> Posted by Ignacio Mas
Let me put it a bit brutally, using round numbers for effect:
- Many people are willing to pay an all-in cost of 70% for a microloan.
- Most people are willing to pay a fee of 7% for a (domestic or international) money transfer.
- Most people do not see much value in paying 0.7% in fees for a savings account.
Notice the order of magnitude reduction in willingness to pay. A savings account, viewed as an electronic receptacle of value, generates little willingness to pay – unless I need it to get a loan or make money transfers from/to it.
It would be much better if microcredit or money transfers were a lot cheaper, but the point is that if people are not able to get better terms, they still find sufficient value in these services to pay quite a bit for them. Not so with savings. Or, to be more precise, not so with the kinds of formal savings products that are being presented to them by formal financial institutions.
I see two main problems with the here’s-an-account-now-start-saving proposition that most financial institutions push into the base of the pyramid. First, most people manage their money by fragmenting it, mentally assigning it to different purposes and physically storing it in different receptacles. It helps them budget and it helps them not raid their own savings so easily on impulse. They have received too much financial education from their parents and grand-parents to think it’s a good idea to collect all those pockets of money into a single electronic account. And replicating the multiple pockets through a gaggle of ear-marked electronic accounts which differ in nothing but name, terms and conditions and fees seems abstract and complex to manage.
Second, most bank products offer either liquidity (current accounts) or discipline (commitment savings plans, time deposits), but not both at the same time. The discipline element is based on denying access to saved funds or incurring explicit financial penalties if conditions are not met. Poor people whose finances are easily overwhelmed by more or less predictable shocks cannot afford to hold a barbell portfolio of temptation money here and locked-up money there. Most informal savings mechanisms do double duty, offering discipline but without foregoing liquidity. A cow, for instance, can be sold in case of need, but it does not offer partial liquidity to satisfy small daily temptations and it invites people to think of it as an investment, even a productive asset, which raises the stakes of dis-saving.
Maybe you disagree with this diagnosis, but the fact is that poor people are not finding electronic accounts so useful. If they did, you wouldn’t find such meager balances in so many of their accounts, balances which have no chance of being impactful for the client nor profitable for the financial institution. Most opt out of formal banking, and continue doing what they’ve always done. If we want to change that, we need to find ways to add customer value to these electronic accounts.
Somewhere along this post you probably got to thinking: but doesn’t the experience with deposit collectors in Africa demonstrate that there is willingness to use and pay for saving? Well, that’s a great example of how value can be added to a savings account so as to generate much more customer interest: in this case by offering door-to-door collection services and a dash of daily discipline. It’s a cash management service that combines a mini-savings account with a mini-Brinx (cash transport) service, and traders like it.
My feeling is that the most powerful and promising approach is to redefine the purpose of the formal account around financial management: helping people get as many of the things they want to spend their money on — now and in the future. It’s about helping them manage payments over time, so that today’s expenditures don’t obliterate tomorrow’s goals.
So yes, Beth, let’s actually talk about money management.
We need to construct a much more nuanced savings service that incorporates all the mental discipline features that people already use, but is not so complex to operate that people give up on it. One example of how this might be done is re-imagining mobile money as a tool for managing payments across space and time. Your mobile money tool would help you accumulate the money you need to make specific future payments (through a series of payments to yourself to particular dates or goals), and then of course it would help you deploy the money when the time comes (through real-time money transfers).
Why have I suddenly started talking about mobile? Because planning tools need to be immediately available to people, so that they can assign money to purposes the moment they earn it or whenever they have a virtuous thought. The mobile phone can be the basis of building a continuous relationship between a poor client and the bank, one that is based on capturing the client’s personal goals, habits and mental processes rather than on promoting a prescribed list of bank products.
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6 comments
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July 25, 2012 at 3:53 pm
financialwoe
Love the title and subject matter…I as well am looking to get to making finances easier.
July 26, 2012 at 1:36 pm
John Gitau
Ignacio,
Your posting is great to read and your innovative ideas brilliant to say the least. Please clarify for me what is a little bit confusing. You say that the poor like their money liquid and near but they have the discipline of holding it for the mentally planned use in the future. You are suggesting that the fall out with electronic accounts results from the accounts not serving them the way they are used to. You recommend a more nuanced savings services that incorporates all mental discipline features that the poor already use but not complex to operate. You advocate that formal financial services providers need to create formal accounts for their clients around financial management helping them get as many things they want to spend their money on now and in the future. I have the following questions:
1. If the informal system is working so well for the poor, why can’t we support it where it is until it is ripe enough to get formal naturally? Electronic accounts failure is evidence enough that formal has some repugnance that chase the poor back to their informal habitual ways of handling finances.
2. Formal accounts seem to work better for people with defined and regular incomes. The poor have neither. Why push them to formality while we know its weaknesses rather than first working on streamlining the systems to suit this unique niche’s needs?
3. Plastic money represented by debit cards and credit cards is a bundle of temptation to spend and we know the global indebtedness resulting from consumerism encouraged by advertising and oiled by easy access to debt through credit cards. Why do we want to assume that the poor with their phone as their version of the debit card, won’t fall into the same ‘spend now’ trap? Do we want to assume that mobile money will enhance savings and better money allocation than their traditional ‘hide-it-far-but-near-enough mechanism?
