Can financial products be designed to provide peace of mind?

Microfinance institutions are lending billions to the poor
each year.  Can they make that money more valuable to
clients simply by redesigning their loans?

 A few months ago I wrote that peace of mind was a first-world luxury.  While I have never seen a study putting a value on it, I think that it’s an important ingredient in development thinking, especially where finances are concerned.

Last week I spoke with the leader of an urban microfinance institution in Dhaka about its clients and their needs: was it mainly credit or savings they were after?  He said,

“When we first talk to them, they ask a lot of questions about credit.  All of them say they want it.  We sign them up for a savings account and after a few months, they get access to credit.  Ultimately only half of them end up using it, but all of them want to know that they can if they want to.”

And there it is—much of the potential value of credit is simply in knowing that it’s there if you need it.  That security enables individuals to change how they use their resources, potentially making greater investments, taking more risks, or even just being a bit happier and sleeping easier at night.

Certainly a big part of providing peace of mind comes from institutional faith—will I be able to get the amount of money I need at the time and the place that I need it?  If the answer is “no” or potentially worse, “I don’t know,” we have a problem. The most caveats required to answer the questions also impede its value—many microfinance institutions are not in the business of “pre-approving” credit lines, others may only allow clients to have one loan at a time (meaning that when they have a loan outstanding, they have no additional credit).

Long-term relationships between clients and
financial institutions help build up trust and
a sense of security.  Are there ways to do it
faster?

This is also a big make-or-break point for mobile money providers—unfortunately in many cases, when people need money, the shops are closed or agents don’t have that much cash on them. Just one experience like this instantly reduces the trust in a mobile wallet as a place to keep savings.  Recent research shows that many people don't trust the phone networks either, due to the frequent issues with connecting.

We can make money go a lot further by thinking more about the psychological aspects--a dollar you can count on in a pinch is worth a lot more than one you will have to search for.