Financial Education: Time for a Re-Think?
Sep 2, 2014
Financial education is often touted as being essential for low-income people. But traditional financial education in both poor and rich contexts too often takes a didactic, classroom-based approach to conveying analytical financial concepts such as budgeting, saving, managing debt, and calculating interest rates. We need to re-think the process of financial education to merge it with product marketing, thereby making it more relevant for customers and more cost-effective for financial institutions.
Recent research by Julie Zollmann and Daryl Collins suggests that, particularly among the poor, traditional financial education is missing the mark both in terms of content and pedagogical approach:
For the poor, financial decisions are not big, infrequent analytical choices about allocating funds. Rather, financial management is a constant cycle of earning and allocating uncertain, erratic cash flows. Managing money is all about staying disciplined. Low-income Kenyans, for example, are already strong at budgeting and saving; the real knowledge gaps come in understanding how financial products should function to help them stay on track and realise their short- and long-term goals.
Research participants said that money management is something they would find difficult to learn in a classroom. Experience rules. People test financial products with small sums of their own money and take little risk to make sure the product performance conforms to their understanding before entrusting it with larger sums. Frequent, clear feedback and ready answers to their questions seem to be key factors enabling effective product testing.
These observations lead us to favour an approach to financial education based on product marketing. But many financial education donors have maintained the position that financial education is a public good, so institutions should not use it as a platform to market their products. The well intentioned idea is to protect people from exploitation by financial institutions, but in order to improve people's financial capability, we need to help them internalise money management concepts, supplemented with information about available products and services and how they work. Better informed people will make better decisions on which products to use, to the mutual benefit of the institution and themselves.
Finally, it is essential to link financial education to real products, not just because of the need to provide consumers opportunities to use and experience products, but also because this provides an opportunity to deliver financial education on a massive scale as part of product marketing efforts. The alternative is small-scale financial education delivered as part of charity or corporate social responsibility efforts. With more than 2 billion people financially excluded, efforts on that scale simply do not fit the need.
It is clearly time to test the efficacy of alternative, experiential, product-focused financial education interventions compared to traditional financial education training. Some financial institutions are already working along these lines. Perhaps the best example is the IFMR Trust's Kshetriya Gramin Financial Services (KGFS) in India.
KGFS uses "wealth managers" to deliver their range of financial products to the 2,500 customers served by their branches. The KGFS model is structured around the concept of financial well-being and aims to maximize the financial well-being of every client individual and enterprise. As part of the enrolment process, customers' income, expenditure, assets, and plans for the future are assessed to identify the household's potential needs for financial services.
To conduct and respond to this assessment, KGFS uses an evolving framework:
- Plan (for future aspirations: education, marriage, housing, acquisition of land or business asset, and so on.)
- Grow (through investing in business from either loans or savings)
- Protect (through life, livestock, and accident insurance products)
- Diversify (through investing in a range of assets and avoiding concentration)
Wealth managers are trained to explore their customers' plans and financial needs. On the basis of this discussion, they fill out a comprehensive form which is then uploaded into the KGFS wealth management system to identify which of KGFS's 14 products should be offered to clients. KGFS is aware that the initial data collected may not be very accurate, but the conversation about the intersection of their financial aspirations and the products available helps customers realise their plans. Customers often start with a single credit product to test KGFS and its intent, but follow-up conversations often yield increasingly accurate data and more opportunities to sell products. Notably, the wealth managers are not assessed on the basis of the products they sell but rather the financial well-being of their customers–as measured by their net assets and the level to which these are appropriately protected and diversified.