Linking Financial Behaviors to Product Development

Using financial diaries, The Portfolios of the Poor by Collins et al. (2009) opened the eyes of many to the complexities of the financial lives of the poor. Microfinance Opportunities (MFO) has adapted the diaries methodology and linked the transactional data the diaries produce to operational issues, such as new product development. Two financial diaries studies – one with Opportunity Bank of Malawi (OIBM), and another in Kenya that deeply explored how low-income populations use M-PESA –speak to the power of this approach.

Uncovering Financial Behaviors in Malawi and Kenya
Over 18 months in Malawi and 8 months in Kenya, MFO collected detailed data on how households and individuals manage their weekly economic flows, distinguishing among their financial transactions, income, and expenditure flows. Across both countries, poor people transacted significant amounts of cash, at least twice their weekly income per week. While the irregularity of income flows among farmers and the self-employed was no surprise, periods of zero or reduced inflows were not necessarily matched by decreases in outflows. The imbalances were instead met by withdrawals from informal or mattress accounts or cash gifts from family, friends, and associates. In both countries, informal cash transactions dominated the financial services market in terms of the number of transactions, while banks captured the ‘big money’ through fewer transactions. The dominance of informal sector transactions has created an awareness among many financial service providers (FSPs) that the informal sector is a more significant competitor than other banks.

In Kenya, the data confirmed that ‘cash is king.’ M-PESA’s market penetration was limited to 6% of the value of all transactions. MFO developed a Distance/Purpose framework, which showed that M-PESA has been primarily used by households to ‘send money home’ over distances of at least 20km. In Kenya these flows, usually from urban to rural areas, are cashed out quickly, often the same day the remittance is received. In both Kenya and Malawi such flows are largely from men to women, a pattern that also characterized cash transactions. While savings for emergencies ex ante does not seem widespread, M-PESA is proving itself an effective tool for use ex post to respond to shocks, especially hospital bills, in a timely manner. Findings on the use of e-money suggest that M-PESA’s strength lies in its ‘embeddedness’ in pre-existing social and spatial relations. Again the same pattern was observed for cash transactions. To date, an important effect of M-PESAs has been to enhance social relations, It has had less of an impact in pushing the boundaries of business exchanges

Applying the Findings                                                                                                                                                                                                                                                       
At MFO, one guiding principle to both our analytical approaches and the processes involved in implementing research is to ensure that we present results that are useful to practitioners. To be successful, repeated interactions between the researchers and interested parties, FSPs and/or telcos is instrumental.

OIBM is a client-led bank. It has, in the past, successfully used market research – mainly focus groups and cross-sectional surveys – to develop financial products based on a particular purpose, e.g., home improvement loans, or the needs of a particular target group. The transactional data coming out of our financial diaries work offers the opportunity to take a completely different approach. Rather than focus on the product opportunity immediately, we seek to answer the following question: how can an FSP intermediate an individual’s cash flows in order to support their financial behaviors? Answering this question means understanding: how customers manage money, how people survive using cash only, how people spend money, and when and for what they need lump sums of cash. Such thinking led OIBM to tweak one product and introduce a new one:

1. An existing Christmas savings product for regular-income and salaried workers was extended to the non-salaried, farmers and the self-employed. In Malawi, November through March is the ‘hungry season’ when farmers earn no income, with consequences for the broader economy. The transactions data coming out of the diaries showed that around Christmas there was a considerable amount of economic activity, despite it being a month into the hungry season, with expenditures peaking in the Christmas week and falling thereafter, as the impact of the hungry season kicked in. OIBM was able to successfully tap the market for Christmas savings in the non-salaried part of the economy once it saw the demand for such a product in the transactions data.
2. Sequential financial inflows and outflows data identified weeks when households were in deficit or in surplus. Indeed, many people find themselves without inflows one week in four and often these weeks are preceded by deficit weeks. Meanwhile, they continue to spend money regularly. Aside from using mattress money and, for a few, drawing down formal savings or borrowing, many farmers compensate for shortfalls through their access to microenterprise loans, which are preferred to agricultural loans. Recognizing the patterns of money flows, informal savings practices and building on existing financial behaviors, OIBM introduced a new overdraft loan for farmers.

The Power of Data-Mining: Moving Forward with Transactions Data Analysis                                                                                                                                                 
The Financial Diaries methodology is increasingly recognized by financial service providers and analysts as a powerful method to collect sequential, spatial, and social network data on economic transactions, to pinpoint drivers of uptake and to analyze usage trends. Together with the parallel analysis of FSPs’ internal management information systems data, we are seeing the emergence of data-mining as a tool for understanding the base of the pyramid. This is proving to be invaluable for informing improvements in competitiveness, efforts to increase market share, and ultimately improvements in services to customers.

Such an initiative is just getting underway in Uttar Pradesh, where MFO will be evaluating the impact of financial education on the usage of smart cards linked to bank accounts. Not only will the diaries track the behavior of people receiving education and those not receiving it, but we will also be looking at the card-use data for our diaries sample as well as a larger sample of card users.

A recent Financial Times article entitled, “Innovators don’t ignore customers” argued that the rapidly dropping share price of Netflix, a DVD rental and online film service could be explained by the fact that the company lost touch with what its customers wanted. Keeping a sharp eye on client demand is thus not only the responsible or developmental thing to do–it simply makes good business sense.