The Opportunity in Pensions Expanding with Life Expectancy

I published this post first on the the Center for Financial Inclusion at Accion blog. It was reposted here with permission.

In most places around the world the subject of pensions is a sore one. In 2012, for example, in looking at arguably the crème of private employers, Fortune 100 companies, only 30 offered their U.S. new hires pension plans, down from 47 in 2008. For public sector employees in the U.S. in the same year, the pension plans of 26 states were less than 70 percent funded. In lower and middle-income countries where financial security is weaker, the situation is even worse. In India, the pension system only covers roughly 12 percent of the population.

The severity of these figures is amplified when we look at demographic trends. Between 2010 and 2020, the population of older adults will almost double in middle-income countries. Worldwide over the decade, it will increase by 40 percent. By 2050, there will be roughly 1.5 billion older adults, 315 million of whom will be in India.

Aging presents unique challenges and opportunities to the financial inclusion industry. During a session at theMicrocredit Summit in Merida, Mexico a few weeks ago, five panelists met to discuss this topic. John Hatch (FINCA), Pilar Contreras (HelpAge), Caroline van Dullemen (World Granny), Reynold Walter (REDCAMIF), and myself all acknowledged the demographic reality—as populations age, if countries have not helped their societies and economies to prepare, they will face a global train wreck in the form of older people without adequate means of support and support systems that are overwhelmed. Financial inclusion can and should play a unique role in helping both individuals and whole countries mitigate risks.

Aging is an issue for everyone. We watch those in their older years – hoping to one day reach that life stage if we aren’t there already – as they manage their income and expenses, paying for health care, continued living expenses, and sometimes even supporting their families. As Hatch demonstrates in his own life, “retirement” doesn’t necessarily mean that older adults stop working, though even in the case where incomes continue, there are still barriers to their accessing financial services. Largely, financial services available to help people either in the aging process or in their older years are either inadequate or non-existent.

Globally, four out of five older adults lack any form of pension, especially if they are at the base of the pyramid. In most lower-income countries, public pension systems are inadequate to secure minimum financial security. Hatch, who has been in the financial inclusion space since its microfinance beginnings, lamented that he has seen only a handful of programs or initiatives that are specifically geared toward the needs of older adults.

In the case of India, there’s a clear opportunity in MFIs offering micropensions. In 2009, India’s National Pension System extended beyond public employees to also encompass private workers. The majority of companies in the private sector with at least 20 staff were then required by law to take part in an employee-contribution/employer-matching savings and investment plan. However, according to statistics from the Indian Ministry of Labor and Employment, as of 2011 only 26 million people worked in the organized public and private sectors in India. The 433 million Indians then working at small organizations or through informal means weren’t covered by the law.

While few, there are micropension success stories. Walter celebrated the successful conclusion of a five-year pilot micropension program through REDCAMIF. Implemented across Latin America through a network of microfinance institutions, the pension program proved that there is a demand, a use, and feasibility for micropensions in Latin America. With the successful conclusion of this program, Walter is launching a formal program, building on the success he has found over the past five years. Most microfinance institutions and organizations around the world, van Dullemen noted, must undergo a paradigm shift, adopting views of older adults as wise, experienced, and still productive members of their families and communities.

Micropensions are critical to addressing the issue of income security. In most parts of the world, older adults are not likely to have the resources to stop working. The income streams that older adults rely on often come from a variety of places, including work, assets already owned, and family. These sources are often informal.

The varied income strategies that older adults employ have implications for their financial services needs, especially since their expenses may be unpredictable. Along with pensions, savings and credit may be important for making sure that there are not significant income gaps. Insurance is critical to mitigating financial shocks, especially those related to health.

I was encouraged to remember that as early as 60 years ago, the world was convinced that customers at the base of the pyramid were unworthy of or unable to use financial services. The very fact that over 900 people from 75 countries were gathered in Merida, Mexico to discuss microfinance is evidence that we have overcome this myth. Perhaps the Microcredit Summit can put its formidable awareness-raising strengths to work proving that older adults are also deserving of financial services and capable of using them.

The World Cup of Financial Exclusion

I published this post first on the the Center for Financial Inclusion at Accion blog. It was reposted here with permission.

