Poor clients prefer to keep their financial options open.
They typically do not find one or only a few providers to meet all of their needs. As a result, many poor clients maintain relationships with numerous formal and informal providers so they have access to emergency financing when they need it. For example, we spoke to one client in Mexico who maintained the smallest available loan with a local microfinance institution, despite a very high interest rate. This client took out the loan “just in case” she later needed an emergency source of funding.
From another perspective, we see that formal financial institutions often struggle to justify the business case for serving poor clients wanting to save. Acquisition costs are high and low balance savings are not sustainable. At the same time, providers recognize that only providing credit to clients may be profitable, but may not develop client trust and longer-term engagement that promote client retention.
In part due to this dynamic, cross-selling in recent years has become a popular strategy for financial service providers, including those trying to reach lower-income clients. Continue reading.