The poor can and do save, but often use formal or informal instruments that have high risk, high cost, and limited functionality. This could lead to under-saving compared to a world without market or behavioural frictions. Under-saving can have important welfare consequences: variable consumption, low resilience to shocks, and foregone profitable investments.
This paper lays out five sets of constraints that may hinder the adoption and effective usage of savings products and services by the poor: transaction costs, lack of trust and regulatory barriers, information and knowledge gaps, social constraints, and behavioural biases. Each one is discussed in theory, and then related empirical evidence will be summarised with a focus on recent field experiments.
Key findings:
- The evidence on the impact of expanding savings access is promising and spans a range of development goals, from impacting empowerment and decision-making, to increasing resistance to health shocks , to promoting entrepreneurial investment and activity, to increasing agricultural investment and production. The jury is still out on whether and why (certain) households under-save, but our reading of the evidence suggests that it is well worth pushing forward on these lines of inquiry.
- Under-saving, and its causes, are hypotheses that still need to be tested and refined. The development of efficient innovations and interventions is difficult without a sufficiently deep understanding of individual and household decision-making, market functioning, and frictions, and the interactions between the three. The broad interest in the microfinance world in expanding access to savings products, and the development of technology-based solutions for delivering products and communicating with customers, affords researchers with unprecedented opportunities to create and implement research designs that build theory-testing into the evaluation of innovations or interventions that seek to drive savings behaviour.
- One approach to this is to develop testable predictions around heterogeneous responses to savings treatments. Prior work suggests that gender, intra-household bargaining power, risk preferences, and behavioural factors are all important mediators of treatment effects, and further theory and evidence is needed to flesh out how best to match different types of people, households, and businesses with different types of savings and investment vehicles. A closely related approach is to focus on specific potential barriers to saving, design “treatments” to chip away at these barriers, and then evaluate the effectiveness of these treatments.
The following five potential barriers offer several examples of avenues for future work:
1. Transaction Costs: More testing is needed of the marginal effects of yields within the range of market rates. There has been more work on the effects of substantial subsidies, but surprisingly little on the long-term effects of such subsidies, which is critical to know because the efficiency argument for such subsidies hinges on habit formation.
2. Lack of Trust and Regulatory Barriers: Qualitatively, the lack of trust is self-identified by non-users of formal financial services as a barrier to saving in formal accounts. Little is known about how to address this; for example, how different marketing, or product design, may help ameliorate such issues. A number of recent studies highlight the rapid rise in mobile phone adoption and airtime transactions across most African countries and they describe the lower KYC barrier to entry as an ingredient in this rapid expansion.
3. Information and Knowledge Gaps: Mounting evidence suggests that the increasingly standard, programmatic approach to financial education is misguided, at least for adults. Whether aiming to build literacy or simply to deliver key pieces of information, stakeholders should consider more targeted, focused, and timely interventions.
4. Social Constraints: There is some evidence suggesting that individuals may make inefficient choices on savings and investment allocations in order to prevent leakage to expectant social networks. Savings decisions within the household may also be mediated by costly strategic behaviour that reduces efficiency and creates concerns about inequity (where bargaining power is unequally distributed). We need to develop better models of how household savings decisions are made as collective, not individual, decisions.
5. Behavioural Biases: Much remains to be done to understand how best to meet behavioural consumers “where they are,” cognitively speaking. Remarkably little is known about which behavioural biases actually drive savings behaviour, and whether and how different biases interact with each other. This has potential implications for product design; for instance, we need to understand the extent to which soft commitment devices might be beneficial for consumers who are overly optimistic about their prospects for success, compared with harder commitment devices.