IMG_3107We are in full World Cup fervor in the Accion offices around the world, with jerseys making appearances at global staff meetings, water cooler conversations centering on surprise advancements (and eliminations), and a high incidence of lingering trips to the conference room screen to check scores in between meetings and deadlines. You could say things are getting a little heated as the group of teams still in the running gets smaller.

There have been a few attempts to use this global competition as an opportunity to better understand our world. The Wall Street Journal published a “World Cup of Everything Else,” where countries can be matched up on categories from the hottest weather to the biggest eaters of seafood, and Dean Karlan produced a set of predictions based on population, poverty level, and interest in soccer to assess which country would experience the greatest increase in happiness with a World Cup victory (spoiler: Nigeria would have had the most aggregate happiness if it had won the tournament).

But what if the World Cup were a competition based on financial inclusion indicators? If we were to create a bracket where the country with the highest level of financial inclusion advanced, the European countries would all advance, which in my opinion wouldn’t be very interesting.

What if, however, we use the World Cup system to see where the highest number of financially excluded people are? We crunched the numbers to show you, of the countries that made it to Brazil for the competition, who would “win” the title of “highest number of financially excluded people.” Basing winners on the countries with the largest number of people without a formal bank account, we noticed a few surprises.

Using the Global Findex data on exclusion rates (measured by the percent of the population that reports not having an account) and UN population data, we calculated the size, in number of people, of the excluded population within World Cup contender countries, beginning with the original FIFA groups. Not surprisingly, countries with large populations tend to be the “winners” in their groups.

Nigeria emerges as the final winner, with Brazil, Mexico, and the U.S. following closely behind. We often think of exclusion as being a low and middle income country problem, but as the advancement of high income countries in the brackets show us, exclusion is everyone’s problem—countries like the United States are no exception.

The bracket system doesn’t return the “top four” countries to the final (Russia, for example, would have made it farther) – after all advancing in a tournament depends on who you play. This exercise does, however, cause us to think about impact and global focus. Where are the highest numbers of excluded people, and how can financial inclusion efforts have the highest impact on access? Conversely, where are the countries where financial inclusion issues are not necessarily focused on access but rather on quality of engagement and quality of services? Which of these countries are the most active in conversations on financial inclusion, and will such conversations translate into a significant decrease in exclusion over time?

Part of what makes the World Cup so much fun is that it’s one of the few times when most of the world comes together, participating in and focusing on one thing. For me, it’s also one of the few times when I focus my attention on particular countries – ones that for whatever reason have stayed off my radar. Has it gotten you to think differently about the world, and about financial inclusion more specifically?

Image credit: Alobos Life

World Cup Update

I’ve been hard at work watching much of the World Cup this year–I think it helps that the games aren’t in the middle of the night for us on the east coast of the US, and it certainly can’t hurt that my work is playing all of the games in their conference room. I’m so grateful to work for an international organization that is willing to support a global enthusiasm for futbol!

In the spirit of the World Cup, here is a brief guest post from my dear friend and colleague Sergio Guzman. Hope you enjoy his commentary–I know I did! 

[Disclaimer: Sergio holds a slight Colombian bias in the below commentary.]


>Posted by Sergio Guzman, Center for Financial Inclusion at Accion

All of our predictions have been wrong, and in some cases we have never been so glad to be wrong, and in some cases being right is just too cruel. Some of you were wondering, why this week’s matches are being played simultaneously and many of you would be right to guess that its to avoid match rigging. In fact it is, but it has a historical precedent, in 1982, during the match between West Germany and Austria, the result was so beneficial to both teams that it will be forever remembered as the “Shame of Gijon”.

Let’s begin this review of the World Cup with a few European goodbyes:

Spain – We knew since last week that Spain would not make it to the World Cup’s 16th round, but it is pleasant to see them play finally a winning match. David Villa and possibly Xavi will make a move to the United States to play for the newly assembled New York FC, which I hope is going to be great for the US fans.

Italy – Out out out! They can blame this on a bite by he-who-shall-not-be-named, but I would blame it also on their tradition of defensive football. Eventhough their match against England was a fantastic display of tactical football, their matches against Costa Rica and Uruguay did not seem to bring any flair.

