> Posted by Elisabeth Rhyne
I wrote a blog post on the Huffington Post a couple of weeks ago, just thin
king out loud about something which suddenly seems absolutely central to financial inclusion: money management. How do people keep track of their finances? Will people new to formal financial services be inclined to use a bank account as a money management tool? How do financially excluded people manage their money?
I was hoping to start a conversation. I even sent the post to several colleagues experts in this area. But what I got was yawns and silence.
Almost. I did get 2 comments, both from a U.S. perspective. “SirVantes137” said that the best way to help poor people with money management, including himself, was to pay them better so they would have something to manage. “Samantha is Soo Savory” referred me to powerwallet, an online money management tool, which looks pretty interesting, and very relevant to the question.
But the conversation among financial inclusion folks failed to take off, so I’m trying again. Come on, people, think about this. It’s important!
We like to say that the poor are “expert money managers,” drawing on evidence from the Financial Diaries and Portfolios of the Poor that they lead complex financial lives with multiple transactions. We also assert that competence in money management is a hallmark of a financially capable person.
If this is true, why don’t we know more about how money management works?
Competent money management consists of at least two functions: keeping track and making decisions. The first function supports the other. You need to know how much money you have before you decide how much to spend. Increased ability to keep track of one’s financial situation should improve financial decision-making, even if other factors remain unchanged (like propensity to yield to temptation or social pressure). But is this effect big or small?
I assume that most people whose financial lives play out in the informal sector keep track of their financial situation in their heads, without a formal system, while most people in high income countries who grew up with bank accounts use their bank statement as a key tool for keeping track, at least of short and medium term status. There are lots of financial education materials for teaching people to keep track more systematically, even simple systems like different wallets for family and business cash flows. Powerwallet is a souped-up version of one of these systems.
Traditionally, most of these systems suffer from being one step removed from the actual money flows. You have to write down the financial transaction independently of the transaction. This extra step, though simple, is a huge disincentive to using a money management tool, because the tool only works if every transaction is faithfully recorded. With a bank account (and systems like powerwallet, which electronically reads your bank statement), the record is generated automatically when the transaction occurs.
But the bank account is only a good system if it consolidates all or most of a person’s cash flows. This works for me because all my payments, big and small ultimately flow through the bank account: my mortgage, tax and monthly credit card payments, in addition to ATM withdrawals and grocery store purchases. For people whose financial lives are straddling the formal and informal sector, a bank account may not offer such consolidation.
Understanding how people carry out their money management is pivotal to many aspects of financial inclusion, from deciding on policy objectives (Are bank accounts the best top line objective for financial inclusion?) to creating effective financial capability-building programs, to evaluating new products and delivery channels (Does mobile banking assist people with money management or make it harder?).
That’s why I’d really like to know what others think. Comments, please!
Image Credit: londonrelocationservices.com
Have you read?
Money Management: What’s a Bank Account For?
The Secret (Financial) Lives of Rural Residents – What Every Market Researcher Needs to Know
Financial Capability: Not Many Answers, but Lots of Great Questions
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July 10, 2012 at 2:52 am
Anatoly Gusto
I really enjoyed reading your blog posts and I was kind of wondering whether there would be an addendum of some sort to your earlier money management post.
In any case, the research I have done somehow indicates that while the poor could be keeping track of their financial transactions in their heads, they actually make use of creative aids to make it more “tangible” for them. An informant once told me that she prefers keeping her money at home because she gets a better sense of how much money she has as she can easily “see” whether she is about to run out of cash or not: seeing here does not refer to counting the money and getting the total value but more of just looking to get a sense of how thick her bills or how heavy her coins are. In the same way, ohters shared that they felt encouraged to save in coin boxes as they can feel the difference in weight of the box as they put more coins into it.
The challenge therefore for those advocating bank accounts, mobile banking services and innovatve financial services is how to make the poor learn the unfamiliar, trust with their life (or at least with the stored value left in their pockets for the day) what they can not see, touch or feel… and convince them to continue believing if they encountered problems along the way.
July 10, 2012 at 7:24 am
aharper
the first step is, as you say, to understand how different people currently manage their money (ala portfolios of the poor etc). I am working on a project in Connecticut trying to help low income people with mental health problems manage their money better. The first step of the project is to spend time finding out how they do it already. Based on that we will consider different interventions to help them do it better. In the absence of sorely needed interventions to increase their incomes, the obvious solutions might include basic budgeting classes, linkages with willing banks along with back-up support from the mental health centre etc.
We are hopeful that we can offer the population some support, but it will be an enormous challenge to enable them to make the most of their limited incomes given the myriad ways that they are being encouraged to spend every day, and the numerous ways that they can fall into arrears/debt (utilities, payday loans etc). Ultimately for this population (and arguably many people without mental illness, I count myself among one of the latter!) we might need bank accounts that can be tailored to promote saving and discourage spending (automatic payment of key bills when money comes in, perhaps setting weekly limits on spending/withdrawals that can only be over-riden through a fairly cumbersome process, very simple to understand on-line/mobile statements that highlight money spent, money left for the month etc). But if not profitable for the bank, will this ever happen? Any ideas?
