CGAP-MicroSave Virtual Savings Exchange
"Serving Small Depositors: Meeting Demand while Managing Costs"
Summary of Dec. 6, 2005 Virtual Discussion of Product Mix 1
Basic Product Types: Some Observations
Demand deposit: This is often the most popular product that especially attracts small depositors. A minimum balance requirement can help with this product's high administrative costs. Because of these costs, it may not pay interest, but it serves as a safe place to deposit money for shorter times (Galor). Limiting the number of withdrawals can differentiate it from a current (checking) account (Mueller, Eastern Europe). An institutional savings account is a demand deposit account for institutions such as small enterprises, public entities, NGOs, and associations (Arévalo).
Contractual savings: Well-designed, market-responsive, contractual products are easier to manage, provide a stable source of funds for investment, and respond to clients' need for a disciplined mechanism to save for specific goals and targets. Restrictions on withdrawals imply low transaction costs, so they can pay a higher return than for demand deposits (Cracknell and Wright, Arévalo). They can allow irregular payments for a lower interest rate (Mueller, Eastern Europe).
Term deposit: Account holders of this product are more likely looking for a high return. It offers low administrative costs and stable funds for financing medium and long-term investments (Arévalo). Term deposits are not necessarily easy to explain to someone who has not used formal financial institutions before (Walden). Interest can be paid monthly or at maturity (Mueller, Eastern Europe). Savers should be trained to understand the difference between the two major categories of savings: short-term liquidity and accumulation or storing of value (Galor).
Some Common Variations
Youth and school savings plan: This product aims to inculcate customer loyalty, to encourage the habit of saving among school children, and to attract parents to become clients. Required minimum and maintaining balances must be small. It has high administrative costs. Prizes may be awarded to children or schools for their participation or cooperation (Arévalo; Thornton, Papua New Guinea).
Pension and retirement savings accounts: This is great for savers looking for an attractive return on long-term deposits. They provide stable funds, high interest rate, low administrative costs, and restricted withdrawals except at high penalties. Contract cancellation fees are high (Arévalo). The account can provide regular income instead of a lump sum payout (Bhattacharya, India).
"Step-up deposit": This single deposit product allows for withdrawal but earns more interest the longer it remains in the account. It is more flexible for clients and, therefore, pays a lower interest rate than a term deposit (Mueller, Eastern Europe).
Compulsory savings: These provide a stable source of capital (Simkhada, Nepal).
Product Mix: Some Principles and Suggestions
It is more important to have products that are easy to explain than to have a lot of different products. Customers for these products do not usually know a lot about banking. Even in Western Europe, it is just a few of the basic products that have the highest percentage of usage. The rest are marketing gimmicks, and managing these other products costs a lot (Moelder, Bosnia and Herzegovina). There are actually only three basic products: demand deposit, contractual account, and term deposit. The real creativity comes in how these are "tweaked" and marketed (Larcombe, Mozambique).
In fact, a mix of just two savings products--one highly liquid and one semi-liquid--is beneficial for both the small savers and the institution. For the small savers, remembering just two or three savings product is easier. For the institution, managing two or three products is easier than managing more (Lab-oyan, Philippines). Senior managers must make a strategic decision about what mix of savers to focus on to attain a desired level of average cost and a "comfortable" level of risks (Lab-oyan, Philippines). One possibility is to have the core offering include two accounts: a demand deposit paying tiered interest with (Facilitator's note: or without) a restricted number of withdrawals and a term deposit with 1-, 2-, 3-, 6-, and 12-month terms (depending on the local market conditions) (Walden).
An alternative view: A range of products is important in order to respond both to client demand for different financial services and to meet institutional requirements, like matching liquidity. The appropriate mix should be based on price as well as on products, and how customers use the different accounts. For example, if customers use a demand deposit account regularly, then a transaction-based fee structure makes sense (Cracknell).
Managers should make sure that the client is using a bundle of basic products, not only to save, but also to make payments, use cards, et cetera. One way to do this is to offer these services in a package as one product. This can help if it doesn't lead to additional cost for the client. The client can first use what he needs immediately, but would also have the other products in place, lowering the hurdle for him to use them as well (Moelder, Bosnia and Herzegovina). In particular, a combination with payment cards (if there are any in the country and the institution wants customers to get used to them) can make sense, especially for withdrawals. Because cards are perceived as modern, they can also be good marketing tools for the institution (Mueller, Eastern Europe).
Initially, to develop a savings culture, institutions should design products for the smallest savers as well as young people. Kids are a major concern for all parents, and they are often the first step into banking business (Mueller, Eastern Europe). As clients mature, MFIs must continuously evolve their products. For example, after two years, clients may prefer to acquire other assets rather than cash savings. MFIs will need to develop strategies--such as partnering with others--to continue to capture savings to meet these changing needs (Hamadziripi, Zimbabwe).
People want demand deposit accounts to smooth financial flows, and they want contractual accounts to accumulate savings and maximize returns. They have different mental models for these two accounts. The physical accounts should reflect this separation. Separating the accounts also allows for better transparency of costs and incentives for accumulation. If the accounts are combined into one, people who wish to use the account to accumulate savings will end up subsidizing out of their savings those people who use the accounts to transact. Blocking savings while a client has a loan increases the cost of both the savings and the loan (Jazayeri).
Serving a mixed market: MFIs must provide products that meet the needs of various types of savings clients. To attract and retain larger clients, they must compete with commercial banks by providing and promoting a mix of products. However, doing so increases the cost of deposits (Asare, Ghana).
In determining the product mix, it is vital to exert much effort and energy on refining products that are used by the majority of clients (Gobezie, Ethiopia).
