[From Savings Revolution blog, 11 September 2011]
In a recent post in this blog, I argued that attaching a payments capability to savings accounts enhances the value of formal savings. If savings accounts are connected to an extensive real-time payments platform, it becomes cheaper and more convenient to receive and park funds in the account and to apply the proceeds of accumulated savings to fulfill specific goals.
But the connection between savings (or credit, for that matter) and payments is more profound than that. For most people, financial services are installment plans that allow them to achieve specific goals (paying school fees, buying a bicycle or whatever) over a more or less defined period of time. But an installment plan is by definition a collection of future payments. A loan is a transfer of value today against a schedule of deferred payments occurring at regular intervals in the future. Commitment savings is a pre-paid installment plan entailing a sequence of future payments against a lump sum at the end. A recent paper of mine with Colin Mayer shows how a whole range of commitment savings services can be added to a mobile payment system by the simple expedient of enabling money transfers to a future date (deferred payments).
Let’s get even more basic. Consider two services. One allows me to send a little money home each time I get a paycheck. The other one allows me to set aside some money from those paychecks regularly to pay for some future expenditures for my family back home. The first one is a ‘mere’ payment service (think M-PESA in Kenya) while the second one is a savings product. But aren’t both in effect some kind of installment plan that allows me to maintain a regular pattern of family support?
So: can you really be good at delivering these installment plans if you are not good at handling the underlying payments? Payments are not just the icing on the financial services cake. Payments are the basic ingredient of financial services.
This is not to say that only electronic payments count. Context matters. A savings led group that meets under a tree constitutes a wonderfully efficient mini-payment system within which to manage all those installments. But when you are ready to graduate to something more, whether it is to a larger, more private individual savings account or to tap into credit beyond what your neighbors can muster collectively, that’s when your payment troubles probably start, for the nearest branch is likely to be far away. That’s when you should wish your savings were connected to an electronic payment system that allows you to have your wages, remittances or welfare benefits be paid directly into your account. Or at least that allows you to deposit the cash you have received, conveniently, at a retail store near where you live.
Why do so many people in the financial inclusion biz dismiss payments as a low-value financial service? For them, there’s ‘just’ payments, and then there’s ‘real’ financial services like savings and credit. I am not going to argue that payments are any more or less relevant than savings and credit, for that depends on context and specific household circumstances. I just think that payments should be recognized as a legit service worthy of the attention of financial inclusion enthusiasts.