England – It is always mentioned that after 1966 England will forever be cursed with not winning a World Cup. Eventhough football is huge in England with some of the most historically winning teams in the sport, this year, again, is a huge upset for them. Better luck in Soviet Russia, where the World Cup outbids you. Arguably they were the victim of the best tweet of the World Cup: @Pitacodogringo  Messi carrying Argentina. Neymar carrying Brazil. British Airways carrying England

Ghana – This African squad played with true grit, but some of the players may have been more interested in getting paid than playing the jogo bonito. There was also a jock strap incident, which you can Google yourselves as I am not going to “expose” myself to an HR violation. 

A few celebrations:

United States: Sometimes, you win by losing, right guys? Eventhough the US lost to Germany, the team made it to the second round. The game was unfortunately not attended by their best player: Will Ferrell, who threatened to bite every German in that stands in the way of the US. Certainly, nobody will watch the next match more conflicted than Nadia van de Walle and Valerie Kindt, both Belgian-Americans.

Colombia: AGAIN DIOS MIO WHAT A WIN! Colombia made it to the second round for the second time in our history showing incredible football and amazing team spirit. We also had the oldest player, Faryd Camilo Mondragon,  step on to the pitch and make a save. It made many Colombians cry. But back to football, our play against Japan, especially the second half demonstrates the quality of the Colombian squad, especially James Rodriguez. We are really on top of the world right now.  Look out for us Uruguay because we are going to beat you, it’s the world against your team!

France: Football legends like Eric Cantona and Zinedine Zidane are now watching the game from the stands as Les Bleus advance to the next stage. A staggering victory against Switzerland 5-2 makes team a remarkable side and a threat to any team who plays against them.  Next up they play Nigeria, which will be an entertaining match to see.

Argentina: This is the story of ten guys and a legend. Not this legend.  But this legend. Argentina is always an interesting side to follow. We’ll see what else Messi and the rest of the squad bring for us to see.

To recap the scores this week:

Australia               0:3 Spain

Netherlands      2:0 Chile

Cameroon           1:4 Brazil

Croatia                 1:3 Mexico

Costa Rica            0:0 England

Italy                      0:1 Uruguay

Greece                 2:1 Cote d’Ivoire

Japan                    1:4 Colombia

Nigeria                 2:3 Argentina

Bosnia and Herzegovina      3:1 Iran

Honduras            0:3 Switzerland

Ecuador                0:0  France

United States    0:1 Germany

Portugal               2:1 Ghana

Algeria                  1:1 Russia

South Korea       0:1 Belgium

Thanks, Sergio, for your commentary. Looking forward to the Round of 16!

What’s in a name? A lot, actually.

> Written by Sonja E. Kelly and Ruben Marquez, CFI and Bancomer. We published this post first on the the Center for Financial Inclusion at Accion blog. It was reposted here with permission.

“What’s in a name? That which we call a rose by any other name would smell as sweet.” – Shakespeare

While Juliet’s musings on the essence of her Romeo might be poetic, she is quite wrong. Words determine a great deal about how we think about things—and one word change could change hundreds of thousands of people’s use of financial products.

In Mexico, if you were to ask those at the base of the pyramid whether they save, they would likely tell you no. CFI’s Country Profiles show the Global Findex Data in the figure at right.

When asked whether they had saved any money in the past year, roughly 14 percent of people in the bottom 40 percent of the economy in Mexico answered yes. This same group of people in all upper middle income economies (of which Mexico was a part at the time of the survey) were about twice as likely to say yes to this question.

Does this mean that the poor in Mexico just don’t prioritize savings? Probably not.

In Mexico, there is a difference between the word for “saving” (ahorrar) and the word for “keeping” (guardar). When you ask people at the base of the pyramid whether they “keep” money for the future, they are much more likely to answer yes.

The Findex survey (the source of the above data) may have inadvertently run into this problem in Mexico. The difference between two words could explain the low incidence of saving reported at the base of the pyramid compared to countries with a similar income level.

When we take this language difference into account, there are implications for institutional knowledge, financial education, and product marketing.

On this front, Bancomer in Mexico has found that there is a reorientation to be done within the bank itself—while Bancomer is listening to clients, for listening to be effective it must be listening for the right language. Within the bank, integrating the vernacular of low-income clients has led to new views on this income segment. Past market research has included the question of whether potential clients are saving—with dismal results. With the recognition that this population is saving, but just calling it something else, there is a different perception of the kinds of products that customers might be interested in.

