What Do Our Customers Need?

I just finished reading a fantastic book titled Portfolios of the Poor: How The World's Poor Live on $2 a Day, a provocative look at how the poor actually related to and make use of financial services.  By meeting with hundreds of families every two weeks for a year, the authors were able to not only understand how much money they bring in per year--which is the number we usually hear of--but also what their cash flow looks like month-to-month.  As I've come to learn over the years, cash flow is king: it doesn't matter how much money you have, if the timing of inflows doesn't match the timing of outflows, you've got a problem!

The book left me with several important conclusions (listed below) that led me to question what it is our customers need, as opposed to what we think they need and what we are presently offering them.

• The poor are extremely active financially, making use of a variety of formal and informal financial services to meet their needs; in fact, one could argue that financial services are more important to them than the non-poor.  Perhaps this is why Dr. Muhammad Yunus, 2006 Nobel Peace prize winner and founder of Grameen Bank, argues that access to credit is a human right.
• What the poor lack is access to reliable financial services--loan, saving and insurance products--that are convenient and structured around their unique needs
• Many of our assumptions about how the poor relate to financial services are wrong:
• Microfinance loans are frequently used for non-business purposes
• They are active savers.  However, the instability and challenges they face mean that they save for short-term needs and frequently draw on those savings.  In contrast, we expect our clients to first build up three month's worth of savings before focusing on savings vehicles that are designed for other purposes (retirement, college and so on)
• They are a good credit risk, but products must be properly designed.  For instance, the poor cannot afford large monthly payments, and they often prefer to make lump sum payments on debts when they have funds; at the same time, they are in-need of loans that they can quickly access when the need arises

So Now The key Question: What Do Our Customers Need?

We make a lot of assumptions about what will, and will not, benefit our clients.  For instance, we try to avoid making frequent loans to the same borrower, preferring that they pay off their loan before applying for another.  We also require that borrowers specify the exact purpose for which they are seeking the loan.  We assume that when it is possible for the client to avoid a loan, say by negotiating a 0% payment plan on late utilities, we should not make the loan.  And finally, we assume that savings should be prioritized according to what we feel is best (described below).

Let me be clear, the thoughts that follow are just that: thoughts. I do not know if they are right or wrong, but I believe it's a useful exercise to question our practices and view them from the point-of-view of our clients.

Frequency Of Loans

Our theory is that if we are successful with our loans, we will obviate the need for more loans; conversely, we feel that if a client is in frequent need of loans, there is likely a more structural issue that more loana cannot solve.  This is also what Grameen Bank used to believe, but when in 2001 they launched 'Grameen II'--a total revamp of their business model--this belief was discarded.  Why?  Because they found that the requirement that loans be taken out for a fixed period of time didn't take into account what the poor needed.  For instance, a farmer might need a loan before harvest time, when money is tight, only to pay it off in three months, when money is more plentiful.  

Instead of this rigid structure, Grameen began allowing borrowers to "top off" their loans--if they borrowed $500 and had paid back $200, they could borrow another $300 at any time.  The truth is that the poor were doing this anyway, but instead of borrowing from Grameen, they were going to friends, family and money lenders.  Why not view this as an opportunity to better serve their clients while also increasing their interest income for us them an organization?

Loan Purpose
From day 1 we recognized that low-income Americans need more than just micro-enterprise loans--like all of us, they use credit and savings to smooth over cash flow, pay for emergencies and invest in their future.  In fact, last year we decided to ONLY do consumer loans--in part because we weren't good at business loans (high defaults), in part because we weren't having impact, and in part because our goal, ending poverty, required that we reach a large swath of the population, and only a small percentage of Americans wants or is able to start a successful business.  This is not to discount the tremendous importance of microbusiness, but rather to acknowledge that most people don't fall into this category (crucially, though, microenterprises create millions of jobs and are essential to a strong and vibrant economy...Thus they are tremendously important to the economy as a whole and to the poor in particular.  For more info on this, check out the Association for Enterprise Opportunity and the FIELD Program).

