A Better Way to Improve Financial Outcomes for Microentrepreneurs in Developing Economies

A behavior-based approach to economic development in Ecuador goes against years of conventional wisdom — and yields extraordinary results.

Contextual research with a shop owner in Quito, Ecuador.

A single mother of three runs a small shop in a residential neighborhood in Quito, Ecuador. She has a steady stream of customers, works long hours, and has a reputation for fair dealing. But while business is going well, it’s not moving forward. She brings in about the same amount every year, which may not be enough to send her eldest to high school. Part of the issue is bookkeeping and financial skills: with no formal training, it’s hard for her to anticipate expenses, improve efficiency, and grow the business.

So which is more likely to change this situation:

• a series of lectures on compound interest and asset depreciation, or…
• a rule of thumb suggesting she start every day with the exact same amount of money in her cash box?

The first approach is an example of what development workers call “Financial Literacy Training”. The second is called a “Financial Heuristic”, and if you guessed that it’s the more effective of the two, you’re very correct.

Newly released evidence from a 2015–2016 Financial Heuristics project in Ecuador shows just how much better. The project, which GRID Impact completed in collaboration with the Inter-American Development Bank’s Multilateral Investment Fund (MIF) and Banco Pichincha, saw increases of 7.3% in sales and 8.2% percent in profits among the micro-entrepreneurs who participated. Traditional Financial Literacy training programs aimed at the same audience, on the other hand, had minimal impact where it mattered: in adoption of best practices, or on sales and profits.

It’s a momentous realization that raises two crucial points. First, that development efforts (financial and otherwise) are more effective when they focus on behaviors rather than just knowledge. And second, that any aid effort, no matter how reasonable or well-intentioned, needs to be evaluated and refined constantly if it’s to stay relevant.

A typical cash management system.

The Financial Literacy approach has been around for decades now, based on the reasonable-sounding assumption that the best way to help small business owners who lack bookkeeping and finance skills is to teach them bookkeeping and finance. It’s such an obvious assumption, in fact, that aid organizations — especially those backed by big banks and foundations — have spent billions of dollars funding Financial Literacy courses around the world, teaching subjects you might find in a college-level accounting or personal finance course.

But Financial Literacy programs don’t work in development efforts, because they take a one-size-fits-all approach that largely ignores context. An Ecuadorian shopkeeper, for example, carries a much heavier cognitive load than a salaried employee or established, medium enterprise owner does, simply because of the day-to-day struggles of running a small business in an emerging market. Chances are good she has less free time, operates on slimmer margins, and has less access to capital.

Because of this, any aid program that asks her to spend many hours in a classroom, over days or weeks, learning in-depth information that must then be interpreted to fit her situation, is likely to fail. It just adds too much to that cognitive load — not to mention the opportunity costs she suffers due to time lost away from her business.

Instead, a truly effective intervention is one that reduces cognitive burden, by giving business owners less to worry about, not more, and by sharing information in a way that’s easy to remember and implement. This so they can stay focused on the full-time task of running their businesses.

Going through the day’s tally.

A 2014 research paper called “Keeping It Simple: Financial Literacy and Rules of Thumb” laid these issues bare. The paper cited a randomized evaluation with a microfinance bank in the Dominican Republic, comparing the impact of standard accounting training to a simplified, rule-of-thumb equivalent. The findings went so strongly in favor of the heuristic approach that it began casting doubt on years of conventional wisdom. Several years later, though, heuristics-based financial development programs are still relatively rare, most likely because of organizational inertia, and lingering insistence that the Dominican Republic experiment was just an aberration (though it’s since been backed up by several other studies).

This reluctance certainly isn’t because Financial Heuristics interventions demand greater investment. When GRID Impact hit the ground in Ecuador in 2015, it only took two weeks of in-country research to develop the insights needed to start developing a heuristics program.

Based on this research, we were able to frame up four categories of heuristics, each containing simple rules of thumb, and each indicated by a unique visual cue, making them easier to keep track of in a busy working environment:

• Set Up
• Sell and Tally
• Pay Out
• Save Up

An English prototype of the fourHeuristic categories and corresponding behaviors / practices and the 30 Day Challenge commitment. All materials were provided in Spanish to the entrepreneurs in our program.

After two more weeks of testing out prototypes with microentrepreneurs (various communications materials, worksheets, a financial journal, stickers and other materials) and a week of refinement, we were ready to start training the trainers and bank staff who would then direct the effort. For participants, the time investment was also minimized as much as possible: a four-hour introductory workshop, followed by regular visits from facilitators over the next few months to check on adherence and progress.

Why it Worked

1. Each of these heuristics is easy to remember, and comes with practices that are straightforward to implement, which is crucial to their long-term success. In Ecuador, heuristics include “Start each day with the same cash” (mentioned above), along with “Pay yourself a salary” (rather than just treating business profits as personal assets). “Separate business finances from personal” is another, which in most cases means literally setting two boxes side by side, to keep the business and personal “accounts” separate — paying salary becomes a matter of physically moving cash from one box to the other.
2. Structuring the program as an opt-in “30 Day Challenge” gives participants an incentive to develop these heuristics into daily practices, eventually making their implementation desirable and, eventually, automatic once participants saw measurable benefits in their businesses’ sales and profits.
3. The heuristics are built up from local knowledge that varies from location to location. In Ecuador, we developed these four by observing different microentrepreneurs, and spotting behaviors that separated the successful from the struggling. In a similar project in Armenia, the same effort produced slightly different heuristics.
4. We also adhered to a “go where they already are” principle for information delivery. Since cognitive load is one of the main obstacles, it’s crucial to rely on channels that participants already use. In Ecuador, local bank officers make regular visits to their banking clients, to check on them and offer services. By enlisting these officers to remind participants of their heuristics, and following up if they weren’t using them, we were able to add information without demanding any time or effort. In another GRID Impact project, we worked with farmers who already rely on a smartphone app to handle many financial transactions, so wrapping heuristics into the app was an obvious place to start.
5. The most fundamental lesson of the literacy/heuristic shift, though, is to focus on behavior above all else. In the world of social impact design, it’s easy to get sidetracked by ideological focus or theoretical constructs — so much of social science grows out of theory that it’s a natural tendency. Knowledge is power, we’ve often heard, so providing information to the underserved can feel like an inherent, obvious good. But in practice, it’s behaviors that determine outcomes, not information or ideology.

An English prototype of the savings plan included in the Heuristics Workshop for entrepreneurs. All materials were provided in Spanish to the entrepreneurs in our program.

By designing development efforts that use behavioral outcomes as their success metric, we end up with things like heuristic-based programs, which work to close the gap between knowledge and action. This also brings a different set of success criteria: not “did participants learn the information?” but “did participants exhibit behaviors that got them closer to their financial goals?” If the behavior’s not there, the program didn’t work, and needs to be re-designed.

But in our experience, starting with behavior in mind often does get you to a better outcome, because it puts the design team in a different mindset right from the beginning. And it’s this shift, more than anything we’ve seen, gives us great hope for the future of social impact efforts, regardless of country, population, or sector.

Check out the Ecuador Financial Heuristics training project case study on the GRID Impact website to learn more about its groundbreaking approach and success metrics.

Alexandra Fiorillo is the Founder of GRID Impact, a behavioral and human centered design firm that works on complex social, health and economic challenges around the world.