CGAP-MicroSave Virtual Savings Exchange
“Serving Small Depositors: Meeting Demand while Managing Costs”
Summary of Dec. 7, 2005 Virtual Discussion of Delivery Options1
When it comes to savings, poor clients will usually opt for convenience. Furthermore, many find the ambiance of the major commercial banks intimidating, and since these facilities are not located with them in mind, they are unwilling to make the effort to get to a commercial banks' premises to make small deposits (Asare, Ghana). The small saver is more comfortable dealing with someone with whom she can identify than with the impersonal front of a large bank. For their part, banks often find serving small clients to be very costly (Bhavani, India). Not surprisingly then, the key to the success of India's National Savings Institute (which has mobilized USD $440 billion from more than 50 million customers) is their use of a mix of delivery options that provide customers with proximity. These include 500,000 agents who do doorstep collection, post offices with a single staff person in far-flung areas, and ATMs in semi-urban and urban areas (Bhattacharya, India).
Doorstep savings collection: Daily doorstep collection by informal collectors is common in West and Central Africa, and parts of India. In Africa, customers typically pay a monthly fee of about 3% of the amount collected. The poor are willing to pay for it. Safety and capital accumulation seem to be their key motivations (Seibel). Pilot research in the Philippines found that doorstep collection did, in fact, increase savings (Karlan). The collected amount is usually refunded at the end of the month, which allows depositors to replenish their working capital. It also protects savings from relatives. Doorstep savings collection is also found among Indonesian and Indian banks which may not charge for the service.
In rural India, female collectors particularly serve village housewives who do not feel free to go to the postal bank (Bhattacharya and Bhavani, India). In Karnataka, three types of regulated institutions—a private local bank, a non-bank financial institution, and the local public sector commercial bank—each hire barefoot deposit collectors to provide a daily doorstep service (Ramakrishna, India).
Collecting deposits outside of a bracj increases the risks of theft and fraud. Countermeasures include:
- Collectors are required to post fidelity bonds and pay an in-transit insurance premium for the average cash amount handled by each collector.
- Deposit collectors issue duplicate official receipts covering deposit of each saver, upon receiving the amount. The duplicate copy is issued to the saver and the original is given to the institution's cashier together with the amount collected. Collectors are only authorized to accept deposits (and cannot grant any withdrawals); this allows some limited time for collectors to remit the amount collected to the branch cashier.
- Cash withdrawal of deposits is only allowed at the branch offices. This scheme puts a physical "barrier" to the immediate access of the saver to their money, thereby allowing the accumulation of the deposited amount (Lab-oyan, The Philippines).
- Stamps may be provided to the depositor in a passbook in exchange for the deposit (Seibel).
- The safety of the officer carrying money in the field also requires careful consideration (Walden).
Doorstep collection services are convenient for the poor, but they are costly in terms of staff, vehicles, and monitoring. Not surprisingly, clients are often given a negative real return on their savings (Ramakrishna, India and Asare, Ghana). A regulated institution can develop a collection service with very little marketing. A deposit collector system is most appropriate where the market is clustered together so that transportation costs are not too high. To succeed, the system also requires appropriate monitoring, supervision, and reporting systems (Asare, Ghana).
Deposit collectors and other delivery options with out-of-branch transactions: Both the relative risk and the relative ease of a delivery option should be considered. While mobile agents provide a doorstep service, their unsupervised operations increase risks. Where banked savings are insured, are delivery channels like out-of-office transactions insured for fidelity? The answer to this is important to both the microfinance provider as well as the customer (Srinivasan, India).
It can be cost-effective to employ individual deposit collectors such as those who operate: (a) by foot and by bicycle daily at municipal markets and small retail stores at town centers; and (b) by bicycle weekly/monthly in rural areas. However, the risk of theft and fraud is higher than branch-based transactions (Lab-oyan, Philippines).
