Savings Revolution — How one thing, changes everything

Thanks to technology, the time is ripe for revolutionizing Savings to solve the age-old problems that both Banks and customers have faced all along!

While banks & MMFs want to solve problems like “how to attract larger savings deposits & balances” and “how to enhance prediction capability for loans”, customers around the world are yet to solve problems like “how to maintain financial discipline” and “how to always keep their budget up to date”, at scale.

But before we jump right into that one magic thing that solves everything, let’s take a step back and look at these common problems from outside the banking and technology box.

Back to the ‘human’ basics — No banks

For any business, including a bank, that wants to flourish, it first needs to solve a pertinent human problem that it can then cash in on.

Human Problem: There is a large group of people who don’t use bank accounts that we can learn a great deal from regarding how to save to reach our various goals.

Human-Centred Design (HCD): People without bank accounts enforce financial discipline by separating their physical cash into different envelopes or boxes. Each envelope is clearly marked with the name of the goal.

Banks, on the other hand, give us one account to pool all the money we have for our different goals with no clear way of distinguishing each of them.

This is the equivalent of tearing up all these envelopes, and pouring all of the physical cash into a pot (the sole bank account) then picking up a piece of paper to keep track of movement in and out of the pot and how it affects each financial goal… NOT SMART, DIFFICULT and TEDIOUS to say the least!!

One Savings account: It’s the equivalent of tearing up all the envelopes, and pouring all of the physical cash into one pot; then picking up a piece of paper to keep track of each savings goal, balances, withdrawals & deposits.

So really, how do you apply this great “envelope” approach with bank accounts? That question led me to this eye-popping article: “How 14 bank accounts saved our budget”.
The approach is shocking & mindblowing, but then it hit me that I’ve actually done the same thing but with 5 MMF accounts as you’ll see at the end of my previous article “MMFs — why I have 5 and still want more”. And that’s when I realised what banks need to do.

SOLUTION

What I’m proposing is simple yet revolutionary. Here we go folks:

My savings account and my budget should be married.
My budget and my savings account should not be 2 separate things.

I should create, manage and execute my budget on my savings account.

Let’s call this new concept the Customer-Envelope-Budgeting approach (CEB).

CEB = Customer Envelope Budgeting approach

The key differences between CEB and what banks have today are:

1. CEB has separate accounts / sub-accounts for each budget item… not one saving account for all your savings goals.
2. CEB Identifies each account/sub-account by name — each customer can give a unique name for each (sub)account and interact with the (sub)accounts by these custom names… not by interacting with the (sub)accounts by using a long 10 digit number e.g. 0101573012 that is handed to you by the bank.
3. CEB enables customers to set target amounts and target dates to track the progress of each budget item from the bank’s interfaces e.g. mobile app, internet banking, ATMs, USSD etc. … not setting your budget on Excel then executing it on your bank account.

The current way that our accounts are designed is focussed on the banks need to easily keep track of the money in each account. It’s not designed with a human in mind. With CEB, on the other hand, my banking experience is primarily designed with a human in mind, not an accounting system.

With CEB, my banking experience is designed with a human in mind, not an accounting system.

In this new concept, everything I say about a savings account is also applicable to Money Market Funds (MMFs) since they are another form of an account that people, including me, use for saving.

We’ll delve into the many benefits this new concept has and the big problems it solves for both banks & customers.
For now, let’s jump into how it would potentially look.

HOW IT WORKS

Let’s assume that this is your current budget for items that would go into your savings / MMF accounts:

Sample budget that we would have otherwise maintained on Excel or some other budgeting app.

Let’s take a look at how things should look like on your mobile banking app when this new CEB approach is adopted by our XYZ Bank:

Creating (sub)accounts

The customers will be able to create each savings goal/budget item as a sub-account as seen here.

Each “parent” account will always have an “unallocated” sub-account. If none of the cash is allocated to any sub-account, then it’ll all sit in the “unallocated” sub-account.

Configuring the sub-accounts

Each sub-account will have:

• Unique Name
• Target (goal) amount — the amount that the customer is aiming to save up to
• Target Date — the date on which that the customer aims to reach the target amount

Reallocation of funds

The customer can re-allocate any money deposited into the account for any of the goals (sub)accounts that he’s created.

If not re-allocated, then it’ll all sit in the “unallocated” (sub)account.

Handling Withdrawals

Similar to deposits, when a customer makes a withdrawal, it’ll sit in the “Unallocated” (sub)account until the customer re-allocates the withdrawal to a (sub)account.

This means that the amount saved for that (sub)account/goal will be reduced e.g. “Rainy day” going down from Ksh 120,000 to Ksh 70,000.

WHY THIS MATTERS: TO BANKS & CUSTOMERS

This new concept solves some big problems for both banks and customers.

