Monique Cohen

One Size Doesn’t Fit All: Understanding the shifting dynamics of BoP clients’ demand for financial services

Client centricity is rapidly gaining currency among those who provide financial services at the base of the pyramid – but this is not the first time I have seen the push towards “putting clients first.” Eleven years ago there was a similar effort, driven by the microfinance industry’s interest in competition and concern for dropouts (ie: customers who stop using microfinance products). A subsequent influx of investment capital redirected attention and the client-centric perspective lost traction. This time I think it will be different. Today, the need to better serve consumers has become a business imperative. Both the context and our knowledge about low-income consumers and their use of financial services have changed.

For those reasons, I believe we need a different approach to customer service and product development. It is time to move away from the more static view, in which clients are seen as passive and one size fits all, in favor of a more dynamic perspective that:

  • respects the changing preferences of consumers as they age and become better off;
  • recognizes that people from different segments and sectors have dissimilar financial needs; and
  • accepts the ongoing coexistence of old and new financial services in a household’s financial portfolio.

This new perspective is framed around three dimensions.

The First Dimension: Recognizing the poor’s reality

The first dimension covers what most financial service providers (FSPs) are doing now, primarily the provision of working capital loans without regard to the financial behaviors and needs of the user. If only people’s financial lives were so simple!

The reality for most low-income people is one in which “life is one long risk” and minimizing one’s vulnerability is an important driver of demand. The daily challenge of matching cash inflows to outflows contends with randomly occurring shocks that continuously deplete hard-earned gains. Moreover, in this zig-zag income world of the poor it is quicker and easier to deplete assets and fall back below the poverty line than to rebuild and climb out.

This first dimension rests on the assumptions that formal financial services are preferred and that consumers understand all their financial options and how to assess their value, singularly and in relation to one another. Product development experts, working in silos, tend to miss the cues that reveal the daily realities of poor people, who rarely have enough money to pay for a full array of formal financial services. But the poor cannot afford to live in silos: theirs is a world of daily trade-offs, in which the choices are between building social capital and saving for emergencies versus buying insurance or paying school fees. Their choice of which sources of finance to use at any given moment depends on:

  • why it is needed,
  • what is available,
  • the cost, and
  • the sequence of transactions that precedes it

The Second Dimension: Responding to the dynamics of demand

A more dynamic view of consumer demand marks the transition to the second dimension. Lack of loyalty, low levels of retention and high levels of dormancy make the practice of one-size-fits-all untenable. Retention means growing with one’s customers by providing a range of products that respond to the arc of a client’s life cycle.

Among the newer offerings that reflect this dimension are microinsurance and ten-year term deposits, known as “micropensions,” that address the need for retirement funds for aging customers. At SEWA bank in India, the driving force behind this innovation was women, many married to men at least 10 years their senior and facing the daunting prospects of widowhood. To put this in perspective, the average age of these clients is between 30-45. Ten years on they not only will need micropensions, but also support to cover cataracts, eyeglasses and other vagaries of age.

Emphasizing the more dynamic and temporal aspects of product demand also moves the focus beyond products and onto customers themselves. Aside from age, gender or occupation, attention needs to focus on the breadth and depth of their financial capabilities. Applying insights garnered from an in-depth understanding of the volume and value of money flows across time and space can help an FSP become more relevant and successful in supporting people’s existing financial needs in a more holistic manner. An example from Malawi is a Christmas savings club product for salaried workers that was expanded to encompass informal workers. The bankers had assumed that no informal income was earned in the hungry season prior to Christmas, but the transactional data proved otherwise.

The Third Dimension: Optimizing delivery channels

Putting clients first means paying attention to the world as it appears to the consumer, and recognizing how they see the comparative advantages of different delivery channels. How a product is accessed can be as important as what is delivered. Indeed, the social benefits of similar financial products and their liquidity farming potential may outweigh the effective cost advantages to the consumer. If FSPs recognize this, they can identify new market opportunities.

For instance, transactions data from Malawi and Kenya highlighted a large number of small and frequent transactions within established social networks.

  • In Malawi, cash gifts added up to more than seven times the number of transactions at all commercial banks – the data showed 34 transactions per individual over a 73-week period;
  • In Kenya, 84 percent of these cash gifts were below $50;
  • In both countries, a majority of these gifts were from men to women.

Managing such small and frequent cash gifts is expensive for brick and mortar financial institutions, and for consumers who must travel to make the transaction or entrust it to others. By contrast, digital financial services suggest an alternate option, which (assuming appropriate pricing and physically convenient agents) could be a win-win for both parties.

Building Consumer Trust and Confidence

In considering these three dimensions, an important cross-cutting issue is the financial capability of the consumer seeking to access formal financial services. Rarely do we ask the question: “What does the client bring to the table in terms of their past use of financial services – formal and informal – and money management practices?”

Digital financial services ask many of the unbanked and underbanked to leapfrog across the digital divide and become part of the 21st century. High levels of inactivity in these digital services have shown that these behaviors may not be intuitive, and may need to be “learned by doing.” In the short run, using new and perceived risky distribution channels requires an incremental process of building both trust between the customer and their FSP, and customer confidence in successfully transacting electronically.

In this increasingly mature industry, product and service diversity are in, and homogeneity is out. It has become clear that ignoring client preferences and past behaviors is not good for business, while incorporating a more client-focused perspective most definitely is. But adopting this new perspective will require changes, some big, some small. Integrating the dynamics of demand so that FSPs can grow with their clients, serve existing markets longer and engender loyalty will also be essential for long-term sustainability and scale. A client-centered approach may be new to this industry, but its obvious advantages should spur a firm embrace by FSPs and their customers.

Monique Cohen works as an independent advisor to a wide range of institutions on financial inclusion and consumer demand.

Base of the Pyramid, financial inclusion, microfinance