Introducing Common Cents Lab Global

Introduction

Throughout this year (2020), the Common Cents Lab has been working on the expansion of our applied behavioral research approach to improve the financial health of low- to moderate- income (LMI) households in Mexico, Turkey and China. Following a train-the-trainer model, we partnered with 3 organizations in Mexico (New Ventures Group, CIRKLO and Proyecto ICCE – UNAM) and 3 organizations in Turkey (BUBA Ventures, CARF and FODER), who are currently leading projects with different financial services providers (FSPs). We also established a co-learning network in China with research teams from universities to implement some field studies and expand knowledge in the field of applied behavioral science.

Our experience in the United States, launching around 100 projects with over 60 financial organizations, has proven our ability to improve key financial behaviors such as: increasing short- and long-term savings, reducing expenses, reducing debt and, when possible, increasing incomes. Moreover, we have built a deeper understanding about how individuals, especially those underserved, make financial decisions in varied and challenging contexts. People are over-optimistic and fail to prepare for financial emergencies, they take on more debt than they can manage and repay it in less than efficient ways.

We have a strong and supported conviction that to change financial behaviors, the context in which decisions are made matters.

Financial challenges are global. The COVID-19 pandemic has exposed and worsened the financial challenges that people face. Before the pandemic, 71% of adults in high-income countries reported saving any money, while only 43% of adults in developing countries did so. From this last group, only 1 in 5 adults saved in a formal financial institution, like a bank or credit union. While saving informally can have behavioral benefits in terms of leveraging social norms and cultural relevance, it also carries higher risks that are even higher in midst of the financial crisis. At the same time, while 73% of adults in high-income countries could come-up with funds to cover an emergency, this is true only for 50% of adults in developing countries, whose main funding sources would be social networks (family and friends) and extra work, instead of savings[1]. With a global decrease in savings and employment[2], these funding mechanisms are weaker and put those traditionally with low financial resiliency at an even higher financial risk.

Traditionally, countries and organizations have taken different approaches to solve these problems, mainly focused on developing financial knowledge and abilities. However, we have a strong and supported conviction that to change financial behaviors, the context in which decisions are made matters. As such, our work focuses on improving the environment, making it easier and attractive for individuals to make the right decisions that lead to financially healthy behaviors.

What challenges are we addressing in Mexico?

In Mexico, the main financial challenges can be represented by the “intention-action gap” behavioral principle. According to a financial literacy index[3] among OECD countries, Mexicans score 6^th in financial knowledge, 4^th in financial attitudes, but last in financial behaviors. What they want to do, and know how to do, doesn’t translate to healthy financial behaviors such as savings. While the number of Mexicans with a bank account has increased from 44.1% in 2015 to 47.1% in 2018[4], the share of people saving at a financial institution decreased from 14.5% in 2014 to 9.8% in 2017[5]. Traditionally, savings in Mexico have been supported by informal mechanisms, which explain some particularities of their savings behavior:

Source: BBVA Research and ENIF 2018.

As the graph shows, at least 63% of Mexicans use some sort of informal mechanism to save. Organizing a “Tanda”, giving money to relatives or holding a “piggy bank” at home are good starting points, but carry inherent risks. As such, our work in Mexico during 2020 is focusing on improving people’s savings behaviors, by “nudging” them towards more sophisticated and formal services. Specifically, we are working with the following financial partners:

1. Albo: Mexico’s leading challenger bank that offers a fully digital experience. While more and more users choose Albo to make transactions, very few of them are using Albo’s “Espacios” tool (partitions in the account for organizing personal finances) as a mechanism to build emergency savings. Given that most of Albo’s users have volatile incomes (independent workers, entrepreneurs, merchants), we are testing different automatic saving mechanisms, in order to implement the one that better fits their transactions and needs.
2. Curadeuda: A debt repair organization in Mexico that helps users consolidate and renegotiate their personal and credit card loans, while helping them save towards repaying their debt through a monthly savings program. Currently, 40%-50% of users who save in the first month don’t save in the second month and drop out. We know that indebted users can experience a scarcity mindset, limited attention or an ostrich effect that deters them from following through with their intentions. Therefore, we want to test if rewarding on-time savings with a chance to win a full debt repayment increases the probability of making savings on time and gets them closer to their savings goal.
3. NatGas: A company that helps taxi drivers save on fuel, by converting their cars from petrol to natural gas. Building on their financing mechanism that allows users to repay the cost of the installation every time the refill their tank, we want to test if we can get taxi drivers to start saving for specific goals through formal mechanisms. We aim to leverage communications as a way to overcome present bias and optimism bias, to get taxi drivers to save for car expenses (their main work tool), instead of using “piggy banks” at home or taking on expensive credit.

What challenges are we addressing in Turkey?

In Turkey, financial instability, mainly driven by macroeconomic factors and government policies, influences how people manage their day-to-day finances. The most recent OECD survey about adult financial literacy reported that 50% of Turkish had difficulties making ends meet at least once in the last 12 months and four out of ten adults had borrowed money at least once to cover their monthly bills and expenses[6]. Even more troublesome, the COVID pandemic is placing a toll on Turkish inflation, making it even more difficult for people to make sound and consistent financial decisions.

On the other hand, Turkey’s financial health environment shows an important gender gap[7]. While 83% of men have a financial account, only 54% of women do. A major challenge to overcome this gap is that 89% of unbanked women are not part of the labor force, compared to 69% of men. However, some opportunities arise in the fact that 88% of unbanked women have a mobile phone, and between 10% and 16% send or receive remittances and use informal savings mechanisms.

