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

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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.

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