The statistics you have given are not surprising. The mind likes pleasure. Saving when so many needs are screaming for attention now is one of the most painful experiences a poor person can go through. Building a picture of a future benefit to result from saving now is not easy on an empty stomach. Obviously, transfer services are pleasurable as a vehicle of receiving or the convenience of paying for a need or even helping a relative in need especially in Africa where social connections are still cherished. Then, a loan is receiving money and nothing can outweigh the joy associated with that, cost aside or debt consideration notwithstanding
What would make savings so exciting for the poor as to encourage more of it with formal financial services providers without extra income? Savings motivators are so personal and invisible. It is the visualized indignity resulting from a child being chased from school that makes a mother forgo a meal to save for the school fees. It is the picture and anticipated pain of seeing an ailing mother unable to get medicine that would push a man to keep something aside. It is the visualized joy of her wedding in the village that drives a young girl to make unwaivering commitment to a Savings and Credit Association. Fear and joy drive the poor’s savings habits, not the enticement of more income from a savings account. How will financial institutions read these joys and fears to design savings services that incorporate the poor ‘mentatim’?
In spite of the above queries, I take home this most important statement” –more nuanced savings services that incorporate all mental discipline features that people already use but is not so complex to operate” and may I add, ” while respecting the money practices that already work for them at their level and terrain”
July 26, 2012 at 3:13 pm
Daniel Rozas
Ignacio — perhaps it’s my ignorance, but I know of no institutions that offer designated accounts that would seem to serve many of the client’s needs.
Consider school fees — the eminently predictable expense that is all too often made through borrowing. Sure, clients could join informal groups, making the mental calculation of when the payout will happen, making sure that the amount is close to what’s required. But what if a financial institution were to offer a service where it would make the precise payment needed to the school on the due date, and calculate out the exact deposit amounts and frequency required to get there, including providing regular updates on whether the account is on track? Seems like value to me. To wit, what if the incrementally saved-up sums could then be offered as a source of ongoing funding to the school, smoothing its own cashflows (which are very lumpy on the inflows and smooth on the outflows). The resulting gain in efficiency could help the school, support a decent discount to the customer, and provide a source of profit to the MFI.
What about offering a product for a pregnant woman, to cover costs of birth, based on her approximate due date? Again, far too many families use debt to pay for births. And instead of paying interest, why not offer a special newborn gift as an enticement?
I can think of many similar products. Do you know of cases where such examples have been tried?
July 27, 2012 at 5:27 pm
Ignacio Mas
Hi John, thanks for sharing your thoughts triggered by my post. You ask a set of big questions which deserve a much fuller answer, but for now please allow me to make a few quick points:
1. I certainly don’t approach the savings problem necessarily as formal-is-better. It’s entirely for formal providers to demonstrate that. I do think, however, that we should try harder to give them better formal options then they are getting today, and they might just actually prefer them.
2. I think the key advantage of formal savings ought to be how safe and easy it is to pay for stuff, once you decide that’s what you want to do. In microfinance we tend to entirely separate the savings and payments propositions, but I think of them as being highly linked.
3. Money kept in a liquid account is subject to being used, the more so, as you say, if the account is attached to a convenient payment instrument like a debit card. To prevent that, rather than limiting their access to the payment instrument, what we need is to help them allocate their money purposefully before they get to spend it, so it’s not so easily available in an undifferentiated liquid account.
Points 2 and 3 above might seem like a contradiction, but they are not. People need integrated propositions that help keep money unspent (i.e. saved) as they work towards a goal, and then help make the payment as effortlessly as possible when they decide to apply their funds to the goal.
I know that’ll be tough to achieve, but that’s the challenge.
Hi Daniel
I don’t know of products such as you describe, but I think that would be very complex to market by the providers and for people to keep the features of all these products straight in their head. What I am proposing is to do it not through a plethora of specific products but through a standard tool that everyone can use in a different way. Families can use me2me payments to accumulate money to be able to pay for electricity bills and school fees. Traders can use the same tool to send money to dates when their working capital loan payments are due. Farmers with annual crop bounties can also use the tool to send money to ensure inputs for the next season and with the remainder they can pay themselves a monthly salary until the next harvest. One tool, a myriad applications. That’s, I believe, the way to go.
Does that make sense?
Thanks so much to both of you and to financialwoe for her enthusiasm!
Ignacio
July 31, 2012 at 7:33 am
John Gitau
Ignacio,
Thank you for your clarification and you have helped me see the context better. I also like your response to Daniel with the take home as ” one tool, a myriad applications( Just like the phone is used as a vehicle for many products). These dialogues as facilitated by the Centre are helpful as we get to share perspectives, knowledge and experience.
October 1, 2012 at 8:36 am
Cynthia Nyakeri
I agree that savings accounts have very little to offer poor clients other than the possibility of taking out a loan in the future. As a user of mobile money, I found that I really had no use for my bank account. I was able to do more with my mobile money account. It was cheaper, I could make payments from the comfort of my home, and I didnt have to deal with rude/unhelpful customer service at the banks. There is a lot to be learnt from this model one of the lessons being that savings accounts are not indispensable.