Investments in this strategy aim to improve the financial health of individuals so that they are better able to smooth consumption, save to confront unexpected events, manage shocks, and pursue opportunities to improve their livelihoods. The sections below include an overview of the strategy for achieving desired goals, supporting evidence, core metrics that help measure performance toward goals, and a curated list of resources to support collecting, reporting on, and using data for decision-making.  

What

Dimensions of Impact: WHAT

Investors interested in deploying this strategy should consider the scale of the addressable problem, what positive outcomes might be, and how important the change would be to the people (or planet) experiencing it.

Key questions in this dimension include:

What is the problem the investment is trying to address? For the people experiencing the problem, how important is this change?

Financial health—having effective daily financial systems that build resilience from shocks and strengthen the capacity to pursue opportunities—is linked to family stability, education, and upward mobility, both for for individuals today and across future generations (1).

Households in poor financial health can face serious long-term consequences from declines in income or consumption caused by emergencies or shocks including deepening levels of deprivation or poverty.

The Center for Financial Services Innovation (CFSI) has defined four components of financial health:

  1. spend less than income and pay bills on time;
  2. save sufficient living expenses in liquid assets, plus have sufficient long-term savings or assets;
  3. borrow at a sustainable debt load and maintain a prime credit score**; and
  4. plan by having appropriate insurance and thinking ahead for larger expenses.

**Might not apply in all contexts.

What is the scale of the problem?

An estimated four billion people worldwide are at the “base of the economic pyramid” (2). These populations have limited assets to access in times of crisis, few resources to direct towards health and education, and volatile streams of income.

Globally, only 27% of adults reported having saved formally (at a bank or other type of financial institution) over the past 12 months. While access to formal accounts worldwide grew from 51% to 69% between 2011 and 2017, the share of adults who report formally saving has remained stable since 2014 (3).

Poor financial health also affects developed markets. Fifty-seven percent of Americans (a share larger than the population categorized as underbanked or unbanked) struggle to various degrees with their financial health (4). Half of UK consumers (25.6 million) present one or more characteristics of potential vulnerability (5).

Who

Dimensions of Impact: WHO

Investors interested in deploying this strategy should consider whom they want to target, as almost every strategy has a host of potential beneficiaries. While some investors may target women of color living in a particular rural area, others may set targets more broadly, e.g., women. Investors interested in targeting particular populations should focus on strategies that have been shown to benefit those populations.

Key questions in this dimension include:

Who/What is helped through this strategy?

Populations at the Base of the Economic Pyramid: Poor individuals and other vulnerable groups often have the weakest financial health, particularly tif they live in hard-to-reach areas with limited access to financial services (though digital financial services are increasingly able to reach such areas) (6).

Women: Account ownership, savings, and credit all have large gender gaps. Fifty-six percent of women worldwide are excluded from formal financial systems (3).

Children: According to research performed in Mexico, for example, once children are withdrawn from school in response to a large financial shock, they are nearly 30% less likely to re-enroll compared to children who stayed in school (7).

Financially Vulnerable Families: Some families in both developed and developing markets would not be prepared to cover the financial shortfall if they experienced a sudden drop in income.

What are the geographic attributes of those who benefit?

While developing countries, particularly in rural areas, have the largest degree of need, financial health is a global issue that affects both developed and developing markets, and both rural and urban locations. The four billion people at the base of the economic pyramid live in relative poverty and are neither integrated into nor benefiting from the global market economy. Such populations, often rural, live in Africa, Asia, Eastern Europe, Latin America and the Caribbean (8). While they face a different degree of need, a sizable number of adults living in developed markets are also not financially healthy.

Contribution

Dimensions of Impact: CONTRIBUTION

Investors considering investing in a company or portfolio aligned with this strategy should consider whether the effect they want to have compares to what is likely to happen anyway. Is the investment's contribution ‘likely better’ or ‘likely worse’ than what is likely to occur anyway across What, How much and Who?

Key questions in this dimension include:

Is the investment’s contribution ‘likely better’ or ‘likely worse’ than what is likely to occur anyway across What, How Much and Who?

Investing in the provision of customer-centric financial products and services alongside tailored financial education to improve financial literacy will help improve clients' financial health beyond what would happen without such investment. As noted above, lack of access to appropriate financial products and services that allow smoothing consumption, saving to confront unexpected events, and managing shocks can raise financial risk. When populations in poor financial health face income declines as result of an emergency or shock, they may face deep deprivation or be pushed into (deeper) poverty.

