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.

Image credit: wadsam.com

Have you read?

An Armchair Safari through M-PESA-Land

Mobile Money Transfer–What Does it Mean for Financial Inclusion?

Mobile Money as a (Payment) Planning Tool

I wrote a blog post on the Huffington Post a couple of weeks ago, just thinking 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