Self-managed groups: Small savings can be profitable if they are managed by groups and mass systems, whereas big savings need to be managed individually (Zakaria, Indonesia). Individuals will only save with groups if they are assured of the safety in doing so. In rural areas of India, large numbers of self-help groups tap the savings of their members. Despite numerous obvious incentives to save, the saving potential of group members is not fully tapped. The amount that members deposit is usually minimal as compared to what the households can (and would like to) save. There are several reasons for this. Members are concerned about the safety of their savings or whether it can be withdrawn since the money is given out as loans to other member in the group. There is also a lack of clarity about when and how much return members will receive on their savings. And finally, there is a distrust of unclear accounting. As a result, the savings services are used more as a means to access loans. To that extent, the savings becomes compulsory (Girija, India).
Groups that can mobilize savings themselves can cut down on transaction costs to the bank or post office. The savings product of the post office or banks has to be aimed at the individual member, with flexible, withdrawable features. The group can be used as a delivery channel of savings services that would facilitate mobilization and depositor servicing (Girija, India).
Serving groups: MFIs can serve both individuals and groups. When groups mature, they may demand different services. The MFI must be prepared for this. The postal savings bank in Senegal provides rural savings accounts for groups of women. By mid-2002, it had more than 1,000 such accounts that included between 80,000 and 100,000 women from all regions of the country (Kamewe).
Promoting self-managed groups: MFIs have avoided promoting self-managed savings groups because they are seen as competitors. However, there are benefits to these groups. They can serve as a financial entry point for individuals, grooming them until they are prepared to use the MFI's services. Groups lower transaction costs for the bank by aggregating small savings into larger deposits. And the costs of promoting them are very low. Linkages between these groups and MFIS have a lot of potential. Some MFIs have tried a strategy of promoting self-managed groups but have mistakenly started from a purely credit-driven approach (Hamadziripi). In Zimbabwe and South Africa, community-based financial services groups have developed excess savings (more than they can lend to group members) after about a year. These can be deposited with an MFI if it has an attractive savings product. This approach has tended to be self-replicating, drastically reducing the costs and commitments from the MFI (Hamadziripi, Zimbabwe).
Lockboxes: These are small savings boxes made either of metal, wood or clay (with the key taken by MFI staff and the box kept by savings clients) that have a small hole just enough to pass money through that are provided to the clients (either sold at full cost, at subsidized cost, or for free). Clients are asked to put cash savings in it during agreed upon intervals. At the end of the agreed intervals (week, fortnight, or month), MFI staff visit the clients to collect the cash put in the savings box, provide the required receipt, and post the deposit in the savings passbook. The scheme has been quite effective, providing a safe option to the client that allows them to put money in the box as they can. Gradually, they build up a large lump-sum. The potential implications of this delivery option on providing savings services to the poor has yet to be assessed in Nepal (Dhakal, Nepal, Afghansitan).
Why do we need cash boxes and at what point should they be introduced? If there are community members who can make productive use of the savings (as loans) and repay with interest on the next sitting, why should they be deposited in the cash? (Hamadziripi, Zimbabwe)
The Malaysian and Thai savings banks use lockboxes to promote youth and school savings schemes, and to attract parents. These are distributed to children or are kept by the school authorities. The children are encouraged to save money in the boxes and usually hand the contents to savings bank agents on a weekly basis. The bank awards prizes to children/schools for their participation (KAMEWE). In India, an individual/household deposits a fixed amount in a container everyday and it is collected by an agent of the bank at periodic intervals, like fortnightly or monthly (Bhavani, India). Self-managed groups make more sense than lockboxes because the former immediately puts savings to work and the interest returns flow to group members. In addition, MFIs are spared the high cost of making small loans (which, instead, self-managed groups make out of their savings); and security issues are avoided (Hamadziripi, Zimbabwe).
Simple low-cost offices: Banco del Estado in Chile complements its distribution network of approximately 307 branches and 1810 ATMs with more than 30 part-time offices in order to serve clients in more remote areas. Personnel from the nearest branches staff these offices for a day or couple of hours a week. Low cost offices are subject to security concerns, limited accessibility of funds and, to some extent, monitoring problems (Kamewe).
