“I opened [my savings account] because there are certain moments when you have a certain amount, fifty, twenty pesos, whatever it is. I said, ‘instead of spending them, I will save them’ but when a bit of time passed and when I didn’t continue saving and they told me ‘your account is frozen, there isn’t anything here anymore,’ for me it no longer had any benefit. In that moment [when I opened the account] I had imagined it as a money-box kept out of my hands, I was assured, but it didn’t help me, I lost the amount I had saved.”
- Low-balance savings account user in Mexico.
There is an underappreciated issue in the admirable push to help expand outreach and access to savings accounts amongst the poor: the potential that a savings account, if not suited to an individual’s financial profile, can actually wipe out much of a poor person’s financial assets in a year, or even a few months.
The above quote from a financial consumer in Mexico is an extreme case, but it is by no means an anomaly, as a CGAP/FSD diagnostic exercise in Kenya encountered, more than 50 separate charges banks were assessing to savings products nationally. Even in countries with high access levels like the U.S., savings account fees have sent many low-income consumers toward pre-paid cards and other savings tools with less variable fees than savings accounts (although they often have their own hidden fees too). More importantly, where options like pre-paid cards do not exist, such as many markets where we find most low-income consumers, the alternative option to savings is in the household or through informal channels (where the risk of fraud is very real as many a caja member in Mexico will tell you).
While we often want to move these consumers to formal savings channels, and wonder why uptake is often so low for savings accounts, it is important to consider these negative experiences, and remember that increasing savings is not just about making the cost for the provider low, but also making small-balance savings accounts a truly safer, more reliable and useful alternative than informal savings instruments.
We’ve dedicated significant space on this blog to exploring new tools to make savings more accessible, affordable, and suitable to low-income consumers. This is an important goal, as the consumers I speak with across different markets want to save their money in formal financial institutions, both because it is safer, but also because they view a bank account as something to aspire to, a sign of economic progress and prosperity.
However, these same consumers often come up against frustrating barriers to access or predatory fee structures like the example from Mexico. So while I am not saying that we shouldn’t be focusing on savings accounts, I do think the actual experiences consumers are having today with savings accounts offer a few key considerations for innovations in small-balance savings products:
Some of the terms of savings products that get consumers in trouble are not predatory, but are actually quite standard to most savings products: minimum balances, limits on withdrawals per month, etc. This means we can’t just use tighter product regulation to wipe away the “losing by saving” problem. In fact, if you look at some recent government-mandated basic accounts (like in Indonesia, for example), you will see that they often have activity restrictions such as limiting withdrawals per month or payments and transfers. Beyond the risk consumers will end up paying penalties for exceeding these restrictions and lose part of their savings, these restrictions might make the product so inflexible that it is only of limited value to the consumer, leading to some of the high dormancy rates we see in government-mandated basic accounts—and a worst of both worlds situation, a product that is both not profitable to the provider and not useful to the consumer.
Restrictions on savings accounts, especially for minimum balance and number of withdrawals, might mean that most savings accounts are not a match for a lot of low-income financial consumers. These consumers’ incomes are small and variable, and their savings levels small and easily subject to outside factors such as household emergencies. So is it really so reasonable to expect these consumers to keep a minimum balance, even if it is as small as 50 pesos ($4) as is the case with some savings products in Mexico?
Savings may not be the perfect replacement for credit—even high-cost micro or consumer credit—it is sometimes sold as. Listening to consumers reveals that they often treat savings and credit not as pluses and minuses on the same balance sheet, but two different products addressing different needs: credit for consumption or business needs, and savings as an emergency fund for unanticipated events or future household needs. Some consumers we have spoken with have mentioned that they know the credit they use is expensive, but they just don’t want to dip into their savings, as they view those as the last line of financial security for their household, only to be drawn upon in case of an emergency situation.
So am I saying we should give up on savings products for the poor? Of course not. But I do think we need to recognize that it is not just a matter of getting small-balance savings products in the hands of poor consumers, there is a lot that can go wrong in something as simple as savings. In fact, these losses can be exacerbated because consumers don’t anticipate the risks of savings like they do credit products, since no one should reasonably expect to “lose by saving,” and so don’t focus sufficient attention on the fees and restrictions attached to their savings accounts.
This is where there is a role for consumer education, but, more importantly, product adaptability.
As I listened to these recent tales of lost savings in Mexico, of the challenge of keeping a steady savings level when you are a low-income, non-salaried worker, I couldn’t help but think of the innovative products that combine savings and credit in a single service, such as the SafeSave and Jipange KuSave products discussed here recently. So maybe the answer to this small-balance savings dilemma isn’t really about improving savings products at all, but moving beyond the limiting binary of credit or savings products towards a more adaptable suit of products.
It is interesting to see the same conclusion reached for banking for the poor that developed markets are also trending towards- the integration of credit and debit products. Every next-generation internet or mobile banking solution I have seen has incorporated some sort of “safe to spend” view that shows not just the balance of separate accounts, but attempts to integrate them in some sort of meaningful way. The best attempts don’t just add them together as a positive and a negative, but do recognise that the customer does want to keep some form of liquidity in their savings account, even if they have an expensive credit debt.
As for hidden fees and charges, they are hated by consumers in developed markets, but are even worse when dealing with the poor. Bankers or other providers of financial services need to pay more attention to their products when adapting them to the poor. This may involve charging for some things that are free to traditional banking customers, but it is better to have a transparent, consistent and understandable charge than an unexpected and surprising cost to the consumer.
In the current era of internet and mobile banking, it is hard to believe that many people still struggle to keep their bank accounts operational. Most of the public and private banks require their customers to maintain a quarterly minimum balance. Further, the account holder has to regularly access and use his bank account to prevent it from being frozen. So the time has come, when someone like Prof Muhhamad Yunus has to develop an alternate micro deposit model to suit the needs of poor and rural people. The new types of accounts will enable the rural people to deposit money at their own convenience and keep the bank account operational even without any transactions.
Michael, your point about “it is better to have a transparent, consistent and understandable charge than an unexpected and surprising cost to the consumer” really resonates with me and the issue I raised in this blog entry. The next step in this for me would be to see if increased awareness about these harsh fees and restrictions actually keep customers away from these products at higher rates than currently. If it does not change things, then I think we are back to tighter product regulation as the right policy response.
Milaap–any thoughts on how to develop such a new product? Any particularly innovative examples you have seen out there?