The extent to which this strategy can successfully help the intended beneficiaries reach and maintain financial health depends on several aspects including: the availability of responsible customer-centric financial products and services (refer to the Client Protection Principles) designed to promote financial health; beneficiaries' appropriate use of financial products and services; beneficiaries' levels of financial and digital literacy; the availability of social services; the local economic and regulatory environment, including the regulatory framework around mobile money; and the existence of polices that incentivize struggling households to maintain positive habits and that create an environment in which consumers can improve their financial health (1).

How Much

Dimensions of Impact: HOW MUCH

Investors deploying capital into investments aligned with this strategy should think about how significant the investment's effect might be. What is likely to be the change's breadth, depth, and duration?

Key questions in this dimension include:

How many can receive the outcome through this strategy?

As indicated above, more than four billion people at the bottom of the economic pyramid and hundreds of millions in developed markets can benefit from products and services designed to improve financial health.

How much change can beneficiaries experience through this strategy?

The amount of change intended beneficiaries derive from this strategy depends on several factors including:

  • whether the offered products and services are customer-centric* and tailored to promote financial health;
  • individual persistence; and
  • the existence of regulation, social programs, and private-public partnerships —an enabling environment—to design and test financial services and programs that encourage healthy financial behavior among those in need.

Examples of change aligned with this strategy from studies using rigorous research methodologies include the following:

  • A randomized evaluation in rural western Kenya found that access to a new commitment savings service enabled female market vendors to mitigate the effect of health shocks, increase food expenditure for the families (private expenditures were 13% higher), and increase investments in their businesses by 38–56% compared to female vendors who lackedaccess to a savings account (9, 10).
  • In the Philippines, a commercial bank offered a savings product called SEED (Save, Earn, Enjoy Deposits) that prevented female clients from accessing their funds until they reached a certain goal—thus potentially either helping with self-control or mitigating family demands. Research found that clients with such accounts had increased their savings balances by 80% more than those with normal accounts (11).
  • A study in Nepal reported a 20% increase in spending on education among households that opened free bank accounts (12, 13).
  • A randomized evaluation in Ghana of weather-based index insurance showed that, compared to those without insurance, insured farmers had higher cultivation expenditures (+13%) and higher yields and revenues (USD 285 higher, with a median revenue of USD 1179 in the control group), which led to 8% fewer missed meals (14).

*Please refer to the Client Protection Principles and CGAP’s Customer Centric Guide.

Risk

Dimensions of Impact: RISK

Key questions in this dimension include:

What risks do investments in this strategy run in terms of either people/planet experiencing impact or society as a whole? What is the probability that those risks happen?

Risk Factors include the following (categorized according to the IMP Impact Risk Framework):

  1. Stakeholder Participation Risk: Lack of proper attention to client protection and/or appropriate tailoring of products, lack of financial literacy, lack of understanding of the objectives and experience of those affected by the investment, as well as lack of trust in financial and technology service providers could result in access not having as positive an impact on clients that it would otherwise have.

  2. External Risk and Execution Risk: Significant economic, political or social instability could make it difficult for clients to use (especially credit) services effectively.

  3. Contribution Risk: Oversaturation of markets could result in overindebtedness of clients.*

  4. Drop Off Risk: Despite positive impacts of financial products and services, a persistent challenge facing financial service providers is the generally low uptake of certain products (e.g., savings).

Other categories of risks included in the IMP framework were not seen to be significant. Diversification of investments across countries and regions, together with a generally strong commitment to the principles of expanding responsible access, putting client interests first, integrating the voice of those significantly affected,** and a focus on environmental screening and monitoring means that on a global level, such risks are well mitigated. The inclusive finance community engages in direct discussions with external parties, including regulators, to strengthen the sector, and proactively addresses issues such as client protection (Client Protection Principles), environmental standards, management standards and best practices to put clients at the center of all decisions of financial service providers (Universal Standards for Social Performance Management), as well as principles for mobile money providers (GSMA Code of Conduct for Mobile Money Providers). In addition the inclusive financial sector counts with different types of third party assessments, certifications, and ratings that allow investors to better understand whether and how the practices of financial service providers (investees) align with global principles and standards (e.g., Client Protection Assessment and Certification, SPI4 Assessment, Social Ratings, Mobile Money Certification).

*Refer to MIMOSA rankings.

**Refer to Engaging All Affected Stakeholders.

What are likely consequences of these risk factors?

Such risks could lead to an inability of clients to use the services provided effectively and potentially result in negative impacts on clients who carry excessive debt burdens or suffer opportunity costs from the use of products and services that are not effectively tailored to meet their needs.