By listening in the right ways, Bancomer has realized that not only are people at the base of the pyramid saving by “keeping” money for the future, they are also saving by investing in commodities. For example, in Mexico it is quite common for low-income families to buy construction material, even when they have no immediate home-improvement plans. This is an inflation-proof savings strategy, as materials can be sold in the future at current market prices.

When it comes to working with clients, financial education must involve affirming that “keeping” money is the same as “saving” and “buying raw materials” is a form of both saving and investment. If low-income customers were to recognize this, it would significantly change the way they approach products offered at any institution. Imagine a prospective customer seeing a “money-keeping account” and thinking “Oh, that’s what I need. It will help me keep my money safe.”

Finally, from the bank’s perspective, how products are marketed is critical. Bancomer already has an arsenal of marketing around certain products. The promotion above, which offers a free pressure cooker if you open a savings account, might not be seen as relevant to someone at the base of the pyramid because it uses “ahorrar” instead of “guardar.” The ad may be sending a message from the bank to low-income consumers that the bank is not for them, keeping the bank from a potential market segment.

As we move forward with our understanding of people at the base of the pyramid, and the ways financial services can empower them to improve their lives, we must remember that the words we use—and the words we hear—are not arbitrary. They are integral to moving financial inclusion forward.

*“Poorer” is defined as those in the bottom 40 percent of the economy, and “richer” is defined as those in the top 60 percent. Figure includes both formal and informal savings mechanisms.

Product Spotlight: Microloans for the Top of the Pyramid

> I published this post first on the the Center for Financial Inclusion at Accion blog. It was reposted here with permission.

We live in an age of cash flow unpredictability. At CFI we’ve championed work like Portfolios of the Poor, which focuses on those at the base of the pyramid. But what about those who aren’t poor? Who is paying attention to the wealthy? Are they fully included?

A new product is now addressing an oft-neglected gap in the market. The product is a microfinance loan for those at the top of the pyramid who need credit while they wait for their yearly bonus to be approved by their company’s board or while they wait for a deal to go through in order to receive their golden parachute.

“I’m waiting for my $80 million golden parachute,” says CEO Robert McMillion, CEO of Lime Werner Cable since January 1 of this year. “In the meantime, I find that I don’t have the $700 for the weekly allowance that I give my daughter and son.” McMillion stands to receive $80 million if the company’s purchase by Cobcast Cable goes through and he steps down as CEO.

“I really am in a pinch,” says McMillion. “My daughter’s prom is coming up, and without money in her checking account, how can she go shopping? Similarly, my son was hoping to buy a new sports car, and without the cash, he will have to finance it at high interest rates. If I can avoid him having to do that, I will.”

McMillion does have a great deal of stock and has saved for retirement—one might say that he doesn’t have a problem on his hands. But his stock isn’t liquid, and if he were to take out the retirement money before he actually retires, he would have to pay high taxes on it.

McMillion is not alone. U.S.-based CEOs used to be able to count on their golden parachutes and high year-end bonuses. Now, under the Dodd-Frank Act, CEOs have to wait for full board approval in order to receive the money, and even then the amounts are slightly lower than in the past. Golden parachutes have gone from $30.2 million in 2011 to $29.9 million today (we are not making this up), and executives are under increasing PR pressure to reject or only take a portion of their bonuses when companies don’t do well.

“The $0.3 million—or 1 percent—drop in the average golden parachute really makes a difference,” says Washington Post reporter Sibalee Fonay. “It could mean the difference between buying your spouse just a Mercedes instead of a McLaren for her birthday.”

French microfinance organization FauxFinance is coming to the rescue with a product they call Bonus-Gap. FauxFinance reports that they have already seen extremely high interest in the product in the American market in which they operate. “American CEOs are used to a yearly influx of cash, but the volatility and unpredictability of year-end bonuses, golden parachutes, and stock prices can really disrupt their family cash flow. It creates a culture of financial fear, and we hope that we can mitigate that fear.”