Yet even though we only do consumer loans, we retain one fundamental belief: the loan purpose must be stated up-front, and it must be for something we think makes sense.  As a result, the majority of our loans have fallen under the following categories: technology purchases, vehicle repairs, home upgrades, immigration costs, paying off high-interest debt and placing a security deposit on an apartment.

A strong driver behind this reasoning is that we only want to make loans that are most needed.  Portfolios of the Poor challenges this assumption.  For example: we don't like to do loans to get caught up on a debt for which a payment plan, at 0%, is possible.  And on the face of it, that makes sense.  What this doesn't factor in, however, is the transaction cost.  After all, if a family is juggling 10 different things--two jobs, taking care of children, after school activities, doctor visits, etc.--the time it takes to negotiate that settlement may not be worth it.  In other words, paying 20% APR for our loan may be cheaper, not financially but rather physically and emotionally, than spending several hours on the phone with the utility company.

Savings
One of the basic tenets of our Financial Coaching program is that our clients should first focus on building up a savings reserve of at least three month's worth of their expenses.  This cushion is meant to protect them from unexpected losses of income or increases in expenses.  Portfolios of the Poor leads me to believe that, though of course that is important, savings are first-and-foremost used for cash flow purposes. Consider this: you put $10 / week into a savings account or envelope or pre-paid card so that, at the end of the month, you have $40 that you can use for your utility bill.  These savings are not taking advantage of compounding interest, and they are not leading to a large balance at the end of the year.  What they are doing, however, is making it easier to meet monthly cash needs. In fact, when you look at the Rotating Saving and Credit Associations that are common throughout the developing world, you find that they are a means by which people put aside money, not so much for emergencies as for meeting their consistent need for small, lump sums of money.

Food For Thought
Again, I want to reiterate that these are just preliminary thoughts.  After all, we have to consider a number of factors on our end, including a limited amount of capital to lend out, the need to demonstrate impact to funders and the challenge of managing the risk associated with these loans.  That said, I'd like to propose several ideas for more discussion:

• Allow borrowers to "top-off" their loans.  This would, in a way, turn our loans into a kind of revolving line (in theory, but not in legal structure), something that could further address cash flow issuess.  When we say that clients shouldn't be borrowing so often, we are ignoring reality and, in effect, driving them to other, more expensive (and predatory) services, such as payday lenders
• Be more flexible in our thinking about loan purpose. This likely means weighing both the financial and emotional / physical cost of our loan vs. an alternative
• Speed up our processes.  Once a borrower takes out a loan from us and demonstrates an ability to make consistent, on-time payments, subsequent loans should be made in an expedited fashion
• Re-think our role from that of infrequent or one-time source of capital to an entity that reliably and consistently meets the legitimate needs of those we serve.  As part of this thinking, we need to understand that the gap between coming to us and using maintream products and services--bank loans, credit cards, insurance and the like--is probably greater than we've assumed in the past.
• Focus on making smaller (<$1K) loans for first-time clients, and then on slowly increasing the amount good customers can borrow
• Strive to be a more convenient source of capital.  This is one of our biggest challenges, as it is costly to go out into the community to do loan applications or closings.  That said, there are certainly things we can do, be it moving to an electronic loan closing process, making it easier for clients to submit documentation verifiying the information stated on their loan application, reducing the amount of time it takes to do a loan application and get a decision, and developing simple options for borrowers to change the timing of their payments with a given month.  A lot of these ideas depend on technology upgrades, investment in personnel and changes to policies and procedures.  
• Evaluate whether the most basic level of savings should be for three month's worth of expenses.  Perhaps the order should be: savings for monthly cash flow purposes; savings for small emergencies; savings for mid-term goals (buying a house or vehicle, for instance); and savings for long-term goals (college and retirement).
• Look at ways of helping people save money in a way that holds them accountable.  A great model is one practiced by a fantastic organization in North Carolina called Community Empowerment Fund (CEF).  They allow their clients, who are homeless, to deposit small amounts of money with them; they can withdraw funds at any time, but they must first come to CEF.  This makes it harder to pull out money when it is not really needed.

None of these things are easy.  They depend on technology upgrades, investments in personnel and changes to policies and procedure...Which is why all the ideas in this post are meant to start a discussion about where we want to be as an organization moving forward.  So please share your ideas by commenting on this post!