Cash cows: Why bank accounts that work like livestock help the poor
In an age of mobile banking and digital transactions, many poor people still shun basic banking services and put their extra money in livestock. Why?
Cows make sense as a savings account, says a senior fellow at the Fletcher School's Center for Emerging Market Enterprises at Tufts University.
People want to put money away in a place where they cannot immediately spend it. Like a certificate of deposit, a cow or other livestock fits this need. A cow also produces milk and fertilizer, which families can sell. It may give status to the owner, or be a religious symbol.
But a recent found that poor Indians lost 9 percent to 64 percent of their livestock investment.
"The poor are often willing to earn negative interest to access reliable savings services," wrote Nathalie Tadena in .
If using a savings account worked more like a cow, poor people might be more willing to put their money in a bank, says Mas. Banks and telecom companies must tailor accounts to suit the needs of poor clients, Mas says, adjusting programs so that poor clients can truly plan for a more secure future.
In short, banks should create accounts that act like cows.
lays out seven ways a cow can help poor people restrict spending and save:
- A waiting period 鈥� the cow can鈥檛 be sold immediately
- Indivisibility 鈥� you can鈥檛 sell only a leg
- A financial penalty 鈥� there are costs involved in buying and selling a cow
- Mental labeling 鈥� the cow invites clear associations to what people save for
- Perceived production 鈥� the cow鈥檚 milk production raises the mental stakes of selling it
- Peer pressure 鈥� the whole town will know if you sell a cow, and everyone may question your financial judgement and start asking to borrow money
- Social meaning 鈥� cows can represent deep cultural beliefs, divinity or fertility or completeness of family
A cow, a gold necklace, or a penny jar labeled 鈥渆ducation鈥� all have different limitations when they serve as saving accounts. However, poor people could benefit from safer and more stable ways of building financial security than physical items that may lose their worth or risk being stolen.
The poor don鈥檛 need simple banking tools, they need intuitive tools, Mas explains. The poor have many financial needs and inconsistent income, creating complex financial lives. Tools need to reflect those complexities to help the poor reach their goals.
Bank account restrictions will fail if users don鈥檛 understand them, . "The account rules seem like an arbitrary imposition, you have to learn them, and you feel cheated when you get caught by a friction you didn鈥檛 remember. Not so with the cow."
When a poor person needs money and an account rule stands in the way, it seems arbitrary and unnecessary. Intuitively it makes sense why they can鈥檛 take cash out of a cow or only sell a portion of it. If a poor person recognizes 鈥渃owness鈥� in a bank account, argues Mas, then she will be more comfortable using it.
Mas suggests several ways banks and telecoms can tweak policies to help the poor use bank accounts more intuitively:
- Name accounts to mirror their restrictions. A 鈥渃hicken,鈥� 鈥済oat,鈥� and 鈥渃ow鈥� account would only allow certain amounts of withdrawal. Say, $10, $30, and $100 respectively.
- Name accounts for different goals, like 鈥渆ducation鈥� or 鈥渘ew plow.鈥�
- Add restrictions to accounts to encourage saving. Allow withdrawal only on certain days of the week or for certain activities. The 鈥淔riday鈥� account only allows withdrawals on Fridays.
- Have a moneyguard for an account. Your money goes into a friend鈥檚 subaccount, but the only thing he can do with it is send it back to you. Peer pressure will help keep you from spending it unwisely.
Banks need to meet the poor's needs through the products they create and how they advertise them. If the poor become comfortable using better formal saving options, an actual bank account can take the place of a cow.
鈥� Reporting from this post is partially based on conversations from the Center for Effective Global Action's , hosted at The University of California at Berkeley in September. Further coverage of the conference can be found on .
鈥� at , a blog published by .
