3-1-0 Three minutes to complete the online loan application, one second for approval and with zero human touch for SME loans. This is the marketing slogan used by Ant Financial, one of China’s largest online lenders with more than 400 million active users.
Digital finance is a cost-effective route to financial inclusion for many unbanked and underserved consumers in emerging markets. But digital finance is also still developing and maturing, with many open questions on the impact it will have. One of the most important of these is whether digital finance will ultimately help consumers to make better financial decisions over time.
October 31 is World Savings Day, a day which emphasizes the importance of savings to economic development, and provides a good occasion to look at how fintech may help solve the challenge of savings.
Like many World Bankers, I took some time recently to look through the newly released 2015 World Development Report “Mind, Society, and Behavior.” From my perspective, in the Finance and Markets Global Practice, one thing jumped out immediately: The report is packed with insights that are directly relevant to our work on financial inclusion.
In the Overview alone, the reader is met with an abundance of findings related to consumer protection, financial capability, savings and other key topics involving financial inclusion (grouped together under the theme of “household finance,” which is fully explored in Chapter 6). We’re told of how changes to the framing of payday-loan terms dramatically altered borrowing behavior in the Unitedc States; how embedding financial messages in an engaging television soap opera in South Africa improved the financial choices of viewers; and how SMS reminders increased saving rates in Bolivia, Peru and the Philippines.
Of course, this is not the first body of work to summarize key behavioral lessons learned from decades of careful research on financial inclusion: See, for example, Chapters 6-9 of Banerjee and Duflo’s Poor Economics or the Bank’s 2014 GFDR on Financial Inclusion.) But these examples do help drive home the key message of the report: Paying attention to how people think, and to how history and context shape their thinking, can improve the design and implementation of development policies and interventions that target human behavior.
The report highlights that psychological impulses such as present bias, loss aversion and cognitive overload can lead to poor financial decision-making. For those in or on the edge of poverty, the ramifications of these poor decisions – low savings, chronic over-indebtedness, investment shortsightedness – can be devastating. We are reminded that most adults in developing economies do not benefit from the sophisticated financial tools such as automatic salary deposits, mandatory retirement contributions, or default insurance programs that help mitigate the effects of automatic thinking.
Yet, as outlined in Chapter 6, there are a range of interventions that have been shown to help address behavioral constraints on financial decisions in a developing-country context. Many of those interventions take advantage of what we know about the natural processes of the mind, using techniques such as framing, default settings and emotion persuasion to nudge people toward better financial decisions.