Three Examples of Product Mix Tchuma Cooperativa de Crédito e Poupança, a non-bank financial institution, offers:
- A current account that allows very small transactions (equivalent to USD $0.40)
- A contractual product with fixed term (but emergency access) for customers with a specific purpose for their savings
- A contractual product with an open-ended term, for emergencies (Larcombe, Mozambique)
Cooperative Bank of Benguet, a rural bank, offers:
- A liquid passbook savings with a minimum account balance of USD $2.00 and a minimum interest-earning balance of USD $9.00, and no limit on transactions
- A semi-liquid fixed deposit product
Savings Banks' product mix includes: (Arévalo)
- Demand deposits with low minimum balance
- Institutional savings accounts
- Youth and school savings plan
- Save-as-you-earn (contractual) savings account
- Fixed deposits
- Pension and retirement savings accounts
- Premium bonds, prize bonds (savers participate in regular drawings for prizes; deposits are interest-free; withdrawals are not allowed within a specified period of time)
Some Principles and Tips for Product Design
- Keep it simple: If people are not used to financial institutions, they need simple straightforward products to test the institution initially (Mueller, Eastern Europe).
- Design for volume: Where a good product design has the potential to attract a large number of depositors, the uptake may be extraordinary and challenging to manage. Between 2002 and 2005, Equity Bank's number of accounts grew from 105,000 to over 600,000 (Cracknell and Wright).
- Design to manage costs and generate revenue: Careful product design can mitigate costs and generate revenue (Cracknell and Wright). A minimum balance requirement can help manage costs (and can be low, e.g. USD $2.00) (Lab-oyan, Philippines)
- A highly liquid account doesn't necessarily mean uncertainty in liquidity planning for the institution. Although a pattern of higher withdrawals occurs at certain times of the year, the variation through the year is not that great (Larcombe, Mozambique).
- Allowing very small transactions may be greatly appreciated by clients even though they rarely make such small transactions (Larcombe, Mozambique).
- Allowing access in an emergency can be a key selling point (comfort factor) for clients even though it may not be used much. (Larcombe, Mozambique).
- Linking savings with access to loans or with complimentary insurance encourages members to save more, at least in the experience of Nepali savings and credit cooperatives (Simkhada, Nepal). However, In SafeSave's experience, requiring clients to save a significant amount in order to access a loan seems to have slowed the development of a "saving culture" amongst both staff and clients (Staehle, Bangladesh).
- Allowing the account holder to nominate the person who is entitled to the money in the event of death is a feature valued by clients. Traditionally, it can take months for the surviving family members to get access to the money, if at all. Plus, it is administratively much simpler for the institution (Larcombe, Mozambique).
Some Guidance for Specific Markets
In countries that have experienced bank failures, people may have the legal right to claim deposits (including term deposits) back within 1-2 days (and they will if there is any political instability). This limits banks and makes it unnecessary to offer a highly flexible product (Mueller, Eastern Europe).
Poor clients require savings products that allow for small balances, irregular transactions, and the ability to withdraw funds. Serving the poor is challenging only if the organization maintains a very rigid approach (Hamadziripi, Zimbabwe). The savings of the poor tend to be stable. Allowing clients to open cashless accounts and giving them one month to build up their balances can help overcome an obstacle to the poor (Asare, Ghana). When financial institutions offer one liquid (e.g., passbook savings) and one semi-liquid (e.g., term deposits) product, the semi-liquid one usually has a high minimum that, de facto, excludes the poor. Some poor may want illiquidity! Illiquid passbook accounts need not cost any more than a liquid one--and they may cost less, because there will be fewer withdrawals (Karlan).
In Eastern Europe, term and step-up deposits may make up most of the portfolio. Flexibility is highly valued. People are still afraid of losing money and they don't really plan over the long run. Therefore, they prefer products that they can withdraw from without losing too much (Mueller, Eastern Europe).
Clients who graduate from community-based services tend to prefer fixed deposits if the maturity can be matched against client capital demand cycles, such as the planting season when agricultural inputs and land preparation services are needed (Hamadziripi, Zimbabwe).
Three Tools to Help Determine and Manage an Institution's Mix of Product Offerings
Market segmentation: Even within a narrow range of savings products, it pays to perform basic segmentation. Firstly, institutions should segment by value, determining what proportion of accounts operate within different value ranges. This information can help in deciding on an appropriate interest rates for higher value clients, or in determining whether the institution has a large enough potential demand for a new product, like fixed deposit accounts. Secondly, institutions should segment by volume of transactions. This analysis can uncover what proportion of customers use their accounts as a savings or a transaction mechanism. Finally, the institution should locate dormant accounts, accounts that have not transacted for six months (Cracknell).
Product costing: Detailed product costing can help managers adjust their institution's product mix by shedding light on the cost drivers and profitability of different products within the mix. Product costing allows managers to:
- Focus promotion on the more profitable products
- Reconsider the pricing, mechanisms and processes used to deliver, and the need for unprofitable or less profitable products
- Re-examine staff incentive schemes supporting the products
Even allocation-based product costing often reveals that institutions have a loss-making savings product in their portfolio (Wright). Another view: Costing should not be used to justify cutting products that cost more because they reach the poor (Gobezie, Ethiopia).
Randomized control tests: Products often include lots of features, although determining which of the specific components are critical is rarely clear. The only way to confidently learn which products work best (and for which type of clients) is through randomized control trials. Although not necessarily appropriate for individual institutions to undertake, policy-makers and donors should encourage and support product tests that use control groups, so that small organizations can have better evidence to rely on when making these important decisions. Randomized control trials do not have to be more expensive than traditional research; they must simply be carefully planned and implemented. This type of research can generate important public goods: better knowledge on what works, what does not, and why (Karlan).
1Summarized by Exchange Facilitator, Madi Hirschland