Cultural practices, uncertainty in the financial environment, and a Fintech sector that is starting to grow define the challenges we are facing to improve Turkey’s LMI households’ financial health. Specifically, we are working with the following partners:

1. Tarfin: A start-up aiming to increase farmers’ access to convenient farming loans that allow them to repay after harvest. Previous research shows that farmers tend to experience scarcity mindset as they run out of income before harvest season. As such, we are exploring ways to present Tarfin’s loans as an alternative to avoid income scarcity throughout the farming season and prevent farmers from taking on more expensive loans.
2. CARF and FODER: One of the consequences of being unbanked in Turkey is the failure to build a credit score that provides access to even more beneficial financial products and services. With two different organizations, we are exploring alternatives to help users improve their credit payment behavior (such as credit cards or utilities), by reframing the benefits of better credit scores and using reminders to overcome limited attention.

What challenges are we addressing in China?

China has a population of 1.386 billion[8], of which 58 percent is located in urban areas and is classified as an upper middle income by the World Bank as of 2017^[9]. However, due to the regional imbalance of social economic development, the phenomenon of rural relative poverty remains prominent in central and western China[10].

Research has showed that disease was the main cause of poverty in China, and the lack of natural endowment, poor geographical conditions and poor ecological environment were major barriers to reduce poverty[11]. Households with elderly and disabled members are inherently vulnerable to poverty, and among population in rural China, the number of people in poverty due to an illness was 44.1%, and those in poverty due to long-term chronic diseases was 22.8%[12]. In general, the long-standing urban-rural dualistic structure, along with the natural resources and social factors that restrict rural development, resulted in a total of 43.4 million people still living in poverty at the end of 2016[13].

More and more young people choose to migrate to cities for better earnings and careers, some leaving their wives in the rural area to take care of the families.  Those migrant workers are a special group in urban cities in China. While they contribute to the local economic growth, especially in major cities, they do not enjoy the rights of urban residents and are not sufficiently protected in and outside of work due to policies. Those workers would take jobs other urban residents are unwilling to do, and live in poor housing conditions, and their kids would not have access to public school systems in the cities[14].

Aiming to solve financial problems of LMI population impacted by disease and urban-rural dualistic structure, we are planning to implement projects in China. However, given the political and economic context, it is unlikely that the CCL will be able to operate in China through the same NGO pathways as in Mexico and Turkey. In association with Duke Kunshan, a co-learning network instead will provide funding and other support to three research projects per year in China, to explore solutions aimed at increasing earnings and decreasing expenses, and to expand knowledge in the field of applied behavioral sciences.

1. Duke Kunshan University: Health care expenses can be a major burden for rural households. To tackle the issue, China added 70 new drugs (including 14 for chronic diseases) to the list of medicines covered by its medical insurance program, cutting the cost by up to 80 percent, but the awareness of the policy among patients is relatively low. The research team is working on reducing the economic burden of chronic diseases for rural elderly patients by increasing awareness and take-up of the China’s cost reimbursement system. The hypothesis is that by working with village doctors and collecting data, they could design field-based interventions that increase the number of people who take advantage of this reimbursement system, which contributes to their family’s financial health.
2. Fudan University: The number of migrant workers still increases year by year, with over 51% of them being the new generation of migrant workers (born in 1980 and after). Survey showed that those populations frequently shift between temporal jobs, and lack clear goals and motivation. The research team plans to use education and gamification methods to look at how changes to working patterns and other behaviors could improve migrant workers’ financial well-being.
3. Peking University: Keeping other conditions equal, the households with working women have higher living standards both objectively and perceived. The overall objective of the project is to help left-behind women (wives whose husbands migrated from rural areas for employment in cities) to commit to more labor supply outside the home and gain a stable source of income. This research project will also examine the mechanism that helps rural low-income populations form better habits of budgeting and planning, and how to guide them to achieve long-term financial goals by low-cost, implementable and logical behavioral tools.

Next steps

Overall, these projects are a unique opportunity for the Common Cents Lab to test our applied research approach in novel settings, as well as to keep building evidence for behaviorally-informed interventions as mechanism to improve financial health. In the next months, our focus will be on designing and rigorously testing these interventions, while preparing ourselves for a new round of international partners for 2021.

 

Common Cents Lab Global Partners

 

[1] World Bank. The Global Findex Report 2017

[2] McKinsey (2020). Financial life during the COVID-19 pandemic.

[3] SHCP. Financial Literacy Index in Mexico 2019.

[4] National Financial Inclusion Survey in Mexico (ENIF 2018)

[5] World Bank. The Global Findex Report 2017.

[6] OECD. OECD/INFE International Survey of Adult Financial Literacy Competencies. Paris: OECD, 2016

[7] World Bank. The Global Findex (2017). https://blogs.worldbank.org/allaboutfinance/call-turkey-close-financial-gender-gap

[8] The World Bank, “China Overview.”

[9] Ibid

[10] Liu Y, et al. Regional differentiation characteristics of rural poverty and targeted poverty alleviation strategy in China. Bull Chin Acad Sci. 2016;31(3): 269–72.

[11] Liu Y S, Liu J L, Zhou Y. 2017. Spatio-temporal patterns of rural poverty in China and targeted poverty alleviation strategies. Journal of Rural Studies, 52: 66–75.

[12] The China National Health Council implements a health poverty alleviation project to prevent rural poor from becoming poor due to illness and returning to poverty due to illness. 2017. http://www.nhc.gov.cn/xcs/2017hydt/201703/399de486b5e044a89dfed9e8c1ff596e.shtml

[13] The National Bureau of Statistics of China. The series of economic and social development achievements in the 40 years of reform and opening up. 2018. http://www.stats.gov.cn/ztjc/ztfx/ggkf40n/201809/t20180903_1620407.html

[14] Li JW (2002). On protection of the labor rights of migrant workers. Academic Exploration 5: 71–74. [In Chinese]