Can banks’ formal savings instruments beat the cow or the mattress?
Poor people can and do save. They even save in banks. But, because banks have little understanding of the savings behavior of poor people, bank savings products often have a limited place in the portfolios of the poor. Using financial diaries (www.financialdiaries.com) along with account data, however, banks are developing segmentation tools by analyzing patterns of savings behavior. This allows banks to better tailor products to client needs and improve the overall value proposition for low-balance savings accounts. The initial returns suggest that big banks may be able to curry favor with small savers.
Daryl Collins, author of Portfolios of the Poor and a director at BFA, led demand-side research for GAFIS, which identified three types of savings behavior:
- Spend down slowly;
These observed practices typically rely on informal instruments, which are more widely used in poor clients’ financial portfolios than formal bank products. For example, poor clients in rural areas of developing countries often use livestock, such as cows, as instruments to preserve higher value, long-term savings. They have de facto liquidity restrictions since the cow must be sold to realize the savings. While the informal instrument in this case also has the advantage of an income flow (in the form of milk production or offspring), and may even hold its value or appreciate over time, the cow could also die or be stolen, losing all value. A formal financial institution wishing to attract savings of this type literally has to “beat the cow” with its value proposition.
Equally, “spend down slowly” behavior corresponds to saving “under the mattress” so that cash is liquid and available for near-term expenditures. For a bank account to attract this type of savings behavior, it must “beat the mattress” by offering convenient, low-cost transactions with no liquidity restrictions.
GAFIS banks are experimenting with new savings products for the poor, with different outcomes so far. After a year or so with an ICICI Bank Apna account, client households held around 5% of their financial assets in the account—an important step towards diversifying their portfolios from reliance on informal savings products. Even more impressively, some of Standard Bank’s AccessSave clients saved as much as 50% of their total financial assets in the new account. Equity Bank’s clients used School Fees and Jijenge accounts to save toward a defined goal. For many, the appeal of the bank account over the equivalent informal instrument (such as a ROSCA) was its longer duration and relative privacy and security.
Account-level profitability varies with balance and activity level, so that better identifying clients wishing to preserve usefully large sums can become a profitable strategy to grow a retail savings book. Banks also learned that their “dormant” customers may be customers of another bank, in which case the proposition to reactivate them is different than if they had stopped using banks altogether. And they learned that “spend down slowly customers used the largest variety of informal instruments. “The more banks understand how savings products fit into the wider portfolios of clients, the more they will be entrusted with the portfolios of the poor,” says BFA’s Collins.