Friction and Flow: How innovation can put relevance back into formal savings
Editor’s note: In launching NextBillion Financial Innovation, we have invited a number of top innovators and leaders to contribute their views on financial innovation – what’s driving it, where momentum is heading, and what obstacles remain. Today, Ignacio Mas tackles the topic from the perspective of savings.
Do you realize to what extent formal savings services are irrelevant to many of the world’s poor?
The first step in any recovery program is to acknowledge the problem. So before we talk about how innovation can encourage savings at the BoP, we need to confront two uncomfortable facts:
1. Half the world’s adult population doesn’t have an account in a formal institution
2. More than half of those in developing countries who have an account admit that they haven’t saved in it at all in the last year (source: Findex).
In reducing finances to a bunch of numbers (account balances, amounts owed and due, available credit), formal financial services tend to become dissociated from the mental models, social relationships and customs that dominate people’s financial lives. But allowing for some of that nuance invariably adds complexity to formal products (more accounts, new terms, longer forms, more levels on the mobile user interface). People are put off by this tussle between relevance and complexity. They might pick out individual products that solve particular large pain points for them (sending money long distances, access to cheaper credit) and avoid the rest, leaving in particular a wake of empty savings accounts.
In an attempt to make savings products both relevant and simple, researchers and providers often narrow their focus to specific use cases that appeal to defined customer segments. This may lead to simpler individual products, but the accompanying product proliferation presents an insurmountable marketing challenge. It also risks pigeonholing customers into prescribed behaviors. For instance, many commitment savings products feel somewhat patronizing in their attempts to develop good savings habits by securing promises of regular deposits.
So how can we establish customer relevance, avoid product complexity and preserve broad product appeal? We need to change tack.
First of all, we must think long and hard about the core customer proposition around savings in developing markets. It’s less about what to do with money people have now (wealth management) and more about how to secure the money they will need (building discipline). It’s less about managing stocks (a storage problem) and more about regulating flows (a payments problem). It’s less about fillable vessels (the account itself) and more about adjustable rules and frictions (the restrictions on it).
Frictions are mechanisms that help you keep money saved. In truly innovative savings products, those frictions cannot be tacked on as features on an account; they need to define the savings products.
Take locking money up, for example. What if instead of opening a time deposit that reaches maturity after a fixed term, people could simply send or push money to a specific date (or a month) based on when they will need it, much as they can send or push money to someone else?
Another friction is avoiding instant liquidity by having a waiting period. What if instead of pushing money to a fixed date, people could push some money to Fridays or Sundays? They’d set up different pots of money that would become liquid weekly, and which they might associate with different purposes (e.g.: play money versus money for a family trip).
Yet another friction is indivisibility, to avoid small temptations. Imagine if people could open an account dedicated to saving for a chicken or a goat, and could only push money in and out in lumps of $4 or $40, because that’s what a chicken or a goat cost, respectively.
Or, as a final example, consider peer pressure as a friction. People often send money to someone they trust (informally referred to as a money guards) for safekeeping so that they can mentally set it aside. Imagine a product where the designated money guard can’t do anything with that money other than sending it back to the person when they ask for it. This is saving through a friend; there’s peer pressure because dis-saving can only be done in connivance with the friend/moneyguard.
These are examples of how one can define savings products as payments to oneself, by adding a time, social or other dimension to them. One can go further by adding rules, which are mechanisms to help people to save more regularly (as opposed to frictions which help people keep the money saved). Common rules consist of recurring deposits (or self-payments) and automatic sweeps, in which accounts automatically transfer amounts that exceed a certain level into other savings or investment options. A more interesting one is a “personal ROSCA” (Rotating Savings and Credit Association), an informal, community-based savings group. Its logical opposite, “paying yourself a salary,” lets people distribute a windfall over a number of weeks.
However, figuring out these frictions and rules as drivers of savings is not enough. For poor people, all moneys need to stand ready to do double duty. A jewel may be a stepping stone to a good marriage and a pawnable asset in case of a medical mishap. A cow is an income supplement and a buffer against emergencies. Savings (building up assets and social status when circumstances permit) is not separable from credit (being able to extract value out of assets and relationships at times of need). So our frictions and rules must have outs, such as being able to borrow against some future money that customers have pushed forward or set aside.
In developing innovative savings products, we must think of financial services as a Swiss Army knife of management tools which people can use and adapt in their own way. It’s the principle of mass customization: a few well-designed tools can be used to support a variety of use cases and shape very personal experiences. People’s sense of ownership over the relationship with the financial service provider – and their feelings of control over their money – will be enhanced if they are able to define how they use the service.
The key challenge is to make these tools intuitive, both in terms of what they do and how they are used.