Customer problems — solved:

• Mixing all their money (and goals) in one pot — CEB helps prevent the temptation to dip into the proverbial one big pot when you shouldn’t.
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  It’s only human nature to fall into the trap of thinking you have a lot of money if all your money is in one big pool = the allure of a large pool of money.
  This creates a big temptation, even to the most disciplined amongst us, to dip into that big pool when you shouldn’t and to further deceive yourself that you’ll recover it down the line
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  By eliminating this temptation, customers will be able to reach their goals faster and as planned.
• Enhanced financial discipline — we often lose discipline because our accounts and budget are out of sync with each other.
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  Our current budgeting experience is disjointed and once our budget on Excel loses sync with our bank account, it becomes a mountainous task to reconcile the deposits, withdrawals, bank balance and all the goals that you had initially budgeted for.
• Reduced time and administration headache — switching between our accounts and budgeting tools is tedious and not necessary.

Bank/MMF problems — solved by CEB:

Larger savings account balances

Customers will maintain larger account balances when they don’t fall prey to the temptation of dipping their hands into the “large pool” of money.

The bank will now have access to a larger pool of money to lend out and thus creates opportunities to increase their revenue.

Cash flow predictability

CEB allows the bank to plan their cash flow management since they know when and how much is going to be withdrawn in the future and also when those plans change.

Having the power to accurately predict how much of the current deposits are going to sit with the bank in the long term vs how much of it is going to be in the bank in the short term is heaven on earth for Treasury Managers. The customer-budgeting feature will enable the bank to accurately manage and allocate cash-in-hand for the bank’s needs.

Accuracy in apportionment for loans

CEB allows the bank to determine what portion of the money in the savings accounts can be used for long-term lending and what portion can be used for short-term lending.

The bank will be able to accurately determine what portion of deposits in its Savings accounts will be there for the long-term vs for the short-term. The bank can then apportion these funds for long-term and short-term loans respectively.
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Liquidity-mismatch is a big problem that banks are plagued with that often has the side effect of them adding a premium on the interest they charge for their loans.

Predictability & data-science enriched

CEB provides data that speaks into a customers financial discipline which is a priceless data point for determining Risk.

Moreover, most data that is out there in the world of big-data / data-science is historical data that’s being used to *attempt* to predict the customer’s future desires.
But with the customer sharing their future plans and desires with the bank, through their budget, and updating it regularly, the bank will now have infinite possibilities! Why use historical data and data-science to predict customers’ future desires when the freely share their future desires with you?

Why use historical data and data-science to predict customers’ future desires when the customers freely share their future desires with you?

Increased customer engagement

Customers will engage more with the bank due to maintaining their budget with the bank.

This presents opportunities for the bank to learn more about their customers as well as opportunities to cross-sell other bank products since they now have more “face-time” with the customer via digital channels.

Tailor-fitting products

CEB allows a bank to get to know what customers truly value. This allows the bank to tailor-make product for each customer.

There’s a great saying:
“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.”
Budgeting data that the customer shares with the bank is invaluable data that speaks to what the customers consider most important to them.
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The bank will be perfectly placed to tailor-make/fit products for each customer. Blindly selling certain products to customers will now be a thing of the past in this new savings account & budget marriage era, where we are almost 100% sure about what the customer’s financial desires are. This has the potential of doubling product uptake for each targetted/direct sale.

“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.”

HCD Reputation

A bank with such revolutionary yet human-centred products to solve real customer pain points creates a great reputation amongst potential customers.

Customers will appreciate the fact that their bank truly cares about helping them achieve their goals by supporting them with effective tools that enable them to monitor progress and enhance their personal financial discipline.

Future iterations of CEB

This could easily become bigger and better with the following iterations:

• Apply to Current Accounts — it’s still easily applicable to current accounts where customers are transacting more frequently and with smaller amounts of money. Some nuances may arise due to the nature of the small but frequent transactions on the current accounts. On the flip side, there will be more frequent transactions and thus more engagement from customers.
• Automation — Allowing customers to automate the apportionment of any new deposit. Example: For all deposits into the parent account, always apportion 50% to “Land purchase”, 20% to “Rainy Day” and 30% to “Buy Car”.
• Enforcing Allocation — Giving the customers the option to force themselves to abide by their budget such that: before any deposit/withdrawal transaction is executed, the customer must allocate it to a budget item. Prior to this, customers would deposit/withdraw money and it would be in limbo (unallocated state) and the customer could allocate it at a later stage.
• Giving customers rewards for sticking to their goals — you’re rewarding predictability (from the bank’s point of view) and rewarding discipline (from the customer’s point of view)
• Transaction costs incentives — Example: Allow for free withdrawals if done @ or after the target dates.
• Budget item categorization — allow customers to categorize each budget item into a set of pre-defined categories that the bank can then use when running it’s prediction models to determine Cost of Risk.
• Additional levers for configuring Goals — Example 1: setting milestones (amounts & dates) before hitting the savings goal. Example 2: distinguishing between target dates & expected withdrawal dates.