Why start with financial health?
The financial lives of people in emerging economies look both similar and different from those of people in advanced economies. While needs, aspirations, and psychology may be similar, contexts and strategies look very different.
Financial lives in emerging economies are often affected by:
Low and unreliable informal income
Limited access to public services and safety nets
The role of social networks in financial management
The limited efficacy of social networks for management
Minimal utilization of most formal financial services
The multi-functional use of financial tools
We built our approach to customer segmentation around the concept of financial health, recognizing that it enables us to generate a more realistic and actionable understanding of people’s financial lives.
We believe products designed to strengthen financial health are more salient and valuable to customers, expand markets, maximize customer lifetime value for providers, and drive the positive human development outcomes we seek.
People are financially healthy when they are able to use financial tools and strategies effectively to consistently:
the face of
financial and economic opportunities
Financial Behaviors in
To make financial health actionable for providers and practitioners alike, we developed a model to describe and measure the financial behaviors and strategies people use.
People have extensive needs and virtually unlimited aspirations. Whether deliberately or not, they prioritize the use of their limited financial resources to strike a balance between the two. Financial priorities evolve as social, economic, and financial realities change. Financial stress often overwhelms people, hindering their ability to set and pursue clear priorities. In such circumstances they may focus only on their most urgent needs.
Most people plan their finances. Whether their plan spans one day, one week, or one year, they deliberately shape income, build reserves, and cultivate receivables to achieve their priorities. They utilize a variety of strategies, with varying levels of complexity and concreteness, and employ a wide range of financial instruments. Long-term planning can improve their ability to achieve financial priorities, increase resilience, and reduce financial stress. Financial stress often inhibits planning capacity and limits attention to the most urgent needs.
People shape income to better meet needs and aspirations. They work to determine the size and timing of earnings and to improve income reliability in a manner that best covers expenses.
People similarly shape expenses to better meet needs and aspirations. They try to control the size and timing of expenses to better match expected income. Many low-income families run small businesses and manage both household and business expenses together.
Reserves consist of a person's net wealth (including all assets), available labor potential, and social capital. People build reserves by storing value in a manner that balances their unique needs for financial liquidity, security, and returns. Those who establish foundational reserves are better positioned to effectively manage their finances, pursue aspirations, and deal with the unexpected. Establishing a foundational reserve often transforms a person’s financial life by instilling self-confidence and offering new possibilities, tools, and strategies with which to work.
Receivables are the financial resources a person can obtain but does not currently hold. This includes both formal and informal credit as well as social contributions from their community in times of need. People cultivate receivables by growing and securing income, building reserves to establish formal and informal credit, and making investments in the social safety net afforded by their network. The social safety net pools risk and provides people limited support in select times of acute need. Its strength relates to a person’s social status and the size and quality of their social network.
The Psychology of Finance
To identify the salient psychological factors that drive financial behavior, we reviewed the literature of cognitive and behavioral psychology, conducted in-depth qualitative research, and gleaned pertinent indicators from the answers to psychometric questions.
A measure of one’s sense of self, their relation to the world, and their perception of the future. Indicators include:
locus of control
confidence in the future
A measure of one’s planning behavior, drive, perseverance, reliability, and impulsiveness in spending. Indicators include:
A measure of one’s tendency toward curiosity and abstract thinking as well as their self-identification as adaptable and creative.
ATTITUDE TOWARDS SAVINGS
A measure of one’s belief that they earn enough to save and that their savings are safe from the claims of their community. Indicators include:
belief in earning enough to save
safety of savings
ATTITUDE TOWARDS DEBT
A measure of one's sense of personal dependability and their comfort borrowing. Indicators include:
comfort with debt
TRUST IN PEOPLE
A measure of one's trust in the people around them and in the more general population as well as their belief in the equality of their community, and their trust in interpersonal lending and repayment. Indicators include:
trust in people
breadth of trust in people
trust in social financial network
belief in community support
belief in community equality
TRUST IN BANKS
A measure of one's comfort taking bank loans as well as their belief in the customer centricity of banks, the clarity of bank terms, the security of deposits, and the complexity of financial services in general. Indicators include:
trust in banks
belief in authority
financial service complexity