Nudges to Help the Poor Achieve their Financial Goals
A call for partners to test and scale up text messaging for improved financial behavior
The Problem: The Poor Face Obstacles to Optimal Financial Decisions
From the United States to Uganda to Indonesia to Peru, the poor face many difficulties in managing their finances to best achieve their life goals. Low income may seem like the biggest obstacle, but in fact, it is only part of the story. The efficient management of one’s resources becomes all the more critical when there is little surplus to spare. However, for many reasons, optimal financial decisions are difficult to make. People often have incorrect information on savings products, or compelling temptations for current consumption. They may be inattentive to their future needs or have incomplete information about future income or expenses. They may simply be inattentive to the daily tasks necessary for saving, like setting aside cash or going to the bank. These factors often result in lower savings levels than individuals say they would like to have, given their resources. In a world filled with present-day needs and temptations that compete for our attention, how can we simultaneously focus on the needs of the future to make better decisions over our lifespan?
The Opportunity: Text Messages
The expansion of mobile phones presents financial institutions and telecommunications firms with an opportunity: sending reminders to save and other financial messages through SMS technology. Where this service has been rigorously tested, results have been encouraging: savings balances increased, savings goals were more often achieved, and loan repayment improved. IPA has already begun to test the application of SMS messages for improved financial behavior in several settings, but there is much yet to learn.
The Existing Evidence: Pilots in Four Countries
Three randomized evaluations of over 13,500 savings account holders in Peru, Bolivia, and the Philippines found that simple and frequent reminders were effective in raising savings balances and helping people reach their savings goals. The simple reminders raised balances by as much as 16% and were most effective when they mentioned both the savings goal and an incentive to save. The full results are here.
In two randomized evaluations of borrowers, text messaging also led to increased repayment: in Uganda, a monthly SMS sent to microborrowers before the repayment date resulted in a 7-9 percent increase in the probability of paying on time. In the Philippines, text messages sent before each payment date were effective in reducing late payments by 24 percent and in reducing the number of loans with unpaid balances by over 40 percent (these effects were only found when the SMS was signed by the account officer).
Significant Impact for Minimal Cost
There are many reasons why SMS reminders present a promising opportunity for financial institutions and their clients. Though 6 to 16 percent represents modest growth for low-balance savings accounts, the low cost of sending an SMS message allows this service to have a high return on investment. Reminders can be brought to scale quickly and at minimal expense. Mobile phones are widespread—89 percent of the developing world has an active SIM card—and SMS is a reliable delivery platform that is already familiar to mobile phone users all over the world.
In short, mobile phone reminders are easy to implement, inexpensive, scalable, and effective. Yet there is much still to be learned about how best to use messaging to help guide people to improved financial decisions.
Designing Effective Messaging Campaigns
IPA is committed to bringing mobile phone messaging to scale across the globe. But many questions remain about why reminders are so effective at improving financial behaviors, and how best to implement them for long-run behavior change. The IPA Messaging Replication Program will test this promising service and derive a robust set of prescriptions on how to implement messaging programs to help people make the best use they can of financial services. IPA is seeking partners to help refine this encouraging program through rigorous product testing.
A comprehensive set of carefully designed deployments will explore many aspects of the theory on why messaging can change behavior. Understanding the underlying theory is helpful for one critical reason: with a clearer understanding of why messaging changes behavior, more robust prescriptions can be made for new institutions in new settings, to help design optimal strategies for interacting with clients. Can messages be informational, and if so, how does one best convey credible, relevant, and needed information? Do messages increase attention to tasks, or future needs, or future income uncertainty? Do messages persuade people to value future consumption more, or current consumption less, thus encouraging higher savings now? Naturally there is no generic message for which the answer is the same for all people, and the tests are designed to be sensitive to different groups.
The comprehensive tests will also examine characteristics of messages that we think can be calibrated to enhance effectiveness in a given setting. Such characteristics include:
- Timing, frequency, and duration,
- Dynamics and interactivity,
- Salience strategies,
- Content and wording, and
- Personalized information, among others.
In the end, we aim for a set of guidelines, backed by evidence, which will help financial institutions design their own messaging campaigns. In turn, they will help improve their relationships with their clients by helping them use financial services efficiently both in the short run and in the long run.
A Call for Partners
The Messaging Replication Program is seeking partners who are interested in exploring these questions with us and in scaling-up a messaging program for their clients. Potential partners include:
- Financial institutions that provide deposit services and/or loan products
- Bank intermediaries or agents with direct client contact (e.g., agents that accept deposits)
- Organizations that deliver training in financial literacy or financial management skills
- Telecoms with an interest in improving the financial practices (e.g., mobile money) of their subscribers
Ideal partners will have over 20,000 clients, an aim to serve the poor, and a robust Management Information System (MIS) to track administrative outcomes, such as savings and/or loan balances. If your institution fits this description and is interested in improving the savings and payment practices of your clients, please contact us. To download the information on this page as a pdf, please click here.
If you are interested in participating in or supporting this project, please contact Aaron Dibner-Dunlap, Project Manager, at email@example.com.
The IPA Messaging Project is led by Gharad Bryan (LSE), Aaron Dibner-Dunlap (IPA), Dean Karlan (Yale), Jake Kendall (Bill & Melinda Gates Foundation), Margaret McConnell (Harvard) and Jonathan Zinman (Dartmouth). It is funded by the Citi IPA Financial Capability Research Fund, supported by the Citi Foundation, and the Yale Savings and Payments Research Fund, supported by the Bill and Melinda Gates Foundation.