Although informed and capable clients are the center of the financial inclusion vision, there is little consensus on how to improve financial capability, who should deliver it, and how to measure its impact. There is even some debate about the extent to which financial capability enhancement efforts should be prioritized. Some argue that clients will develop the capability they need as they have access to, and gain practice with, formal financial services. Others point to the complex and often ingenious informal ways in which poor people manage their money, and say that it is paternalistic to assume that poor people are any less capable of managing their money than wealthy consumers.
There is significant new experimentation and research around financial capability. Policymakers are creating national financial education strategies in several countries. What follows is a snapshot of new literature and research on financial capability.
1. Did you know that financial capability is replacing financial literacy/education as the dominant approach? The World Bank/OECD Russia Trust Fund defines financial capability as, "The internal capacity to act in one's best financial interest, given socioeconomic and environmental conditions. It encompasses knowledge (literacy), attitudes, skills, and behavior of consumers with respect to understanding, selecting and using financial services, and the ability to access financial services that fit their needs."
2. Did you know that according to social psychologists, up to 70% of behaviors can be explained by context and not the individual? Accounting for situational factors in the design of financial capability programs can have significant impact, and making relatively minor changes to a complex process can have significant impact. An example of this was a recent randomized experiment with FAFSA (the financial aid application for U.S. college students). In the experiment, a group that received information and assistance in filling out the complex FAFSA forms were 15.7% more likely to file their aid applications and 29% more likely to enroll in college than the control group, which received neither information nor assistance. Offering information only did not have any statistically significant effect on applications or enrollment.
3. Did you know that there’s limited evidence of whether financial capability interventions actually change financial behaviors (but new research is still emerging)? At the Citi-FT Financial Education Summit 2013, there was general consensus that the field is still in its adolescence, with research efforts only recently shifting to questions around causality. A 2013 World Bank paper conducted a systematic review of the literature on a wide range of financial education interventions, and concluded that they have limited impact. However, the World Bank’s 2014 Global Financial Development Report points out several factors that may contribute to the effectiveness of specific approaches to financial capability interventions, though there is still no consensus about best practice.
4. Did you know that there’s a trend toward using human-centered design in developing financial capability products? At the Citi-FT Summit, Ana Pantelic of Fundación Capital shared insights on the development of their Lista Initiative, a tablet-based financial education program designed to help poor women living in rural areas gain access to information and training (including how to navigate formal financial services via an ATM simulator) from the comfort of their own homes. As a result of the human-centered design approach, the simulators used rich colors – which the women said attracted their attention – and the organization decided to distribute tablets to community leaders in order to make them available to more women in the community. This helped improve take-up of the technology.
5. Did you know that a TV soap opera in South Africa taught viewers positive financial behaviors? A recent World Bank study analyzed the impact of financial education messages on debt management shown through Scandal!, a television-based soap opera in South Africa. Its storyline incorporated examples of financially irresponsible behavior (e.g. excessive borrowing, installment payment plans, and gambling) and the resulting financial distress. Scandal! viewers were almost twice more likely to borrow formally, gambled less, and move away from installment plans compared to a control group. During focus group discussions, participants revealed that their emotional connections with the leading character motivated their behavioral changes.
6. Did you know that a ‘rule of thumb’ approach works better than traditional numeracy-based financial education? Researchers found that a simple "rule of thumb" training (e.g. writing down every transaction) for micro-entrepreneurs in the Dominican Republic increased the likelihood that they kept accounting records and calculated monthly revenues, as compared to a control group that received a more complex accounting-based training.
7. Did you know that a ‘just-in-time’ approach is gaining traction among financial capability practitioners and researchers? An evaluation of a recent financial education program covering a variety of topics for soldiers in the U.S. Army found that the only subject that helped young soldiers make better decisions was on the topic of buying a car, as evidenced by smaller loan amounts and higher down payments compared to the control group. Researchers concluded that many of the soldiers were in a phase of their lives during which the purchase of a car would be a high priority—and that the lesson stuck because it was perceived as relevant.
8. Did you know about the cutting-edge approach of embedding consumer education in product-linked ‘touch points’ between consumers and financial service providers? At the Citi-FT Summit, Guy Stuart of Microfinance Opportunities (MFO) discussed recent findings from their Consumer Education for Branchless Banking program in Zambia. MFO provided consumer education around the complexities of using a branchless banking channel, such as troubleshooting skills, how to access customer service, debt management, and savings. At the end of the training, MFO found that clients tended to ask for smaller increases in new loan amounts. In other words, customers began pegging their requests to what they actually needed, which the partner microfinance institution predicted would decrease the risk of defaulters in the long run.
9. Did you know that as of 2013, 45 countries are designing national strategies for financial education? This is a growing trend among policy makers, particularly after the global financial crisis. In 2011, there were only 26 countries with national strategies for financial education.
10. Did you know that in June 2012 at their meeting in Los Cabos, Mexico, the G20 Leaders endorsed the High-Level Principles on National Strategies for Financial Education? The High-Level principles were developed by the OECD International Network for Financial Education.