Savers, Planners, and Entrepreneurs

My colleague Xavier Faz has worked in the Mexico banking sector with low income clients for nearly twenty years. In the last six months he’s probably learned more about the gap between what low income Mexicans want and need, and what the banks are offering them than ever before.

Mexico has 27 million households. Twenty-two million of them are middle and low income. Even though banks reach them physically, almost none of these people choose to use bank accounts to manage their money.

Six months’ ago, Xavier commissioned a nationally-representative survey with 426 low income households (so-called segments “C-” and below) to examine income structure and expense cashflows; aspirations; concerns; and money management strategies. You can read the summary results in his paper, A Structured Approach to Understanding the Financial Service Needs of the Poor. Or watch this eight-minute video in which Xavier talks with five low income Mexicans about their day-to-day money management strategies.

Low income people in Mexico manage their money very actively—just not using banks. Most of them have actually decided NOT to use banks even though unlike much of the world they have access, and instead they use informal financial and social networks—family, friends, community—for financial management needs.

Certain aspirations are shared: people want to educate their kids, they worry about meeting medical expenses if someone in the family gets ill; they want better housing.

We interviewed dozens of low income Mexicans. Two common themes came through in every conversation: a desire for better housing, with a variety of strategies for improving housing from investing in building materials to saving up for land purchase or borrowing from family to buy a plot; and spending on children. Families with many children have strikingly different financial pressures from those with similar levels of income but fewer children, or from young families who live with their parents. On the whole, parents deny themselves treats and unnecessary expenditures. But they find it very hard to deny their children.

Those are the similarities. The differences come in how people use savings and credit to move money in time. People use savings and credit in different ways to deal with foreseeable expenses, unplanned events, and shortfalls. These differences relate to the regularity of income.

Regular income is an important driver of savings patterns. There was a striking pattern among salaried workers, who tend to save to plan foreseeable expenses–and who need a variety of simple savings products to help them plan, as well as to build a cushion against unplanned events– and longer-term savings for bigger expenses and aspirations such as a washing machine, or kids’ school uniforms, or housing.

In contrast, those with the most irregular income—entrepreneurs such as street vendors or taxi drivers– often juggle short-term credit and savings. Whereas salaried workers focus on planning cashflows to meet expenses through saving, entrepreneurs actively manage their financial assets and rely on a mix of savings and credit, juggling a complex array of loans and savings to cover planned expenses as well as unplanned needs and business opportunities.

“If you just look at income,” Xavier says in the video, “you’re completely missing the point of who these people are and the kinds of products they would find valuable.” In the next installment on this work we’ll talk about developing products to meet the needs that low income clients clearly express.