CGAP is conducting a series of Applied Product Innovation projects to test different product development methodologies in branchless banking. For more information on each project and to see a list of the product concepts that were developed, please visit the Applied Product Innovation Program.
Poor and low income people lead extremely complex financial lives. Portfolios of the Poor vividly shows this by letting us into the homes of 250 families across three countries through financial diaries.
This study and subsequent ones showed that finance, currently mostly informal, is useful to fulfill multiple objectives and aspirations. Some are daily, short-term, and mundane—put food on the table or renew stock for petty trading activities. For this, access to finance helps to smooth the often highly irregular income streams of the poor. Another need is to build some resilience to the shocks that life invariably brings, so financial tools that help with risk management, such as insurance, are important. Enabling families to build assets for investment in the home, businesses or human capital is another common use of finance. And access to finance can help foster peace of mind, allowing people to plan for the future.
With such a variety of evolving needs over the life of a client, it is clear that one rigid product cannot respond to them all. And yet, with some important exceptions, the main offer of microfinance to date has been microcredit.
Developing a broader range of quality, transparent, and affordable financial services—informed by client needs—is an imperative of financial inclusion today. The G-20, national policymakers, providers, and donors all agree that people should have access to: savings, payments, credit, and insurance.
Ensuring the availability of a broader range of products is not just good for clients. It can also be good for the financial service providers. Responding to client needs with the right range of products will help ensure that providers can deepen their client relationships, broaden market share, grow responsibly, and reduce their own risk.
The need for a diverse range of products is not new, but most providers have taken a long time to move beyond a single, simple credit product. Many financial service providers have built their business model around a credit offering, rather than exploring ways to offer a full set of services that their clients would find useful over time. New ways of thinking about the business case for a diverse offering to low income clients are needed. One study showed that savings can be profitable for microfinance institutions if they make deposit services part of a broader offering.
There are at least three core requirements to unleashing innovations in product development.
Incentives: Management and boards of directors are often reluctant to invest in research and development when the core business is still growing. Incentives from investors for growth and high returns, often within a short-time frame, can also stymie innovation and risk appetite. Running a business while innovating may be hard, but it is essential for any business to survive.
Organizational Capacity: The relative lack of innovation on products is not just an issue of incentive. Capacity is also needed. Integrating systematic ways to listen to and learn from clients to inform product development must be a priority for providers, and it requires management buy-in. Though this can be done in-house, the culture and skills needed to run the current business are often different from the entrepreneurial mindset needed to source and act on client insights. One option is to bring in an outside firm to conduct market research and provide insights and ideas for products. Leveraging the expertise of specialists can bring fresh perspective and be highly effective. Another approach entails establishing product innovation labs or committees within a financial service provider that run as independent entities.
Regulatory Environment: Besides the issues of organizational capacity and incentives, new product development can also be greatly affected by local regulations. In some markets, there is either a legal vacuum, high barriers to entry, or express restriction to offering diverse services. For example, in many parts of the Middle East, North Africa, and South Asia, microfinance providers are prohibited from mobilizing deposits. For product innovation to flourish, the regulatory environment must allow for, and encourage, the development of new product approaches to financial inclusion.