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Graham Seel

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Graham Seel - BankTech Consulting

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Financial Inclusion

The financial services industry has much to contribute to the UN and World Bank goal of full financial inclusion by 2020. This group will focus on industry contributions, ideas, barriers and enablers.

Not All Savings Are Created Equal

12 May 2015  |  2388 views  |  1

There is a tendency to talk about savings for the poor rather generically, as though there really is just one thing called “savings”. With credit, it is more obvious that there are short-term and long-term loans, revolving lines of credit, credit cards, secured real estate loans, etc.  Too often it seems that financial institutions have a rather one-dimensional view of poor households’ savings, and therefore only partially meet customer savings needs. If provision of financial services to the poor is to become profitable (which is a prerequisite for commercial banks’ sustainable participation in financial inclusion), then banks will need to be able to capture all of a customer’s financial activity – fragmentation across methods and institutions will likely prevent any of them covering costs.

Webster defines saving(s) as “the amount of money that you have saved especially in a bank over a period of time” or “money put by”. This generic definition is what many of us have in mind. But when we look at how poor people save, we realize that there are in fact many reasons for saving, several types of saving, and many savings vehicles used.

This multi-faceted view of savings is very clear when we look at some of the financial diaries work done over the past several years. The seminal “Portfolios of the Poor” (Collins, Morduch, Rutherford and Ruthven) hits this as early as page 3. For those of us living in developed countries, and with reasonably stable and adequate income streams, saving can seem almost optional. But with low and unstable incomes, it is a matter of survival.  

In “Big Banks and Small Savers” published by Gateway Financial Innovations for Savings, four kinds of saving behavior are suggested:

  • Dump and pull” where received income is immediately spent (which is surprisingly uncommon except where households are truly living day-to-day)
  • Spend down slowly” where received income is applied to daily needs over a period of time, for example until the next payment is received
  • Accumulate” where income sufficiently exceeds daily needs to allow forward-looking strategies such as provision against future financial shocks, and saving up for a larger need (such as education or dwelling improvements)
  • Preserve” where a portion of income is to be maintained over a long period of time, for example provision for old age

The biggest distinctions between these behaviors have to do with length of saving, need for liquidity, and amount saved. These distinctions drive what the most appropriate savings vehicles will be. This is why poor households tend to use many methods for saving, including cash (the metaphorical “mattress”), informal money-guards or deposit-takers, savings groups (ROSCAs, Village Savings and Loans Associations, etc), digital money services (e.g. M-Shwari), informal lending (friends and family), non-financial assets (such as cow or chickens), and accounts in deposit-taking financial institutions. In Portfolios for the Poor, the conclusion is that “at any one time, the average poor household has a fistful of financial relationships on the go.”

All of the mechanisms used for financial management by most poor households carry significant risk, and significant disadvantages. Depositing cash to bank branches or ATMs is secure but sometimes inconvenient and expensive. Savings groups can be inflexible when funds are needed unexpectedly. Keeping cash is highly liquid, but very insecure. Keeping livestock provides ongoing income (e.g. milk or eggs) but is highly risky due to the possibility of animal illness or death, changing market conditions reducing value, theft, etc.

There are several key parameters that poor households have to juggle in deciding how to save, and any comprehensive savings account to be offered by a financial institution will need to offer ways to balance all of them in order to capture a complete relationship:

  • Security/safety: with a bank this will generally be relatively high, but deposit insurance options may still influence usage.
  • Convenience: ease of making deposits and withdrawing, paying or transferring balances, through alternate channels such as local agents, mobile banking, and ubiquitous ATM capabilities.
  • Liquidity: for longer-term savings behavior (“accumulate” or “preserve”), liquidity may not be as critical as for “spend down slowly” behavior.
  • Minimum balance: for daily transactional accounts this needs to be very low, but could be higher for accumulation or preservation.
  • Income: to compete with non-financial assets that yield some income or grow in value, some level of return will be necessary, more particularly for larger longer-term savings.
  • Management: provision of sub-accounting or similar capability to allow savings to be segregated by purpose (e.g. education fund, healthcare fund, old age fund).

The challenge, then, is to create a simple and inexpensive savings product that allows the poor household to balance savings by intended use and the needs associated with that use. Current technology and infrastructure make this very difficult, but increased access to mobile banking services, lighter regulation for financial inclusion, and development of purpose-built financial inclusion core banking platforms and payment systems should take this end goal into account. Accompanied by financial literacy education that leverages household experience, and by government and financial institution savings incentives, it should be possible to create more effective and flexible financial management tools that would be valuable to, and used by, the poorest households.

The content of this blog and associated comments reflects my personal views and is not reflective of The Norman Group, World Renew, the CRCNA, or any of their partners.

 

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Comments: (3)

David Gerbino
David Gerbino - @dmgerbino - Brewster, NY, USA | 12 May, 2015, 21:58

Savings using traditional bank and credit union savings products is as antiquated as the products themselves. New modalities need to be created. These modalities should have been built during the creation of internet based banking but it was not. We are finally starting to see movement in this area. I could share more here but I already did here: The FinTech Assault on the Bank and Credit Union Deposit Relationship

 

and Duena Blomstrom, did here: Get me addicted to Saving!

 

These services are a help. FinovateSpring is also unleashing even more spectacular product and services offering from DoublePay Net, Yadlee and Moven.

We need more from the traditional banks and credit unions.

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Graham Seel
Graham Seel - BankTech Consulting - Concord | 12 May, 2015, 22:36

David, while I agree with you that formal financial institutions have opened the door to FinTech companies to win business because of a lack of innovation in the former, I see the DoublePay model as a good example of one that oversimplifies consumer needs and expectations around savings. There is certainly value in providing financial management tools that go beyond basic savings capabilities, but the needs of different households, especially perhaps among the poorest, vary enormously based on level and stablity of income, cultural factors, etc. The poorest typically have several very small and unpredictable sources of income, quite differently from the average salaried Western employee, for example, and the financial management tools they need are also very different - I'm not sure that for most of them the DoublePay model would work.

Having said that, I thoroughly agree that we need simpler tools that actually meet customer needs, and are delivered through inexpensive and convenient channels, and also agree that this will look very different from the traditional banking products.

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Graham Seel
Graham Seel - BankTech Consulting - Concord | 13 May, 2015, 00:40

One other thought for David. In many parts of the world, people will pay someone to come by daily to collect the day's savings. Portfolios of the Poor discusses the willingness for short-term savings to receive an annualized negative 40% interest, because it is so important to have the discipline of saving a little every day, and keeping the money away from temptation's way until the end of the month when it is needed for school fees for example. This example really supports the idea behind DoublePay and other financial management models, so I didn't intend to disagree in principle - it's more a matter of how the tools are structured and delivered for poor households.

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job title Principal Consultant
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Consultant to Fintech firms selling to, or partnering with, banks. Services include fractional Customer Success Executive, custom sponsored webinars, papers, etc.

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