The Surprising Complexity of Money Management on a $2-a-day Income
In 2005, the number of people living on less than $2 a day was about 2.5 billion. Without much thought, I assumed these people lived hand-to-mouth: spending their daily $2 on food. They don’t.¹
The language of the statistic implies they receive $2 a day, but in fact it is an average, and smoothing that average requires financial products. So too does paying for an emergency, saving for a wedding, and temporarily extracting cash from non-fungible assets.
The poorest people are actually financial wizards
The language of “unbanked” implies that these people are without financial products.
It turns out, the poor and unbanked push and pull 75%-185% of their income through informal financial tools. This means that every dollar made may be saved, borrowed, lent or otherwise moved about before being spent — up to 185% of a person’s annual salary.¹
Money management is, for the poor, a fundamental and well-understood part of everyday life. It is a key factor in determining the level of success that poor households enjoy in improving their own lives.¹
Financial products galore
The informal financial products listed below are built on community trust, which allows for a lower transaction cost of providing service, but increases the risk.
There is a Bangladeshi tradition called “musti chaul”: holding back one fistful of dry rice each time a meal is cooked to save for an unexpected visitor or a neighbor in need.¹ The listed informal financial products not only rely on, but serve to build, the bonds of trust in a community.
It is for that same reason that they lack what MasterCard calls “syndicated trust,” such that the bonds of trust need to be created anew when a person moves, such as for a migrant worker.²
Balance sheets built on trust and community are wonderful, and I would never suggest we do away with them entirely. But these solutions are not scalable, and there is little recourse when something goes awry. Furthermore, without proper legal infrastructure, half-measures to provide organized financial services can go disastrously wrong, as in this example with an attempt to offer life-insurance that customers could borrow against:
Bangladeshi pro-poor insurers suffered multiple problems: administration was so loose that fraud became commonplace; nepotism was rife in the awarding of jobs; cash flows were not tracked, so that for many clients the promised loans never materialized; and many agents were incompetent or became lazy and failed to visit their clients regularly.¹
Why banking the unbanked doesn’t solve the financial inclusion problem
The common narrative is lack of access, but the problem seems to be lack of relevance.¹ Account fees, minimum balances, and remittance commissions are simply unaffordable.
This is far from a case of “the evil bankers.” It is merely an economic reality that there is a fixed cost for each new customer that a bank takes on. This means that the banks must recoup these costs from the customer, either though fees or through lending customer deposits. For poor customers with a low balance, this necessarily means through fees, which they cannot afford.
The opportunity for DeFi solutions
A stablecoin wallet would instantly provide a level of security that cash does not: inflation resistance and protection from physical theft & destruction. This is why I’m excited about the Mosendo wallet. It will hide crypto in the background and show balances in local currency.
Next, MasterCard's notion of “syndicated trust” can be created with modules on top of such a wallet to supplant and supplement informal products. Because these DeFi solutions are scalable and will eventually be entirely fee-free, there is no longer a transaction cost barrier. Scalable financial products can empower even the smallest income with financial wizardry.
Finally, a crypto wallet need not replace every element in the informal products listed above. For example, a shopkeeper may negotiate store credit with a customer, and collect repayment through the wallet app. It is easy to imagine how pawning, keeping savings with a friend, and interest-free borrowing and lending can all be improved with simple financial modules built on a stablecoin wallet.
Low-hanging fruit
When cash flow is of prime importance, the poor will do things that may seem baffling: take out a loan instead of spending down savings, or choosing a higher-interest loan because the repayment schedule is better suited to cash flows.¹ Resolving these inefficiencies with customizable solutions and micro-transactions will be an immediate net benefit.
Another low-hanging inefficiency: savings clubs. These popular clubs work by collecting daily wages from participants, and giving them the sum at month’s end, less one day’s fee. That’s an annual savings rate of -4%. A smart contract module could easily replace this, and furthermore could offer opportunities to earn a return on balances through DeFi lending.
There is a tech gap, but it isn’t as wide as you might suspect
In my personal travels to poor regions, I am always struck by how common smartphones are even among the very poor. I like to say about the Thais that they will buy a smartphone before putting a fourth wall on their house. I had an experience last month of talking to a father in a hill tribe in Thailand who built his house out of bamboo. As he showed me the thatched roof and single room, his 7 year old daughter was sitting on the bamboo deck playing Fortnite on the family phone.
There is still considerable ground to be gained by going after the unbanked with mobile phones. This data from MasterCard shows the unbanked with mobile phones by country:²
Conclusion
The growing suite of DeFi tools is being tested by those who can survive the bugs. As they become more reliable, they will be well suited to help low earners manage their finances. It is low earners who have the most to gain by learning about and using these tools, as Andreas Antonopoulos told us at the Deconomy 2019 conference, because they suffer the most severe pain points. This means that crypto adoption will start from the ground up, where it is needed most.
Clayton Roche
Founding Member & Economic Analyst
Mosendo
If what we are doing resonates with you, there are a few ways to continue this conversation and bring this vision to life.
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References
[1]: Stuart Rutherford, Jonathan Morduch, Orlanda Ruthven, and Daryl Collins. (January 9, 2009). Portfolios of the Poor: How the World’s Poor Live on $2 a Day
[2]: MasterCard Report. Unraveling the Web of Inclusion. Accessed April 13, 2019. http://financial-inclusion.com/wp-content/uploads/2019/03/MCC1-FinInc-Report-Screen.pdf
Photographs by the author.
