In the last few weeks, we read about Wells Fargo firing over 5,300 employees who created ghost accounts for their own real customers. We still don’t know exactly what the precise orders were, but it seems clear the bank’s managers were incentivized to increase business revenues by boosting account volume.
Microfinance in the developing world reached a similar kind of inflection point about 15 years ago. (In a nutshell, microfinance is the provision of the full range of financial services, including savings, credit and microinsurance, to poor households, in an effort to give low-income populations access to affordable and reliable services.) As microfinance institutions (MFIs) matured, managers looked for ways to grow their business and incentivize and reward their employees. Thus, MFI managers came to tie bonuses to the volume of loans employees could produce.
That was until MFI senior managers noticed that the value of non-performing loans was increasing proportionate to the value of loans outstanding. They took a deeper dive to try to understand why their loan portfolio no longer had a loan-loss rate of the typical 1 to 4 pecent, but instead had a much higher rate of loans defaulting. They discovered several reasons including: loans too large for the borrower to manage for the size of their income-generating activities; multiple loans to single borrowers; or loans that were foisted upon the borrower in an effort to meet targets.
These actions were not illegal to the letter of the law, as the Wells Fargo situation certainly seems to be, however, they ran counter to the philosophy behind establishing microfinance in the first place: trying to help people improve their lives by providing them economic tools to help themselves. By incentivizing only loan portfolio growth, and not the quality of those loans or customer financial health, the MFIs were merely bringing additional debt and problems to the very people the MFI purported to help.
The solution was simple: Microfinance institutions began to tie employees’ bonuses not just to loan portfolio growth (or account growth), but also to the performance of those portfolios. In other words, they began to realize that without financially healthy customers, the MFI’s own business could not thrive, and they began to structure incentives accordingly.
For microfinance institutions, the needs of their low-income customers are at the forefront of product design and delivery. In contrast, it seems like some US bank executives have forgotten that their customers should be the most important stakeholders in the room.
There’s a reason large banks in the U.S. routinely make the list of America’s least liked companies: they treat their customers with remarkable disregard. Banks across the developing world, for example Equity Bank in Kenya and CARD Bank in the Philippines, are demonstrating that simple, transparent, well-designed financial products allow their clients, communities and businesses to thrive, while still earning banks a healthy profit.
Elizabeth Toder is a Visiting Instructor at Middlebury College and consults in the field of financial inclusion.
Image credit: Alexius Horatius/Wiki Commons