Illustrative Investment

EarnUp is a consumer-first platform in the United States that helps users optimally manage and pay down their debts. At no cost to the individual user, the platform tracks all their loans in one place and makes their payments in the order and amount that reduces their outstanding debt at the fastest possible rate. The platform also aligns loan payments with the user's personal income schedule, eliminating the significant stress of budgeting limited resources and putting a few dollars aside for future payments whenever the person can afford to do so. Since its launch in 2015, EarnUp reduced delinquencies for its users by 30% and expects users to realize an average of USD 10,000 in savings over the life of each loan.

Fisdom is a holistic financial health platform in India that enables individuals to access investment, savings, and protection programs. Through Fisdom, consumers can invest in mutual funds, purchase tax-saving instruments, manage their pension savings, and buy life insurance. The user benefits from a customized risk-allocation engine that is free of fees, bias, or jargon and is simple to use. The platform nudges customers to pursue micro-investment strategies that will enable them to build long-term savings habits, such investing as little as USD 8-10 on a monthly basis. Through a recent survey on the financial health of its clients, Fisdom found that about 66% of respondents were financially vulnerable. Through Fisdom, customers can grow their assets and savings base to improve their financial health.

 

Draw on Evidence

This mapped evidence shows what outcomes and impacts this strategy can have, based on academic and field research.

NESTA: 4
Risk Sharing and Transaction Costs: Evidence from Kenya's Mobile Money Revolution

Jack, William, and Tavneet Suri. “Risk Sharing and Transactions Costs: Evidence from Kenyas Mobile Money Revolution.” American Economic Review 104, no. 1 (2014): 183-223

NESTA: 3
The Long-Term Effects of Access to Mobile Money in Kenya

Jack and Suri, The Long-Term Effects of Access to Mobile Money in Kenya,IPA

NESTA: 3
Saving for Health Expenditures in Kenya

Dupas, Robinson. Saving for Health Expenditures in Kenya,IPA

NESTA: 3
Commitment Savings Products in the Philippines

“Commitment Savings Products in the Philippines.” The Abdul Latif Jameel Poverty Action Lab. Accessed May 22, 2018. https://www.povertyactionlab.org/evaluation/commitment-savings-products-philippines.

NESTA: 3
Facilitating Savings for Agriculture: Field Experimental Evidence from Malawi

Brune, Lasse, Xavier Giné, Jessica Goldberg, and Dean Yang. “Facilitating savings for agriculture: Field experimental evidence from Malawi.” Economic Development and Cultural Change 64, no. 2 (2016): 187-220.

NESTA: 3
Disaster-Resilient Microfinance: Learning from Communities Affected by Typhoon Haiyan

Disaster-Resilient Microfinance: learning from Communities affected by Typhoon Haiyan; 2016; Asian Development Bank and Vision Fund International

NESTA: 3
Banking the Poor Via Savings Accounts: Evidence From a Field Experiment

Prina, Silvia. “Banking the poor via savings accounts: Evidence from a field experiment.” 2013

NESTA: 3
Agricultural Decisions After Relaxing Credit and Risk Constraints

Karlan, Dean, Robert Osei, Isaac Osei-Akoto, and Christopher Udry. “Agricultural decisions after relaxing credit and risk constraints.” The Quarterly Journal of Economics 129, no. 2 (2014): 597-652.

NESTA: 3
Unpacking the Links from Financial Education to Financial Behaviors in India

Carpena, Cole, Shapiro, Zia, Unpacking the Links from Financial Education to Financial Behaviors in India

NESTA: 3
Reducing Barriers to Savings in Rural Malawi

Brune, Lasse, Xavier Giné, Jessica Goldberg, and Dean Yang. “Reducing Barriers to Savings in Rural Malawi: A Field Experimental Approach’.” (2009).

NESTA: 3
Constraints to Saving for Health Expenditures in Kenya

Dupas, P; Robinson, J., Constraints to Saving for Health Expenditures in Kenya, IPA

NESTA: 3
Unpacking the Links from Financial Education to Financial Behaviors in India

Carpena, F; Cole, S; Shapiro, J; Zia, B., Unpacking the Links from Financial Education to Financial Behaviors in India

Each resource is assigned a rating of rigor according to the NESTA Standards of Evidence.

Define Metrics

Core Metrics

This starter set of core metrics — chosen from the IRIS catalog with the input of impact investors who work in this area — indicate performance toward objectives within this strategy. They can help with setting targets, tracking performance, and managing toward success.

Additional Metrics

While the above core metrics provide a starter set of measurements that can show outcomes of a portfolio targeted toward this goal, the additional metrics below — or others from the IRIS catalog — can provide more nuance and depth to understanding your impact.