Commitment is hard.
And other lessons from digital savings experiments in the developing world
Sean Higgins is a postdoctoral fellow at CEGA. He is currently studying digital payments, savings, and gender-differentiated credit scoring algorithms in the Dominican Republic and Mexico.
Over 2 billion adults around the world do not have a bank account. Most poor households lack sufficient savings to deal with shocks such as drought or illness. Why is it so difficult for people to save in poor countries? Can digital financial services help?
To tackle these questions, I organized a session on Financial Inclusion through Savings at the 2018 American Economic Association annual meetings. Papers explored the effectiveness of three simple yet potentially powerful features of digital financial services:
- “Default” or “opt-out” savings plans, which automatically enroll employees to contribute part of their salaries to a savings account (employees can opt out or change their monthly contribution at any time);
- Commitment savings accounts, which allow people to “lock” their money away for a certain period of time (these accounts help clients bind themselves to saving and avoid short-sighted, impulsive spending); and
- Debit cards or mobile money, which reduce common barriers to saving, including traveling long distances to deposit money in — or withdraw from — a bank account.
What’s your default?
In an experiment in Afghanistan, Joshua Blumenstock (UC Berkeley and CEGA), Michael Callen (UC San Diego and CEGA), and Tarek Ghani (Washington University in St. Louis) studied how automatically enrolling employees in an “opt-out” savings plan affected their behavior. Those randomly assigned to a plan where 5% of their monthly salary was automatically deposited into a mobile money account were 40 percentage points more likely to save. Why? As it turns out, having to think through different savings scenarios and choose a monthly savings contribution (the alternative to the “opt-out” approach) leads people to procrastinate rather than start saving. The results of this study suggest that financial service providers should look for ways to simplify and automate savings decisions.
How committed are you?
Some people save to avoid needing to take out high-interest loans when life deals them an unexpected cost. A study by CEGA affiliate Simone Schaner (University of Southern California) and coauthors offered salaried workers in Ghana a commitment savings product designed to help them avoid overdrafting, which we can think of as a high-interest loan (as it incurs similarly steep fees).
In the experiment, researchers classified study participants as overdrafters and non-overdrafters based on how likely they were to incur overdraft fees before the study began. All were offered commitment savings accounts; adoption and resulting savings were high among both groups. However, now that their savings were tied up, overdrafters simply took on more debt elsewhere. In contrast, non-overdrafters saved more both at the partner bank and with other formal financial institutions, and they did not take on more debt elsewhere. This suggests that financial service providers should consider broader financial portfolios when designing commitment products, to avoid having clients offset their tied-up savings by taking high-interest loans from other financial institutions.
Direct-deposit savings accounts with commitment features may also provide information to employers about how committed their employees are to staying at the company. In a study by Emily Breza (Harvard), Martin Kanz (World Bank), and Leora Klapper (World Bank), employees in Bangladesh were offered a commitment savings account, with a twist: employers sometimes endorsed the product, and employees were sometimes told that their decision to save would be disclosed to the employer. Only the group that received both employer endorsement and disclosure of the employee’s choice had higher adoption of the accounts, suggesting that signaling their intention to remain at the company motivated employees to sign up for the accounts and save.
You can trust me.
Two important barriers to financial inclusion are transaction costs and low trust in banks. In a paper I coauthored with Pierre Bachas (World Bank), Paul Gertler (UC Berkeley and CEGA), and Enrique Seira (Instituto Tecnológico Autónomo de México), we study the impact of providing debit cards to government cash transfer recipients who were already receiving their benefits deposited directly into a bank account. Once they receive debit cards, beneficiaries increase their number of transactions and also check their balances frequently; the number of checks decreases over time as their reported trust in the bank and savings increases. The lesson here is that financial service providers should aspire to make it easier and less costly for customers to access their accounts, and in particular to check their account balances, which builds trust.
So where does this leave us?
From studies like these, we’ve learned that commitment devices can help individuals save, but they can also have negative consequences for those who unexpectedly need to access their savings to cope with shocks. The question remains: can commitment devices be improved so that they help individuals save without overly penalizing those who need to access their savings?
We’ve also learned that debit cards and mobile money reduce barriers to access and allow savers to more easily monitor their accounts. But how can financial service providers further reduce barriers to access and increase users’ trust?
Finally, all the studies from this session combine digital financial services with automatic payments (direct deposits from an employer or government-to-person payments). Can savings interventions successfully increase financial inclusion in contexts where automatic salary payments are not possible (such as for individuals employed in the informal sector)? Evidence so far is mixed: mobile money reduced poverty in Kenya, but basic savings accounts offered in three developing countries were not very popular, and even those who opened accounts did not use them much.