Background

Despite the staggering growth of India’s financial sector, the financing needs of millions of households still remain unmet. The poor, in particular suffer from unreliable and expensive financial instruments that unnecessarily exacerbate many of their hardships. Loans from informal moneylenders often come with extremely high interest rates. Formal borrowing is frequently limited to joint-liability group models that do not allow the flexibility of taking up loans whenever cash needs arise. Reliable and accessible saving devices are rarely available to poor households, particularly in rural areas. Therefore novel products are needed that allow poor people to meet their financial goals such as smoothing the cash flows despite their irregular income or the ability to save lump sums to cope with unforeseen life-cycle expenses.

Innovation in financial product design is still hindered by a conceptual framework that is frequently underpinned by unrealistic assumptions about human nature. Contrary to what the standard economic framework suggests, potential users of financial services are not rational utility-maximizing individuals. Over the past decades, research in psychology and economics has increasingly emphasized the strong influence psychological factors exert on people’s ability to make and adhere to decisions they consider beneficial. In the realm of finance, for instance, self-control problems and cognitive biases pose severe challenges for many individuals in building up savings or choosing the right loan. These new insights into the challenges people face in managing their money require a shift in thinking about the economic lives of the poor and how to increase their financial access.