What Does Focusing on the Client Really Mean?
It’s been interesting to watch the microcredit sector struggle with the concept of what it means to put the client at the center of their work. Perhaps, we should start the conversation with family finances, how the poor generate their income, and the big expenses they incur along the way. A 2007 Oliver Wyman study tried to do just that. Commissioned by the Bill & Melinda Gates Foundation with the purpose of describing the potential demand for financial services from 2.6 billion people who live on less than US$2 a day, the study divided the poor up into livelihood segments according to how families generate most of their income. The thinking was, if we knew how families generate their incomes, we could better understand: which financial products would best fit their cash flows, how they can take advantage of major investment opportunities, and how to address their primary vulnerabilities.
The results of the study are interesting.
Source: Oliver Wyman (2007), “Sizing and Segmenting Financial Needs of the World’s Poor,” unpublished paper commissioned by the Bill & Melinda Gates Foundation.
Of the 2.6 billion people living on less than US$2 a day, one billion are technically classified as being either too young or too old to participate in the labor force. This leaves about 1.6 billion, of which just over one billion earn a primary income from farming, casual labor, fishing, and pastoral activities. A little under 500 million depend on salaries or microenterprises. If you think about it, that means that two-thirds of the poor have incomes that are highly irregular, in addition to being low, and only one-third earns regularly from an enterprise or a low paying job.
We have built an entire sector around the notion that the poor need a highly standardized product, one that is best suited to those with regular incomes. While at times we have worried about the ‘self-exclusion’ of poorer segments, rarely have we questioned our core assumptions around the importance of sticking with rigid repayment schedules, regular meetings, and programmed credit renewals at the expiration of the present loans.
This high degree of standardization has had its benefits. For many clients, it provides a self-disciplining mechanism that allows them to reach certain specific financial goals. It has allowed leading microcredit organizations to drive their operating expenses down from more than a dollar for each dollar lent (during the 1970s) to less than 10 cents on a dollar today. And it has facilitated ancillary activities that address other social goals.
But, how well can microcredit serve the one billion poor whose incomes are both low and highly irregular? Families in rural areas have particularly volatile income flows from farming, work as day laborers, and periodic migration to urban areas.
And, is microcredit the best product for families whose incomes are not constant, who may face periods of the year in which they are food deficit, and who have few assets to fall back on in times of special need?
Actually, a tiny loan might be a perfectly useful instrument for a farmer who needs to get a crop in and is lacking money for fertilizer. But the loan that’s just right for that farmer doesn’t look like the products offered by microfinance organizations. That fertilizer loan might be best designed to be repaid when the farmer receives his proceeds, or around the cash flow from other activities in the household meanwhile. More interesting is the potential to offer savings. When farmers in Malawi were offered an opportunity to set aside part of their harvest in a commitment savings’ account, 21% took advantage of the opportunity. Committed farmers spent 26% more on inputs, and increased the value of crop output by 22% and household expenditures in the months immediately after harvest (17 % increase) compared to the control group.
By increasing the repayment frequency to a weekly basis, taking into account that market vendors had high points each week when they were flush with cash, microcredit made huge strides in the 1970s and 1980s. But all this progress was largely concentrated on one segment of poor people excluded from formal financial services.
If we truly care about providing the maximum benefits through financial services to the worlds’ poor, should we not be thinking carefully about the majority of the poor households whose cash flows may not fit very well with our current product offerings? Should we not be thinking about products that can be tailored to those flows, or marketed against major financial goals? Will the advent of agent banking, with its potential to dramatically reduce transaction costs for clients, allow us to offer savings and loan products that are more flexible, allowing clients to save all the time, borrow when they need, and repay when they can?
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.