Coimbatore.

  • Observation 4: Districts such as Tiruvallur and Vellore had low levels of credit depth with 15% and 18% respectively (current prices). Hence, there was a wide variation in the levels of credit depth in Tamil Nadu as of 2011-12.

Figure 4: Growth in Credit-to-GDP Ratio for Chennai and Coimbatore (2004-05 to 2011-12)

Figure 5: Growth in Credit-to-GDP Ratio for Select Districts (2004-05 to 2011-12)

Figures 4 and 5 show distinct patterns for different districts in their growth of Credit-to-GDP ratio from 2004-05 to 2011-12.

  • Observation 5: Districts such as Chennai (Figure 4) and Theni (Figure 5) have been growing relatively steadily whereas districts such as Thiruvallur and Dharmapuri have relatively stagnated.

Thus, the exploratory analysis undertaken clearly establishes the wide variation in distribution and depth of credit among districts in Tamil Nadu. Our future work will focus on better understanding the factors that lead to this difference, both from demand and supply sides.

(Note: Please note that the figures in this post are interactive files, you can hover or zoom in on these for more details.)

1 – CAGR = [(Amount / Principal) ^ (1/ Number of years)]-1
2 – http://www.econ.nyu.edu/user/debraj/Courses/Readings/BarroGrowth.pdf
3 – Credit-to-GDP of Kancheepuram has increased from 15% in 2004-05 t0 20% in 2011-12.


Notes from a Kenya trip

By Bindu Ananth

Last week, the leadership team of the IFMR Group had an opportunity to visit Kenya and among other things, it was a fantastic opportunity for us to get a sense of the trajectory of Kenya’s financial sector development relative to ours in India. This post is intended to share some of our broad impressions.

We arrived to headlines of a banking crisis in the local newspapers. Chase Bank, Kenya’s 11th largest Bank, experienced a run on the bank and had just been placed in receivership – the third such bank in the last few months. The issues seemed idiosyncratic – bad loans and governance failures and also appeared limited to the small-sized banks. Kenya has 42 commercial banks for a population of ~ 44 mn. (Contrast with India’s 100 or so Scheduled Commercial Banks for a population of 1.2 billion). In the meanwhile, new bank licenses have been put on hold by Governor Njoroge.

We spent a couple of hours understanding the business model of M-Kopa (excellent FT interview here). They have developed an excellent pay-as-you go solar energy solution for households who are off-grid and the service is seamlessly integrated with M-Pesa (the founding team is heavily drawn from Safaricom), rendering it a fully cashless operation. Interestingly, since the SIM-controlled unit gives them a “kill switch”, they are able to leverage the household’s eventual ownership of the solar unit to also finance other consumer durables such as water tanks and cook stoves. A neat solution to moral hazard! They have also launched a personal finance product that appeared to be in the same category as M-Shwari, the Commercial Bank of Africa’s unsecured loan product based on M-Pesa usage patterns that has rapidly scaled up since launch. The CFO explained to us their working capital cycle linked to consumer behaviour on payments (inevitable delays and non-trivial but stable write-offs) and the severe constraints on local financing options. In their case, all consumer payments directly are escrowed by the partner bank, eliminating servicer risk on M-Kopa although product risk remains key.


We were excited to hear their plans to launch in India although significant work will be required to replicate the cashless environment and to co-exist sustainably with the Indian Government’s rural electrification drive. We were very impressed with M-Kopa’s mission focus and the small, thoughtful touches everywhere on their beautiful campus. See this exhibit for instance:

This is the amount of kerosene that a typical rural Kenyan household uses that can be substituted for by an M-Kopa unit.

M-Pesa continues to be a significant driver of the financial system. Findex (2014) reports that almost 60% of adults in Kenya above the age of 15 have a mobile money account while that number in India is about 3%. It took us a passport and less than 5 minutes to open an account and start transacting with an agent near the airport. We overheard that ~ 40% of the Kenyan GDP now flows through M-Pesa. Even the Post Bank of Kenya, who we briefly met, uses the M-Pesa network. While the concerns on market dominance continue, the Kenyan Government apparently owns 35% in Safaricom Kenya now as a strategy to limit this risk.

In the Mor Committee’s Report, we talk about our vision of a “Payments Highway” – comprising a shared back-end of Aadhar, e-KYC, AEPS, UPI and the Payment Banks providing the agent networks for cash-in/cash-out. The belief is that once this infrastructure is in place, several users including lenders, consumer goods distributors and so on could leverage it seamlessly for payments without having to invest in creating a proprietary network. In Kenya, it felt like we saw this Payment Highway in action; with an important design difference though. Despite our significantly later start, if Payment Banks in India are able to pull off activation of a nation-wide agent network in the next few months, we would have a system characterised by publicly owned infrastructure at the back-end and atleast a few private players managing agent networks. In Kenya, the infrastructure and the agent networks are all controlled by a single provider. Our design should, in theory, enable more competitive outcomes for consumers.


In Rural Financial Services One Size Does Not Fit All

In a recent interview with The Hindu Business Line, Sucharita Mukherjee, CEO, IFMR Holdings, talks about our wealth management approach and why is it at the heart of our financial services offering. She also provides a perspective on the unique offerings through our rural branch network and talks about both our learnings and the journey so far.


How does the wealth management approach work in the rural market and when was it conceived?

The wealth management approach has been a core part of the financial services offering since we started in 2008. It is designed to provide financial services in a comprehensive manner by understanding our customer’s needs and aspirations. The most important part of the approach is the conversation a wealth manager has with the customer about her financial needs, both immediate and long-term. The approach helps in informed decision-making, both for the customer and the institution. This approach also fits well with our objective of offering a suite of financial products including non-credit products like insurance and savings.

Click here to read the full interview.


Video: Recent Regulatory Developments in Advancing Financial Inclusion

As part of IFMR Finance Foundation’s Financial Deepening & Household Finance Research Initiative, the National Stock Exchange & IFMR Finance Foundation recently hosted a two-day Inaugural Conference in Mumbai to present the results of the collaborative research effort underway and to obtain feedback on it. The event saw participation from an array of researchers, practitioners and policy-makers that set the tone for an insightful and thought-provoking discussion on themes within Household Finance.

On the first day of the conference we had the pleasure of hosting Mr. N. S. Vishwanathan, Executive Director, Reserve Bank of India, who delivered the keynote address on “Recent Regulatory Developments in Advancing Financial Inclusion”. Outlining the access to finance efforts in India and the correlation between penetration of banking services with economic development, Mr. Vishwanathan emphasised that financial inclusion has always been an important policy focus for the RBI over the past decades. He spoke about the vast credit requirements of people across the country and the need for different types of institutions with varying risk appetites to cater to them; he threw light on the role of RRBs, MFIs and Business Correspondents (BC) in enabling access to finance for the unbanked. Lauding the role of BCs in providing banking services as a major step in financial inclusion, he underscored the need to address the challenges of connectivity and working with banks to make the BC movement more remunerative going forward.

Commenting on the licensing of payments banks and small finance banks as a major milestone in financial inclusion, he underlined that while banks have been asked to make financial inclusion a part of their business, in the case of these differentiated banks, financial inclusion becomes their business. Likewise he also highlighted the importance of Direct Benefit Transfers in addressing leakages and as an important way to address dormancy in bank accounts.

He stressed that the role of RBI is to ultimately provide an enabling environment for financial inclusion to reach the remotest corners of the country and in ensuring that service providers see it not as something that is mandated but as a huge opportunity that is part of their overall strategy.

Watch Mr. N. S. Vishwanathan’s Keynote in the video below: