Can Digital Savings Reduce Risks in Digital Credit?

When the financial inclusion community talks about innovative digital credit and savings products these days, it seems like we focus almost exclusively on the credit side.

This makes some sense. Credit products generate revenue for lenders, whereas small-balance savings accounts are often money-losing products, and overall we have seen relatively small balances kept on these accounts. But recent data from an experiment in Tanzania, which used interactive SMS to teach M-Pawa customers how to save and borrow responsibly, suggests that savings should be a bigger part of the conversation. The findings indicate that we may be overlooking how savings accounts can support positive borrowing outcomes when they are offered on the same mobile wallets that customers use to obtain loans.

M-Pawa is a fully digital mobile money product of Vodacom and Commercial Bank of Africa that offers both savings and credit features. Its new SMS platform, run by Arifu, provides customized learning content based on consumers’ preferences and responses. The platform was rolled out to farmers in rural Tanzania as part TechnoServe’s Connected Farmers Alliance. CGAP and the Busara Centre for Behavioral Economics used the account activity of more than 21,000 farmers, from June 2014 to May 2016, to measure how Arifu’s interactive learning content impacted the farmers’ behavior.

One of the most interesting findings was that interactive SMS increased savings on M-Pawa. On average, Arifu users more than doubled their savings balances from Tsh2,673 ($1.20) to Tsh7,120 ($3.20) after interacting with Arifu’s learning content. Looking at the loan behavior of Arifu users, we find something more interesting still. Overall, there were improvements in Arifu users’ borrowing behaviors both in comparison to other users and to their own activity before engaging with learning content:

• Arifu users took out loans that were Tsh1,666 ($0.75) larger than loans taken by non-Arifu users.
• Arifu users had Tsh2,654 ($1.19) less in outstanding amounts and made payments almost three-and-a-half days earlier than non-Arifu users.
• Arifu users took out loans that were Tsh1,017 ($0.46) larger on average than the loans they took out before interacting with the learning content.
• Arifu users repaid loans five-and-a-half days sooner and made first payments that were on average Tsh1,730 ($0.77) larger than the payments they made before interacting with the learning content.

These behaviors — taking out larger loans, maintaining lower outstanding amounts, and repaying faster — mean that customers are more likely to borrow responsibly, improving the sustainability of lending.

Taking a bigger picture view, these findings offer two key lessons for digital credit:

• There are business and consumer welfare benefits to using tools like interactive SMS to better understand and engage with consumers beyond just getting them to take out a loan with a few clicks on a USSD menu or app.
• Digital credit models that offer a single channel for both credit and savings can leverage the complementary nature of saving and borrowing for increased consumer activity and responsible borrowing.

Financial services providers and mobile network operators have proved the concept of digital nano-credit. Now it is time to take things a step further, get to know our digital consumers better, and offer them the tools — such as linked savings accounts — to become better borrowers and manage their money across diverse products.