Financial tools – in much of the world we use them every day and often do not even remember that they are there. They work as a support system underpinning our lives – connecting one node to another, moving money, holding money, helping us to budget.
However, the supportive financial system low-income people get from formal financial providers is not as strong as it is for the more privileged. As Tim Ogden has written in CGAP’s blog series on the impact of financial inclusion: “After more than 30 years in the spotlight, the lack of clear, compelling and consistent evidence that financial inclusion interventions reduce poverty has raised questions about whether continued investment is wise.”
Another important conclusion coming out of this blog series is that impact from financial inclusion comes from different directions and that there is a need for “unbundling the heterogeneity of impacts – who benefits, when and why…”
Understanding the benefits of financial inclusion requires not only piecing together different segments and contexts of consumers, but also soliciting the perspectives of consumers from a range of economic and financial backgrounds. How do they feel about using more formal financial services? Do they perceive a benefit, such as greater physical safety, less stress or higher income? These questions are the focus of such work as CGAP’s Theory of Change, which maps the various channels through which financial services help poor people to improve their well-being across different individual circumstances and contexts.
The UNCDF Impact Pathways method has been designed as a tool to help illuminate the "pathways" that lead from the use of a particular financial service to benefits users experience as a result, and ultimately to the potential contribution of that benefit over time to the SDGs. The method uses transaction and balance data to identify people who use a financial product in different ways, and survey data to gauge how they benefit from using the service in those ways. When customers who use a financial tool in a particular way and say they experience certain benefits, academic literature is then used to assess whether these benefits are consistently reported and may lead to achieving an SDG.
So far, the Impact Pathways measurement tool has been used across two mobile money providers and two banks in Zambia, Fiji, the Solomon Islands and Papua New Guinea. It also can be adapted to measure financial health, which some donors, especially those in the United States, are beginning to favor. For more information, see the UNCDF Impact Pathways website, dynamic infographic, product analyses and toolkit on how to conduct a pathways analysis.
Those with long experience in this sector would agree that it’s rare that financial services interventions can influence SDGs quickly or without other interventions. Regardless, financial services are often part of the mix of interventions that try to alleviate poverty, as is the case of many poverty graduation programs. It’s also important to realize that most low-income customers were already transacting or saving in some way before they started using a formal financial account. The benefits they experience – whether safety, privacy, expanding social networks or empowerment for women – often result from the overall user experience with a financial institution and from using a basic multipurpose product rather than having multiple products tailored to a specific need.
The Impact Pathways research to date shows that consumers consider formal digital finance tools to have benefits that vary to some degree across environments, products and channels. The results provide us with a measurement of how these financial tools support low-income customers. They also yield lessons for financial services providers and donors concerning what products and use cases can deliver the most benefits to customers and where customer value is being “left on the table.” Some key findings include:
- More benefits are good for customer loyalty. There is a positive correlation between the number of benefits that a customer reports and both their level of satisfaction with the provider and their willingness to recommend that provider to others.
- Enhancing safety features can increase customer value. The feeling of greater physical safety that comes from using formal financial instruments is the benefit that customers report most often and consistently across a range of products and use cases.
- Privacy is valued, especially by women. Providers can add in privacy features in products to give low-income customers a greater sense of privacy and control.
- Enabling customers to store money has strong and diverse benefits. However, the proportion of customers who exhibit this behavior is small across all the four institutions where we piloted this method. If providers could introduce features to encourage customers to store money in their accounts, customers would experience more benefits.
- Saving can improve income. Customers say that it is not only loans but also the ability to save that helps them take advantage of business opportunities that provide them with more income.
As the Impact Pathways method is applied to more and more financial services – insurance, pensions, fixed deposit accounts, loans – the data will inform the Impact Pathways framework and provide a better roadmap to build stronger financial systems to support low-income populations. While no one impact evaluation method can capture every dynamic and change in the supportive system of financial services, the Impact Pathways method can illuminate the strengths and weaknesses of financial services and their role in helping households at the bottom of the pyramid.
This guest post was contributed by Daryl Collins, an author and pioneer working at the intersection of finance and human vulnerability, and Liz Larson, results measurement advisor with UNCDF.