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Mobile Money and Commitment

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Mark Pickens, over at the CGD blog, shares stories of unique saving devices:

One man  – let’s call him Richard – used an ingenious method to save for a new motorcycle.  Whenever he had a bit of extra cash he wrapped it in heavy plastic, waterproofed it with industrial-grade resin, and dropped it into the petrol tank of his current motorcycle. After a year when he thought he had enough to buy a bigger, better vehicle, he had the petrol tank removed and cut open with an acetylene torch to recover the currency. The motorcycle cost USD 750. He paid USD 110 to have the petrol tank cut and buy a new one to make his old motorcycle re-sellable. That equates to negative 14.66% annual interest on his savings.

Why would he do this? Same reason a woman — let’s call her Jennifer – dropped coins into her jerry can of cooking oil. She wants to save money to buy some clothes for her children at Christmas (at which time she cut open the jerry can to get to the money).

For both Richard and Jennifer, the requirement to destroy something they owned created an effective barrier against temptation…The temptation to raid savings is continual and almost irresistible. Unless big barriers are erected.

Can we productize these insights to improve branchless banking services?…

…What if Richard or Jennifer could name the point in time when they wanted their money? What if they could not touch it until reaching their goal?What if Richard or Jennifer could name the point in time when they wanted their money? What if they could not touch it until reaching their goal?…

What Mark is describing here is a commitment savings account.

Innovations for Poverty Action (IPA) is conducting a host of studies on commitment savings. (Full disclosure: I am an employee of IPA.) IPA and its research network have examine demand for commitment and its behavioral explanations, effects on savings balances, use of formal bankingfarmer inputs, quitting smoking, how remittances are spent, employee behavior.

These studies reveal a growing body of evidence that people are indeed willing to use formal commitment savings accounts; even when those accounts entail high implicit costs. I agree with Mark that banks can do a better job of designing financial services for the poor. That is precisely the motivation behind commitment savings accounts.

Where I lose Mark is when he says:

…consumers might be happy to pay for the service. Perhaps not the effective 15% which Richard paid, but 2% to 3%. That’s the same average price many people are paying already on an average mobile money transfer. P2P helps consumers alleviate the pain point of moving money over distance. Is it so crazy to think poor people might pay for a service which helps them effectively move money over time, allowing them to move current income forward to the future to finance much-desired purchases?

One of the attractions of mobile money is that it has the potential to reduce transaction costs. Moving money from one account to another, whether this is through physical deposits of cash or through mobile phone, don’t imply a commitment to save or a savings goal. If anything, mobile money should make breaking your commitment easier.

Thus, as we think about the spread of mobile money. Perhaps we should embrace reduced costs of transactions delivered by mobile money, but, at the same time, we should find methods through people can make it hard to succumb to temptation expenditures.

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Written by Niall

May 31, 2011 at 10:15 pm

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