July 11, 2012 at 6:28 am
Siddhartha Chowdri
Dear Beth –
This first comment is re-posted from our intranet, the second was based on a recent discussion with microcredit clients of Swadhaar in Mumbai.
1. In India bank accounts serve another purpose. They enable the government to keep track of where the money is and who they should be taxing. Therefore, many many transaction in India are pushed outside of the banking system to avoid the taxman. People with both high and low incomes avoid the banking system. It is not because they do not like the service it is because the tax cost of this money management service is not worth it. So in India we need two money management tools. A bank account for the “white money” and some other tool (usually a plastic bag, mattress or lavish wedding) for the “black money.”
2. Many people in major urban centers like Mumbai are migrants from another part of the country. These people use bank accounts as a means of self-remittance. They deposit the money into the account and when the travel to their “native place” they withdraw the money from the bank there.
July 11, 2012 at 2:00 pm
John Gitau
Elisabeth,
Thank you for waking us up from the slumber. The many postings you write ask tough questions which require reflection. I read your posting on money management and having read the Financial Diaries, the Portfolios of the Poor, Financial Capability -are we missing the mark and the Financial inclusion agenda as stipulated in Opportunities and Obstacles of financial inclusion and the Citi Monitor’s Bridging the Gap, I was speechless. I see two paradigms in the inclusion field, which have to be viewed separately. The poor have their own informal ways of handling money (not necessarily managing money). Those ways are as complex as their cash-flow patterns. The not so poor with definite incomes have their own paradigm which entails managing money using formal tools and vehicles.
Now, when the formal financial services providers design products for the poor complete with new rules of operation, the poor slide and slip in indebtedness they are not aware how to handle. To mitigate that, these formal service providers come up with mechanisms of teaching them how to manage their money is a certain way. The poor find the pedagogy esoteric and scamper to their terrains where the informal service providers speak with them in their own language. They know them, they understand them.
So far what is coming out in the inclusion agenda are reports of those who have taken time to study the poor and their money behavior patterns. But is studying these patterns of the poor and how they handle their money synonymous with asking them how they want to be helped to better their lives? Suppose the poor are of the view that they are being herded down to the slaughterhouses, to be skinned alive by banks with their sharp profit knives, the MFIs with their sharp axes and the governments with their lethal machetes as Chowdri has mentioned? Has that potential fear being addressed or do we just want to call the poor into the dance floor to dance to our music whose lyrics they have not learned to dance to? Isn’t it better that we who are more enlightened should go to the poor’s neighborhoods, study their dance and ask them whether they want us to help them improve on their dancing skills. That seems better than flashing them from their terrains and herding them to the city centres with bright lights ( inclusion) and asking them to dance to the tune they have neither studied nor heard before. And as we dance and urge them to do the same and they are unable, we laugh and call them all names from naive to illiterate to survivors to pyramid bottomers.
When I did a survey in a central Kenya district targeting 27 villages, the answers they gave to our questionaire told me that these people knew exactly what they were doing, what they wanted and stated clearly the help they need from anybody who cared to improve them. I realized that if i was to be of help, I would have to do it their way. It dawned on me that these rural folks were the ones who educated the so many brilliant men and women in urban areas who are now telling them to get included. And they would ask, included in what and for what? If it is money, they have always had money. If it was juggling with it they have always done so and educated children who became leaders, policy makers, workers and all.
Out of the pilot in that rural district, they wrote clearly that if all their economic groups projects were funded with a total of $ 1.7million, they would not need anybody’s extra support and their children would feed better, go to school uninterrupted and be happier. As evidence that they were not just idle seekers of help, I picked out total investments within 139 groups with an average of 20 people per group savings of $96,000 and investments of $ 102,000 with just over two to three years of groups’ existence on average. That was very encouraging. The district has a population of around 157,000 people involved in subsistence farming on tiny pieces of land.
Let us support the poor within their terrains at their terms, guided by motivation principle. We perform better in what we like, know and understand. Let us give the poor what they want and they shall give us what we want of them and that is more integration into the formal and informal financial services mainstreams.
Thank you Elisabeth for the provocation that made us write at this point.
July 31, 2012 at 4:33 pm
Ingrid
Thanks for starting/continuing a great discussion, Elizabeth.
Juntos Finanzas is a new company working in a similar space to PowerWallet; however it is developing mobile personal finance tools for cash-based families. The idea is to provide users a simple sms system to text in expenses as they are spent, to see running totals anytime by text, and to receive monthly visual statements either by mail or email.
My organization is looking into piloting the tool with our participants (we offer credit building lending circles to low income and immigrant communities in the US), and are very interested to find out how useful and utilized the tool could be for our participants. If the uptake is strong, it could also provide an excellent viewpoint into the financial lives of participants. But, that is the keep question: are the incentives in place for someone to take the extra step and record all cash transactions? What have been your findings thus far?
We’ll be interested to follow the conversation along the way!
September 14, 2012 at 7:09 am
online banking
I currently have a basic bank account and a prepaid card and to be honest i dont miss having a regular bank account at all