Financial Inclusion
24 June 2019

Increasing Trust in Bankers to Enhance Savings: Experimental Evidence from India

Lore Vandewalle, Associate Professor at the Graduate Institute, Rahul Mehrotra, Postdoctoral Researcher at the Institute, and Vincent Somville, Assistant Professor at the NHH Norwegian School of Economics, have a paper forthcoming in Economic Development and Cultural Change on the behavioural nuances of banking in rural India. They show how trust between local bankers and new account holders is influenced, and its strong association with savings behaviour. In this conversation with Rahul Mehrotra, we discussed the relevance of this research for financial inclusion programmes which have emerged as a policy priority in many developing countries. 

What gave you the idea to write this paper?

In the last few decades there has been a behavioural revolution in economics research due to immense contributions by scholars like Daniel Kahneman, Amos Tversky and Vernon Smith, among others. Simply put, behavioural economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the economic decisions of individuals and institutions, while aiming to systematically evaluate how these decisions vary from those implied by classical economic theories. Within my research fields of development economics and policy evaluation, behavioural insights enrich our understanding of how and why individuals respond to certain development policies. As I was setting my doctoral research agenda, I was fascinated by this intersection between development and behavioural economics and started building expertise in behavioural game theory and experimental methods.

During this phase, I had the opportunity to interact with Lore Vandewalle and Vincent Somville, who were conducting a field research project evaluating the mobile banking programme used to improve financial inclusion in India. There was a confluence of research interests since they were contemplating the addition of a behavioural component to their project and offered me the opportunity to collaborate in this endeavour. Till a few years ago, India was home to the world’s largest unbanked population. However, successive governments have since made financial inclusion a policy priority and expanded formal banking services to over 350 million new beneficiaries under the current programme. In previously unbanked rural areas, a combination of mobile technology and correspondent banking, which relies on local village-level bankers, is used to extend basic banking services. Our research idea emerged naturally from the objectives for the overall project – making a deposit in your account implies trusting your local banker to make it available for withdrawal at a later date. Therefore, enhancing trust among newly banked individuals is particularly important in the context of the large ongoing financial inclusion programmes in low- and middle-income countries. A lack of trust had been hypothesised to be one of the main challenges contributing to low account utilisation rates, especially in the absence of direct benefit transfers in terms of salary, subsidy or welfare payments.

Our paper accordingly asks the question, can trust in local bankers be influenced? And, does trust indeed matter for driving account savings among newly banked individuals?

Can you describe your methodology?

We designed and conducted an innovative lab-in-the-field experiment including five rounds of behavioural games. Our study sample included 544 subjects selected using stratified random sampling from 17 previously unbanked villages in Chhattisgarh state. The subjects were then randomly allocated between treatment and control groups to help us identify the causal impact of opening a new bank account. Two rounds of trust games were used to measure subjects’ trust and expected trustworthiness in local bankers, as well as the bankers’ actual trustworthiness. Two rounds of dictator games were then used to measure subjects’ social preferences, such as altruism towards local bankers. The first round of each game was played between the subjects and their own banker from the same village, while the second round was played with an anonymous banker from another village. This helped us distinguish between personalised trust in the subjects’ own banker versus trust in bankers in general. Finally, the subjects also participated in a risk lottery game designed to measure their risk preferences, i.e. whether they are risk averse, risk loving, or somewhere in between. 

What were your most important findings?

In line with our study hypothesis that repeated interactions shape trust, our findings showed that opening a bank account led to an increase in interactions between subjects and bankers while also having a positive impact on trust towards bankers in general. We found that personalised trust in the subjects’ own banker is less malleable, which can be explained by pre-existing relationships. Personalised trust is, however, strongly associated with our subjects’ account savings. In summary, our novel experiment showed that personalised trust in one’s own banker indeed matters for account savings among previously unbanked individuals; however, it is more difficult to influence than trust in bankers in general.

Were there obstacles to overcome during your research?

One of the big challenges for any lab-in-the-field experiment is ensuring a controlled laboratory environment across multiple sessions in potentially challenging field settings. Our study was no different. While the experimental protocol was written and pre-registered from Geneva and Bergen, the implementation included training and managing a team of enumerators and supervisors under challenging conditions across different villages. This required building strong relationships and knowledge of local settings for effective organisation, as well as rigorous training, field-testing and monitoring to ensure consistent adherence to the study protocol. Overall, it was one of the most enriching experiences of my doctoral training.

What are the policy implications of your work?

To paraphrase a simple yet impactful comment received on this research from a distinguished academic on the Pictet Foundation’s Board: a single experiment is simply a first attempt at answering a big social science question. As researchers, we should analyse the big questions deeply across multiple studies and collect insights from a wide range of perspectives in order to offer robust conclusions for policymakers. 

In this paper, we link our contributions with other emerging evidence from rigorous causal inference research which highlights the importance of trust in explaining bank account utilisation, especially in the context of financial inclusion in developing countries. We also note the importance of distinguishing between personalised and general trust in the context of designing last-mile banking policies. Our study explains why a financial services infrastructure that only permits transactions through a limited number of local bankers may not be optimal in driving account utilisation.

What potential do you see for future research on financial inclusion?

Financial inclusion and the broader finance and development agenda is a rich and influential field of ongoing research rapidly advancing our collective understanding of the nuanced role of finance in the development process. Behavioural and experiment methods have also established a firm footing in economics research, with many exciting areas for exploration. In my next solo-authored research project following this study, I designed another lab-in-the-field experiment to analyse the magnitude and patterns of gender discrimination in economic decision-making in India, where gender inequality remains a persistent development challenge despite the historically high rates of economic growth and poverty-reduction observed in recent years.

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Full citation of the article:
Mehrotra, Rahul, Vincent Somville, and Lore Vandewalle. “Increasing Trust in Bankers to Enhance Savings: Experimental Evidence from India.” Economic Development and Cultural Change (just accepted). doi:10.1086/703084.

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Interview by Nayantara Sarma, PhD candidate in PhD candidate in Development Economics; editing by Nathalie Tanner, Research Office.
Banner picture: Enumerators interview study participants in village community centre. Chhattisgarh, India. Photo by Rahul MEHROTRA.