“We find that we can address a critical market failure and fill a niche role in the microfinance market,” FauxFinance continues. “Everyone seems to be focused on clients that are around or below the poverty line. The wealthy aren’t receiving the services that they have a right to.”

CFI cares deeply about financial inclusion for all. We cannot ignore the wealthy as we look to address cash flow issues through financial inclusion, and we look forward to watching the success of this product as it is rolled out in the U.S. market.

Happy April Fool’s Day! If you’re not from a country that takes the opportunity of April 1 to play a harmless joke, click here for a bit of background. Did I get you?

Elections and Interruptions: Financial Inclusion Strategy Pitfalls

> This post was originally written for the Center for Financial Inclusion at Accion blog. It was reposted here with permission.

Chile Election

I was thrilled when I opened the paper this week to the news of Michelle Bachelet’s victory in Chile. The first female president in Chile, first elected in 2006, is back in office after a one-term break. I have long admired her advocacy for those living in poverty, her tenacity, and her activism. However, her victory also means a question of what will happen to the admirable financial inclusion initiatives begun by the Piñera administration.

In many of my conversations with government employees in Chile in the past year I have heard some caveat to the effect of, “I’m not sure what we’ll be able to do in the coming months given the upcoming election.” Initiatives like electronic government-to-person (G2P) payments, for example, were pushed forward by people connected with the Piñera government, and if the new administration does not prioritize such initiatives, financial inclusion may receive less policy attention.

This highlights a larger issue of who “owns” government-initiated financial inclusion efforts. The answer matters because the leadership structure of government-led initiatives determines longevity. If financial inclusion policy is spearheaded by the Central Bank, and the Central Bank ministry is largely independent, financial inclusion initiatives are unlikely to change course with an administration change. If it is a Ministry of Finance-led push, however, financial inclusion may indeed be an administration-specific initiative.

In the Chilean case, the electronic G2P payment initiative was in part tied to the administration because the work was led by the ministry of Social Development, a part of the president’s cabinet. Recognizing that lack of continuity may be a weakness, many countries, including Chile, have created intra-departmental committees with formal structures that involve departments with a spectrum of players and a diversity of mandates. Rwanda and Fiji have established Financial Inclusion Taskforces. Brazil organized a National Partnership for Financial Inclusion. Mexico has a National Council for Financial Inclusion. These committees or councils are set up to endure beyond the political lives of their participants.

Governments are also moving toward formalizing longer-term goals and structures that outlive the tenure of a particular administration by undertaking initiatives like national strategies, complete with long-term targets for access, use, and quality. Examples of these efforts include Nigeria’s Financial Inclusion StrategyBrazil’s Financial Education Strategy, and Mexico’s Financial Inclusion Strategy. We’ve talked before about various national strategies for financial inclusion here on the blog. In the past few years, many additional countries have adopted such strategies or announced their intention to create a financial inclusion strategy through their Maya Commitment to the Alliance for Financial Inclusion.

Long-term financial inclusion efforts like these, however, require broad political support and long-term thinking. Initiatives that have been set up for the long-term, with broad support from both ends of the political spectrum, will not be very affected by political change. Countries with large and complex government structures are attempting this—India, Nigeria, South Africa, and Mexico, for example, are all moving toward or have achieved this kind of a sustainable financial inclusion strategy.

We would be naïve, however, if we did not acknowledge how difficult such efforts are—a reality we considered in the Financial Inclusion 2020 consultative work that we undertook this year. A robust and long-term financial inclusion strategy involves accommodating a large number of stakeholders, both internal to the government and external. It means finding common ground between elected, appointed, and long-term government figures, and it often requires outside consultation. Given how many hoops they have to jump through, I admire the regulators, policymakers, and legislators who promote financial inclusion at the government level.

To Michelle Bachelet and her future administration, congratulations. And please don’t forget financial inclusion as you move forward in your work in Chile.

Image credit: Sebastián Villanueva

Scarcity: Why Having Too Little Means So Much

> This post was originally written for the Center for Financial Inclusion at Accion blog. It was reposted here with permission.

Since Sendhil Mullainathan is speaking at our Financial Inclusion 2020 Global Forum in two weeks, we ordered a few copies of his new book with Eldar Shafir to pass around the office. As a result, the hypotheses of Scarcity are informing our thinking both on our own habits and on financial inclusion.