Small offices: Establishing lean branches in strategic areas, such as near town centers, provides easy access to small savers and can be cost-effective for the MFI (Lab-oyan, The Philippines).
Mobile banking units: Many savings banks, including the National Bank for Development in Egypt, the Government Savings Bank of Thailand, and the Vietnam Bank for Agriculture and Rural Development, have tested mobile banking units to serve areas where they did not have branches. The results have been mixed. Mobile banking units are also subject to security concerns, limited accessibility of funds, and to some extent, monitoring problems (Kamewe).
Piggybacking services onto postal savings banks: Many savings banks work through the post office infrastructure, and some post office savings banks operate as departments within the postal system (Kamewe). Postal saving banks provide rural outreach, low minimum deposit and account balances that suit the poor, and have low administrative costs. But their manual recordkeeping can be difficult, as in Zimbabwe (Hamadziripi, Zimbabwe).
Piggybacking onto existing credit operations: An MFI that wants to mobilize savings might want to piggyback new services onto an existing credit service. FinComún is designing a savings product that allows borrowers to make deposits at the same times as they make loan payments (Zuniga, México). This lowers deposit transaction costs. The collection/meeting center at the community level also serves as a center for accepting/soliciting deposits from savers. This carries a higher risk of theft and fraud than branch-based transactions (Lab-oyan, The Philippines). This can be done by having credit agents cross-sell savings products. This could contain costs by keeping staffing lean (Ayo, Cambodia).
However, a number of MFIs have encountered difficulties with this cross-selling strategy. Credit officers, especially when they are incentivized for loans, often sell loans by encouraging clients to open savings accounts. This can cause a future liquidity crunch when the savers all come looking to borrow, or leave disgruntled when they find the promised loan cannot materialize. In many cases, the large depositors that an MFI needs are different from the typical borrower that the loan officer meets. This does not mean institutions should exclude normal customer, but they must move beyond the normal customer to mobilize a large enough volume of deposits (Cracknell).
How can an MFI avoid these possible problems?
- Conduct market research to establish profiles of different potential depositors (this can help credit officers identify target clients).
- Recall that the net depositor often has many options for savings deposits. Study the competition's offerings and help staff explain savings product in terms that are different from other institutions' savings products.
- Free up time for the branch managers to do marketing, to talk to high-value clients, to talk to schools or agricultural fairs or anywhere they can talk to many potential depositors at the same time (Cracknell).
Motivating the credit officers can be extremely difficult, even after countless sessions explaining the advantages of savings for the client, for the institution and for the credit officer him/herself (because a client with reserves is less likely to run up arrears). The objective is not just to get the client to open the account but to deposit significant amounts of money into it. Furthermore, unlike with credit, a staff incentive scheme for savings should reward the entire branch rather than an individual staff person. Making the switch from individual to branch-level incentives can be a difficult change in culture (Larcombe). It might make sense to employ low-cost marketing officers (often university leavers on a sales incentive with a short term contract) for marketing savings accounts. The advantage is that they have no mixed incentive. This tactic is relatively low cost, but it runs the risk of encouraging the opening of accounts that become dormant soon after (Cracknell).
Electronic banking: In the long run, e-banking solutions will significantly reduce costs and extend outreach. Where inadequate infrastructure and education levels have slowed the exploration and use of such solutions, some investment may be needed at a more macro level (Kuwik, Haiti). E-banking solutions work well when the amount of physical cash to be handled is less. In developing countries and in regions where microfinance is prevalent, savings would more likely be collected in cash. If mobilized cash deposits are used in the same area, then the accounting and back-office operations could be e-banked. However, if cash is to be transferred to another place, then more than e-banking is needed (Srinivasan, India).
Point of sale (POS) terminals: The Caixa Economica Federal of Brazil added 12,000 access points to its main network by using point of sale terminals at retail outlets like the State Lottery (Kamewe).
