A trial by fire

A trial by fire

May 22, 2020    

The future of financial health measurement

What is financial inclusion contributing in the face of COVID-19 and how do we measure it?

The COVID-19 pandemic rages like a bushfire across the world – putting to test the development community’s long-held notion that financial inclusion would protect the poor against the consequences of financial shocks. What will the focus of financial inclusion strategy be when it emerges from the fire, and what does this tell us about where our financial inclusion measurement efforts must lie?

A different measure of success

insight2impact was set up to promote the use of data in advancing financial inclusion. When we started out five years ago, the ruling measure of financial inclusion was how many adults had bank accounts. Whether they used them or not was not yet measured to any significant extent. Our hypothesis was that financial inclusion can only be meaningful if accounts are used and that people would only use a formal financial service if it meets one of their core needs: to transfer value from one person to another, to meet their recurring expenses, to deal with a shock or crisis, or to pursue opportunities and achieve longer-term goals.

The ultimate measure of success would not be growth in the number of accounts, but how successful the financial sector is in meeting client needs. And such success would not mean outcompeting other formal service offerings but beating default cash behaviour and informal and social alternatives, such as turning to family and friends, in providing a means of transferring value, making ends meet, withstanding financial shocks and pursuing opportunities.

To test these hypotheses, we rolled out a series of pilot studies globally. We conducted our own demand-side surveys and analysed existing financial inclusion data – quantitative as well as qualitative. We overlaid the demand-side findings with transactional data analysis on bank accounts and mobile financial services to develop an objective picture of usage behaviour.

Not preferred

Our findings are sobering: For the most part, the poor are not using the formal financial sector to meet their needs. They prefer to live their lives in cash and to trust their households and their community – the people they know – rather than formal financial institutions, with their finances. For example, our Mexican study shows that 87% of those who have a bank account still predominantly use cash for their day-to-day expenses. When faced with a financial shock on the back of a risk event, a third of the sample turned to their social circle for credit and a similar proportion asked their social contacts for assistance. Almost nobody used insurance and less than 10%, each, turned to formal credit and savings. The same picture emerged from the Kenya, Nigeria and Philippines data.

It is only for specific transfer-of-value use cases that the formal sector is used at any scale – receiving salaries, buying airtime, sending money or receiving remittances. And here, most success is due to the rise of mobile money and the introduction of instant payments. For example, our Nigerian analysis showed that while POS and cheque transactions remained flat over the study period, the number of unique customers using the instant payment platform almost doubled.

Not building financial health

Even more sobering is that we’re not picking up evidence that financial service usage is really changing poor people’s financial outcomes. The COVID-19 pandemic is bringing home just how hard-hit people are in the face of an economic crisis. Initial research shows that, although some are able to draw down formal savings, it will not last them very long, and credit isn’t a sustainable solution either. In fact, global data shows that those with debt obligations are less likely to be resilient [1].

The fire test also shows up weaknesses in informal and social ways of meeting financial needs: When the real economy suffers and everybody has less, turning to the community or needing to sell assets becomes less viable as a coping strategy.

In the final instance, governments must step in as guarantors of the survival of vulnerable populations.

Out of the ashes

So, as the fire burns, how can financial inclusion help?

Financial inclusion can also provide viable ways for people to be resilient in times of crisis. When social networks are no longer enough, the only other sources of financial resilience are financial or physical assets and insurance. The imperative for accessible savings and investment vehicles to build up assets over time, asset-linked lending and insurance is stronger than ever.

Measure where it matters

What does this tell us about where our measurement efforts must lie?

As policymakers face the enormity of the task to provide emergency relief and then, gradually, rebuild what society has lost, they need to know what the resilience of the population is. They must also be able to reach people digitally. This means that:

  1. We must get better at tracking financial health and understanding what business models are most successful in building it. Financial health (or the absence of it) is a proxy measure for the contingent fiscal liability of the state – the extent of support needed to sustain livelihoods. Good work is already being done, but more is needed.
  2. We must get to the bottom of digital behaviour. Tracking of digital savings and remittance patterns can help inform decisions on how to leverage people’s behaviour in tailoring the policy response. Tracking digital transactions can also help governments to understand whether their digitisation measures are successful. Rwanda is a case in point: The Rwandan Government instituted a number of measures (such as making P2P transfers free) when the COVID-19 lockdown started. By tracking mobile payment transactions, we were able to give policymakers rapid insights on whether the policy changes are working as expected.
  3. We need to provide a nuanced view. Vulnerability differs across population segments, geographical areas and economic sectors. Segmenting the population to track behaviour and impacts per segment can help to target policies.
  4. We must provide real economy insights. As the policy priority shifts from managing public health impacts to restarting the economy, what can we learn from data on financial transactions? Measurement of digital transactions across merchant types gives an indication of what people are buying and how payment streams to different industries are affected. It may not paint a complete picture of economic activity, but it can help governments to take the temperature of the real economy.

In the data we’ve collected and analysed, we can find little seeds of what is needed for the financial sector to build a more resilient world. The importance of digital payments means that transaction data analysis will continue to grow in importance. Equally important is understanding people’s needs to cope and pursue opportunities, especially so in times of crisis. Looking at financial services through the financial needs lens has proven a useful framework.

Download the infographic Size 5.80MB

See the AFI Financial inclusion data working group special report and our FinNeeds synthesis note for more on the financial needs approach to financial inclusion measurement, as well as our recent note on what policymakers need to know about .


[1] Based on analysis by FSD Kenya on global Findex data for 2014 and 2017

insight2impact (i2ifacility) was funded by Bill and Melinda Gates Foundation in partnership with Mastercard Foundation. The programme was established and driven by Cenfri and Finmark Trust.

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