Making Electronic Money and Banking More Discrete

Electronic money is intangible, and that makes it intrinsically a lot more discreet than piles of cash or physical forms of savings such as jewelry or livestock. One can be more “circumspect, unostentatious” (an online dictionary’s definition of ‘discreet’) with electronic money, and that makes it potentially safer and more private.

But when money is handled electronically as pure numerical information, it also becomes a lot less discrete: it is jumbled into a single quantity within a continuous scale of value that we call our balance. It makes it harder to keep things “separate, distinct” (the dictionary’s definition when you drop an ‘e’). It may be mathematically convenient to handle money electronically, but it makes the act of planning and saving more difficult for many who are not used to it.

Consider a parable of traditional savings: livestock. Every chicken, goat, pig or cow represents a discrete value, and this helps the saver in three ways. It presents clear proximate investment targets (“I want another cow”); it presents clear investment strategies (“I’ll accumulate ten chickens which I will then exchange for a goat”); and it invites assignment of ultimate purposes to each savings vehicle (“the goat is to pay for school fees, the pigs help pay for durable assets like a motorcycle, the cow is for marriages and funerals”). This kind of savings fragmentation helps discipline and planning.

Now go electronic using a bank (or mobile money) account: the savings progression is now one dollar after another after another, a continuum. There are no obvious proximate investment goals, there are no decision markers, and any dollar is as good for one thing as for another. There are no in-built discipline devices to use as savings crutches.

The tough challenge banks have at the base of the pyramid is creating a discrete and intuitive progression of electronic savings vehicles analogous to the animal progression. Offering multiple accounts with differentiated terms is complex for both users and providers alike. Banks typically differentiate their accounts by discretizing in the time dimension via term deposits. Banks equate discipline with illiquidity and with freezing money in time (or incurring penalties). That may work for people who have regular salaries, but people who have erratic income flows and are subject to large relative shocks are understandably reluctant to concede quick, full access to their money in case of sudden need.

The animal progression is intuitively associated with both value and time, with cows representing the larger, longer-term projects. But people don’t have to fully compromise on liquidity when they save in the form of a cow. A cow is sellable, but it has some characteristics which helps instill discipline: it is indivisible (“I can’t sell part of a cow to go out drinking with my mates”), it lacks immediacy (the fact that you first need to find a buyer acts as a ‘waiting period’ and does not support impulse shopping), and it is charged with family and social connotations (not discreet).

In order to move people from informal to formal savings mechanisms, banks must find new ways to discretize electronic money accounts, creating separate savings pots for different classes of expenditures or goals. The operation of the accounts must be directly intuitive, relating to how people think of their money, and not based on bank-speak (example of what not to ask: “Which account do you want to move money from? Which account do you want to move money to?”). These savings pots must incorporate effective mechanisms to combine discipline with liquidity, rather than creating a tug of war between these desired qualities.

It’s not entirely clear how you do all of this, but the approach I am investigating, based on earlier concepts developed with my co-author Colin Mayer and with generous support from the Financial Sector Deepening Trust of Tanzania, is to conceive savings as future self-payments on mobile money schemes (see new paper here). People could arrange their savings goals in time, allocating funds to these future goal dates as and when they have some extra money. They’d save by sending money to themselves, just like today they are dis-saving by sending money to others. For each of these goal dates, people could choose among a menu of non-punitive early liquidity options, based on their circumstances and how precise their goal is.

For me all this links into Stuart Rutherford’s notion of savings as creating useful lump sums. It would be tautological to say that bigger lumps are more useful than smaller lumps. The real point is that, be they large or small lumps, it’s their distinct lumpiness that makes them useful. Savings lumps must resolve themselves in people’s minds, not lose themselves within a bank account.


24 August 2012 Submitted by Susan Johnson (not verified)

Hi Ignacio
I have yet to read the full paper but let me launch in anyway. I appreciate some of the way you are thinking in terms eg equivalence between money and goats, cattle etc. However, and it is a big however… Your proposition assumes that poor people are willing to save in cash or a financial instrument when in fact they have far better options. The point about chickens, goats and cows is that they are a much more sensible way to save that in an e-money cash equivalent or similar financial instrument. Interest on these is essentailly insignificant, withdrawing them will cost something, and inflation will erode them also. You will with pretty much 100% certainty get back less than you put in. Buying a goat, cow, chicken or whatever is not only inflation proof, but has a high chance of yielding a return by bearing off-spring as well as providing useful milk, eggs etc. Ah, someone says, but they might die in the process, yes that’s true but I think we need to understand how people view those kinds of risks, because of course they may not and the return is worth it when they don’t. So to me the issue of attracting savings into the formal sector is not so much the progression but making savings in the formal sector a viable proposition at all.

By the way – I would really appreciate any advice anyone has on somewhere other than the bank to keep my savings at the moment – and somewhere other than the financial instruments I have access – on the current record I am certainly going to get less out than I put there given the very lousy rate of interest! And my pension plan has also recently changed the rules without me agreeing!

24 August 2012 Submitted by Stephen Gornick (not verified)

One way to lessen the chance the money will be spent for frivolous purposes is to have the separate savings account require multiple signatures for spending. That way both spouses, for example, would need to agree to spend the funds.

It isn’t likely that M-Pesa is set up for this, but it could be done. Multi-signature is a feature being added now to the Bitcoin protocol and will be available in the mobile clients over the next months as well.

Keep an eye on Bitcoin for innovations in which the best capabilities can be replicated elsewhere.

24 August 2012 Submitted by Ignacio Mas (not verified)

Hi Susan. In this post I was just making a point about how difficult it is for e-money to achieve the kind of mental fragmentation of savings that many people are used to. I did not mean to imply that this is the only thing that matters: yes, they will also look at the risk/return profile of different savings options.

Hi Stephen, your point of requiring a second signature to build up savings discipline is indeed an option I consider in the paper I refer to in the post.

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