Despite progress in extending access to financial services to underserved populations, many still hesitate to use them. Through an understanding of human behavior and decision-making, regulators can design policies that close this gap, writes Veronica Presley, Senior Officer, Procurement, Alliance for Financial Inclusion.

In recent years, expanded banking access through digital platforms and microfinance has brought financial services within reach of previously marginalized communities, including low-income individuals, rural populations, and women.

While efforts may seem successful on the surface, simply having access to services doesn’t guarantee people use them. Many people remain reluctant to use financial services, notably digital financial services, due to psychological and behavioral restraints. For financial inclusion efforts to be truly effective, they must take account of these critical behavioral factors.

Role of Behavioural Economics in Financial Inclusion

People do not always make decisions based on rational calculations. Our interaction with financial services is shaped by cognitive biases, emotions, habits, trust, fear, and other forces. Behavioral economics provides a framework for recognizing these patterns, and designing interventions that align with natural human tendencies. By understanding how people perceive risk, process information, and respond to incentives, policymakers can create financial systems that meet real people’s needs.

Around the world, financial institutions have successfully applied behavioural insights. For example:

• To encourage its customers to save, a bank in Tanzania implemented a behavioural insight-based SMS campaign. Customers received personalized messages, based on behavioural science principles, incorporating elements such as:
• Social proof: “Did you know that many people in your area are saving regularly? You can too! Check your balance today.”
• Goal setting: “Dear [Name], thank you for continuously saving towards your goal. You are now at 80% of your goal. Keep saving!”
• Commitment Reinforcement: “You’ve saved X amount this month towards Y goal. Keep up the good work!”

This led to a significant increase in savings rates, and demonstrates how small behavioural nudges can have a profound impact on financial behaviour.

• M-PESA’s success in Kenya is driven by its ease of use and trust-building strategies. By eliminating the need for traditional banking infrastructure, it reduces friction caused by paperwork and complex procedures. Its immediacy and convenience encourage frequent usage, reinforcing positive financial habits and ultimately increasing financial inclusion.

• In Latin America, Fintech platforms have adopted Behavioral Economics to tailor microloans based on user profiles. By analyzing behavioral data, these platforms not only extend credit to underserved populations, they generate higher repayment rates by adjusting loan terms to fit individual behavior patterns.

How can policymakers leverage Behavioral Economics?

By leveraging insights into cognitive biases, decision-making processes, and trust-building strategies, policymakers can design interventions that truly empower underserved communities. Across the global AFI network, we see policymakers applying this insight to their regulatory strategies.

• The Central Bank of Armenia’s (CBA) approach to financially including rural populations approach includes enhancing consumer understanding of loans and financial terms, ensuring that financial products are more accessible and user-friendly. CBA also leverages behavioral insights to tailor financial education programs, ensuring that individuals understand how to use financial services effectively.
• The Superintendency of Bank of the Dominican Republic’s Behavioral Economics Laboratory (SBLAB) applies behavioural insights to generate policies that empower financial services users. A key SBLAB output was the 2022 ‘Charter of Rights and Duties of Users of Financial Products and Services’, which seeks to improve transparency and consumer trust. SBLAB also uses BE in its financial education programs.

• Bank Negara Malaysia (BNM)’s Pocket Money Book applies BE principles such as habit formation, cognitive load reduction, and visual reinforcement, to encourage responsible money management among schoolchildren. By making financial tracking simple and engaging, the tool nudges children toward better budgeting and saving behaviours from an early age, fostering lifelong financial discipline.

A key finding from behavioral economics research is the importance of trust. The World Bank has noted that low-income or inexperienced consumers often distrust financial institutions, which deters them from using available services.

Behavioral insights reveal that the consumer’s journey toward better financial health involves multiple decisions and actions. Often, inaction is a significant barrier. Designing interventions that make financial processes simpler, more transparent, and less intimidating is critical.

Conclusion: Behavioral Economics matters for financial inclusion

To design policy which drives real change, we must first understand how people think and feel. Behavioral economics offers powerful insights that, when applied to policymaking, can bridge the gap between access and engagement, bringing us closer to achieving financial inclusion for all.

Learn more: Watch a recent AFI webinar on ‘Behavioral Insights for Effective Financial Inclusion Policymaking’, featuring insight from Central Bank of Armenia and Superintendency of Banks of the Dominican Republic