The title of the session in which Mullainathan, a Professor of Economics at Harvard University, is speaking is “Why Financial Inclusion Means More Than We Ever Knew.” A mouthful, yes, and a bit mysterious. To unravel the mystery, one has to start with Mullainathan’s hypothesis that scarcity of some kind of resource—money, time, even social relationships—brings about an intense focus on the scarce resource, a focus that has negative effects on the way we think and act in areas of our lives outside that of the scarce resource. If this is true, financial inclusion is a game-changer that both prevents scarcity and alleviates its effects.

On first reading, Mullainathan and Shafir’s book seems to apply immediately to my own life. In my case, a scarcity of time means that I often adopt a focus on time and resulting tunnel vision for the task at hand. This focus has some positive effects—I produce work much faster than I would if I had more time. And it has some negative effects—I forget special events like my closest friend’s birthday (I’m sorry, Sarah! Does mentioning you in this blog post make up for it?). In essence, the authors contend that the single-minded focus that severe scarcity creates absorbs so much psychic energy, mindspace, bandwith, or whatever you may call it, that rational decision-making suffers.

This tunneling—devoting a great deal of bandwidth to a single resource—produces intense focus on the scarce resource, but also catastrophic failure on the things that get neglected to make “space” for such a focus.

For those living in poverty, according to Mullainathan and Shafir, this can have dramatic effects. The data they present indicate that a scarcity mindset, caused by poverty, makes coping with poverty even harder. For the authors, this explains many of the behaviors we see at the base of the pyramid:

… if you want to understand the poor, imagine yourself with your mind elsewhere. You did not sleep much the night before. You find it hard to think clearly. Self-control feels like a challenge. You are distracted and easily perturbed. And this happens every day. On top of the other material challenges poverty brings, it also brings a mental one… The failures of the poor are part and parcel of the misfortune of being poor in the first place (161).

The authors deftly point out that in the wake of this scarcity mindset it is often the small economic shocks—the unexpected illness, the sudden change in income, the school fees that weren’t figured into the monthly budget—that perpetuate the scarcity mindset.

What Mullainathan and Shafir suggest is that financial services can both help keep people from falling into a scarcity mindset and can keep people from making poor decisions while in a scarcity mindset. They note that people need to have cash when they need it, and there are two ways to cultivate this. First, people who are living in poverty need financial services that help build savings slack. Loans with built-in savings requirements address this, as do commitment savings accounts. Second, people who are living in poverty need products that prevent the firefighting that comes from economic shocks. Building a product for farmers that helps to smooth out income between harvest payments works toward this end. Loans, savings, or insurance for special events—weddings or funerals, for example—allow funds to be available when they are most needed.

This is why financial inclusion is more important than we ever knew—providing financial services helps to both prevent and alleviate mental bandwidth issues. Financial services might have psychological benefits that help people to make good decisions for themselves and their families. If Mullainathan and Shafir’s conclusions are correct, financial inclusion becomes a game-changer with major implications for decision-making at the base of the pyramid.

Underlying the solutions offered in Scarcity is a fresh perspective on economic development. It acknowledges the role of understanding behavior when building products and encouraging financial capability—principles that emerged in our “Roadmap” to Financial Inclusion. It also calls for us to “zoom out” and understand the trends, like demographic and urbanization trends, that are working in the lives of those at the bottom of the pyramid—the premise for our Mapping the Invisible Market work.

The book’s conclusions are refreshingly wide-reaching amidst other financial inclusion literature that I’m reading, which are mostly small, randomized control trials whose conclusions are by definition limited. It could be that the book tries to explain a bit too much, however, applying the same concepts to everyone in the world and to nearly every kind of problem. Though the authors are self-aware of this weakness, and in response they complicate their primary hypothesis, adding a few bells and whistles to explain the behavior of those living in poverty and appropriate solutions to scarcity at the bottom of the pyramid.

Whether Scarcity is read to be too far reaching or appropriately ambitious, we are eagerly anticipating Mullainathan’s remarks at our Financial Inclusion 2020 Global Forum. We can’t wait to learn more about why financial inclusion is more important than we ever knew.

For more information on Financial Inclusion 2020, sign up for project updates.

Image credit: Macmillan