[By James Militzer, on NextBillion blog, 26 March 2014]
Have you ever wondered why low-income people who have money saved in a bank account decide to take out small loans? Why use scarce resources to make interest payments rather than just tapping these savings? According to Ignacio Mas, it's a question that puzzles many economists. But once you hear people talk about how they actually use financial products, it makes perfect sense.
(See full interview here)
"Imagine for example that I'm putting money aside because I want to buy a motorcycle," he explains. "And then my kid gets sick and I need some money to go to the hospital. This notion that I'm going to withdraw money from my motorcycle account to pay for the emergency- that's really depressing. It's sad enough that I have to deal with a medical emergency, if in addition now you're setting me back on my goal, you're just compounding my sadness.
"So it's entirely logical to say, 'On no, that goal remains what it is - I'm not going to touch a single dollar of my motorcycle money, I'm just going to be borrowing against it. Because mentally, I'm still working on the motorcycle. Don't make me feel like that goal has become any less relevant or accessible to me, simply because I have to deal with this other thing.' People tend to compartmentalize a lot, and if that has a price, so be it. If the price they have to pay to be able to continue to be focused on that motorcycle is to pay a little interest ... I think that's potentially a very good use of money for them."
In Mas' view, financial service providers should take these psychological needs into account when designing their products - and also when describing them. In fact, he says, the words used to describe financial products can have a significant impact on the way they're used - even with seemingly neutral terms like "savings."
"The word 'savings' has two problems at the base of the pyramid," he says. "First, [people] don't think it's relevant to them, because 'saving' is what you do when you have excess money left over - and they never have money left over! Their problem is not that they have excess money - it's that they have excess payments." That's why Mas feels it's helpful to reframe the savings discussion around the concept of payments. "How do I help you achieve all the payments you have to make, and buy the things you want to buy in the future? How do you make your money stretch... so that not all your money goes to today's payments, and there's some left over to build up for tomorrow's payments?
"The other problem with the word 'savings' is that people interpret it as a very weak thing," he adds. "If I think of something as 'savings,' it's vulnerable - it's there for the taking. Whereas if I think of it as an 'investment,' I've just built another mental barrier to [withdrawing] it." Though these changes may amount to a simple tweak in product labeling, they can make a difference. But unfortunately, he says, few financial service providers are doing the basic testing - of user interfaces, concepts or words - that could show them which approaches work best.