Mobile phone-based systems may have particular potential. New accounts would be opened during advertised field visits where bank agents would also instruct new clients. The menu would be added to the client's phone when they open an account. It is in local language, requires a PIN number, and sends and receives encrypted SMS messages. Transfers would also be facilitated by the menu. Withdrawals are essentially transfers to vendors who have agreed to pay out cash—and are probably happy to be converting cash into a bank deposit (McKay and Wright).
These mobile phone systems use agents (most commonly the vendors of pre-paid airtime) to provide the deposit and withdrawal facilities for the system. This then hugely multiplies the service outlets of the financial institutions involved that can extend as far as the mobile network. Essentially, customers have their bank account on their SIM:
- Deposits are made via purchasing top-up cards from vendors and entering a serial number into a special menu.
- Withdrawals from the account are made by the customer by sending an SMS to send value to the agent's account (who then gives the customer cash).
From their own business premises or homes, the account holder can:
- Pay or transfer money to other users on the system by sending an SMS to send value to their account.
- Repay loans by sending an SMS to send value to the lending institution.
Some issues that need to be worked out: How can public call offices/shared mobile phones be used most easily? What kind of financial education will assist potential customers to use mobile banking services? How can this service be made valuable for potential customers and agents? (Wright)
Some Challenges: There are some challenges to overcome. In countries like Ghana, the communication infrastructure will not support using internet banking, smart cards, or ATMs to reach the poor and rural residents. These technologies may be available only in the major cities (Asare). With low levels of literacy in the Southern part of Africa, the population who are not literate may be suspicious of electronic banking, especially in light of ATM and credit card fraud. Culturally, the details of one's bank account and its operation are very private. For most countries in this southern region, the cell phone network and even fixed network coverage is still a big challenge. Where it is available, the performance is not always efficient. A strong community awareness program is needed (Hamadziripi).
In countries (such as some in Latin America) where education and infrastructure are not significant challenges, the financial sectors do not seem to be exploring technological solutions to expand outreach of savings services to lower income populations. This may be due to high rates of urbanization, or conservative attitudes about the cost of mobilizing savings, or even the use of technology. However, the reason for this seems to be the perception or actual experience that the customer's trust and confidence cannot be developed (or re-built) through the use of mobile phone and other technology solutions. Deposit-taking institutions may not be trusted by many low-income people due to past banking failures, current business practices, or poor customer service at their bank branches. In such contexts, the physical presence of a branch network and the quality of customer service will continue to be essential to building and maintaining confidence and trust in a deposit-taking institution. Without this trust, the scope for expanding outreach through mobile phones and other technology solutions appears limited in many countries in the medium term (Kuwik, Haiti).
POS terminals and ATMs may be able to reduce cost for mobilizing small savings, but they must first overcome at least two challenges. First, some ATMs and POS devices do not accept various currencies (or do not accept the poor quality small denominations that small savers want to deposit). The currency notes of some developing countries are not yet recognized in the international network of ATMs and POS device manufacturers, etc. Second, people who are not yet accustomed to technology may fear that money put into these machines may not be deposited into their account (Gamaa).
Using local merchants might be a way to expand rural outreach by overcoming the limits of ATMs and depositors' distrust of technology. The financial institution would sell cards (any hard copy document or voucher) to merchants, who would then resell them to potential clients. The merchant would then deposit the money into the bank physically, by mobile phone, or via the internet. The client or the MFI would pay the merchant a transaction fee. For a reduced cost or for free, the client might directly deposit via mobile technology or over the internet. This might motivate the client to test the technology. This concept would work only for small deposits with merchants who can safely manage cash. In addition to using electronic means, paper, or stamp receipts, both the client and the MFI must trust the merchant who might also be required to hold a guarantee deposit with the bank (Meier).
Resources: The MicroSave website, www.microsave.org, has information and case studies that discuss a range of delivery options, including informal mechanisms, Equity Bank's mobile branches, Grameen II, electronic banking, and high-volume urban branches (Cracknell).
1Summarized by Exchange Facilitator, Madi Hirschland