Details Matter: Product Design for a Better Savings Experience

Savings has been gaining traction as a vital financial resource for poor people. More financial institutions in poor communities now offer savings accounts to round out their portfolio of products for poor customers; development researchers are testing the best ways to encourage saving; governments are exploring the benefits of enabling the deposit of social transfers and other cash sources—like remittances—into bank accounts.

As a concept, promoting savings makes a lot of sense for a lot of people. Unlike credit, you can’t do damage by offering too much of it; it is less expensive for the saver to pay expenses using capital he or she has accumulated than pay interest to a formal or informal lender; and formal savings held in the bank contribute to the commercial stability of the institution and the business case of serving poor clients.

Yet savings has its challenges. The first is attitudinal—it is still quite common for government officials, bankers, and others to doubt the ability of poor people to save. I had a conversation just yesterday with a field researcher working on a savings project in the Philippines, who told of the typical conversation she has with a local government official. “You realize these people collect garbage to earn a living,” he told her. “They can’t save.” Yet this same researcher also saw the gold ring a woman in the village had recently bought with money she’d put by because a ring is “harder to spend.”

The second challenge to savings comes from the saver. People around the world show the kind of ingenuity displayed by the Filipino woman. They buy rings or bracelets or a goat because they’re “harder to spend.” Those mechanisms also may be easier to access. If a store down the road sells gold rings every day, but the bank is ten miles away, or the savings collector comes only once in awhile, the more convenient option wins. Yet even ingenuity gets eroded by temptation: when people come into a little extra they might treat themselves with sugar or sweet tea because they can and its there. They also might give a loan or some help to a friend or neighbor who asks.

Attitudes change with experience, so as the number of institutions offering savings accounts has grown, so too have the efforts to help people save more by dealing with the challenges of convenience, impulse control, or requests from friends. In the new CGAP report, Latest Findings from Randomized Evaluations of Microfinance, I wrote about a number of design approaches that have been proven to help poor people save. Commitment savings accounts, for instance, limit the saver’s access to funds until a predetermined time or balance is reached. Text-messages or letters sent through the mail reminding people to save help keep savings goals current and relevant, so that people may be less tempted by short-term treats like the sugar or the tea.

Recent programs have also looked for ways to see what happens when financial institutions increase convenience. In thePhilippines, for instance, Dean Karlan, a Yale economist and president of Innovations for Poverty Action, worked withBostonUniversityeconomist Wesley Yin to design a program in which a savings collector from a microfinance institution visited savers on a bi-weekly or monthly basis to pick up their deposits. The service was not free, yet it still increased the average savings balance of participants by 25 percent over 10 months, and those clients borrowed less.

More work is ongoing. In Bolivia, Karlan is working with two other researchers to test whether lock boxes equipped with a daily alarm help people save more. The lock box is right there in the house, and the only way to shut off the alarm is to deposit cash, so savers get convenience, a commitment of sorts (they’d have to break the box to get the money inside), and a reminder to save. Karlan and his Yale colleague Chris Udry are also working in Ghana to see what happens when they offer savers a labeled account and a collection service.

Underlying all this work is a real desire to understand how to stabilize the financial lives of poor people. How can people with uncertain and uneven incomes equip themselves to consume enough calories, weather shocks, send children to school, and otherwise invest in the future. It is not yet clear whether savings helps achieve these aims, but increasing savings levels is an important first step toward finding out.