> Posted by Guy Stuart, Ph.D., Senior Advisor, Microfinance Opportunities

This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at ACCION International.

My work using the Financial Diaries methodology has made me very cognizant of how much cash low-income people handle daily – more cash, in real terms, than a middle-income person in a developed country handles. If we are to increase financial inclusion by increasing low-income individuals’ use of savings products, we have to find ways to channel some of the large amounts of cash they handle into those products, in ways that they value. Monique Cohen and I have written about this in our recent article “Channeling Cash: Towards a New Business Model for Low-Income Savings Mobilization.”

In the article, we first had to step back and define what we really meant by savings. In the paper, we assert that low-income people use savings for three different purposes:

  • Cash flow management in order to manage expenditures that are anticipated and expected
  • Risk management in order to manage expenditures that are anticipated but not expected
  • Asset accumulation, which can act as either cash flow management with a long time horizon (the old age scenario, for example), or a planned expenditure, at a specified time, for an asset that will improve well-being

Regardless of the purposes for which they are saving, the financial cash flows of individuals will determine the timing, the frequency, and the size of the amounts saved. While it is important that we understand why people save, it is just as critical that we understand how people can save given their cash flow.

Take Bright and Mercy, for example, who have a cooked food business, raise cattle, and maintain a farm. They live in Malawi and were 40 and 36, respectively, at the time of our Financial Diaries study. As you can see below, their income was highly inconsistent, not only because three cattle sales resulted in large infusions of cash at fixed points in time (see weeks 13, 60, and 67), but also because their cooked food business’ net income was highly inconsistent on its own.

Net Income, Cooked Food and Cattle Sales

Stuart and Cohen 2012

When designing a product for this household, therefore, financial service providers need to be at the right place at the right time. If they are going to help Bright and Mercy save in a formal savings account, they have to find a way to physically or technologically meet that income inflow at weeks 13, 60, and 67, as well as help them handle the ups and downs of their ordinary, weekly cash flow.

Collectively, there are ways that governments, businesses, and individuals have already begun to work with financial service providers to channel cash flows. The government of Malawi, for example, pays government employees—including teachers—through direct deposit into a bank account. In Kenya, people are increasingly being paid through M-PESA, even in the informal economy. This direct infusion of funds into the formal financial system automatically increases financial inclusion. Having a bank account that automatically works with one’s income flow allows people to have financial services without the inconvenience of having to cash in or cash out of the system.

These examples suggest a different business model for financial service providers wishing to mobilize savings. Instead of focusing solely on the design of the savings product, service providers should also focus on the value they can add through payment services that reduce the amount of cash the poor handle. If they can get those types of services right, the additional step of then channeling some of the money flowing through them into a savings account will be that much easier.

As we dialogue about reaching financial inclusion by 2020, we need to keep in mind the daily money management challenges facing low-income individuals to ensure we focus not only on access to services but also on the use of services, their quality, and the value they add.  It has to do with understanding client needs, and converting that understanding into products.

So, getting back to Bright and Mercy—what kind of product or delivery channel might you design that would meet their needs?

If you wish to read our full paper, you can view it here.

For more information, sign up for updates from the Financial Inclusion 2020 campaign.

Guy is an Independent Consultant who uses “bottom up” research methods such as Financial Diaries and participatory exercises to identify ways for financial service providers to meet the needs of low-income individuals and households more effectively. 

He is a Senior Advisor to Microfinance Opportunities on their client-focused research projects, including serving as Principal Investigator on five Financial Diaries studies and project leader for the development of the Financial Capabilities Index Web Portal.

He is a Fellow at the Ash Center, Harvard University, where he conducts research on distributed service delivery systems.

He received his PhD from the University of Chicago in 1994, and subsequently worked for four years in Chicago in the field of community economic development. He then served 13 years as a Lecturer in Public Policy at the Harvard Kennedy School where he taught courses in management and microfinance.  He continues to teach in Executive Education programs at the school. 

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