From Bricks To Deposits: Transforming Emerging-Market Savings by Henry S. D’Auria, Vivian Lubrano
A drive down a dusty road outside Cholula, Mexico, quickly reveals residents’ preferred means of savings: piles of bricks and cement bags in their backyards. But change is afoot. Innovative companies are helping pave the road to global financial inclusion.
Locals in the poor, rural communities on the Cholula outskirts aren’t illiterate when it comes to finance. They have access to microfinance credit, and some even buy life insurance. What they lack is a convenient, safe and affordable way to save their cash—a challenge faced by the poor in emerging markets globally.
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Closing the Savings Gap
This very vulnerable form of savings creates significant capital inefficiencies in poor nations. Capital that could have been used to fund productivity-enhancing investments instead sits under a ratty tarp in a backyard earning no interest, susceptible to theft or natural disasters—a time when these savings are most likely needed.
Eradicating extreme poverty is the primary goal in the United Nations’ 2030 Agenda for Sustainable Development. During meetings this week, the UN General Assembly will discuss what’s needed to help people out of poverty. Ensuring they have enough support to avoid returning to severe poverty levels will be essential.
In order to sustainably achieve this goal, we believe that it’s important to reduce the poor’s vulnerability to unpredictable events—from job loss to disease to natural disaster. Formalizing the savings of the poor and focusing on their financial inclusion will help increase the resilience of disadvantaged communities. This view is shared by the International Monetary Fund, which sees increased economic resilience and growth as an important benefit of financial inclusion in emerging markets. Much progress has been made on financial inclusion with regards to credit—microfinance institutions have mushroomed across the developing world. But as the piles of bricks attest, there has been no significant progress in developing micro-savings.
Big Impact from Small Sums
The math is compelling. If each poor adult in Mexico, for example, saved an average US$1 per week—the equivalent of a street taco lunch—their annual savings would aggregate to US$1.8 billion (Display). If a single bank were to capture these savings, in a country where 46% of the population lives in poverty, it would become one of the 10 largest Mexican banks by size in less than four years. In 20 years, the accumulated savings of Mexico’s poor would represent 4% of GDP.
Blazing the Trail: Revolutionizing Financial Access for the Poor
There are big challenges to make this work. Financial networks need to be created that reach all poor communities conveniently and safely. And these networks must be scalable and profitable for the company that operates it.
Technology can solve only part of the problem. It’s true that technology has made banking in the developed world much cheaper, and in places like Kenya and Bangladesh, the poor have successfully adopted M-Pesa’s mobile money solution for transactions. But in Mexico, these strategies have struggled because poor people don’t trust automated technologies.
Banco Compartamos is trying to change this lack of trust. Through its banking correspondent company Yastás, the Mexican firm is adding a human element to its automated savings systems. In many poor Mexican communities, small mom-and-pop shops—from delis to drugstores—dot the landscape, and residents can easily walk to one. Yastás has installed point-of-sale devices at these stores, allowing store owners to perform financial transactions for the bank, including loan disbursements, loan payments and savings deposits. These devices also allow for third-party transactions, such as payment of electricity and cable bills, mobile time top-ups and Avon payments.
This change has been revolutionary for many communities. Until recently, residents near Cholula had to take a 30-minute bus ride to the main utility office in town to pay their utility bills—a cost of MXN$24 round trip. Now they can walk to a local shop to pay their bills and are charged only a MXN$6.50 service fee.
India-based YES BANK has rolled out a similar correspondent network through local shops in rural communities. It’s even gone a step beyond, developing a mobile transaction solution powered by wireless connectivity on low-cost mobile phones, paired with a Bluetooth-enabled handheld printer. This technology has allowed for increased payments in rural locations to dairy farmers and other small- and medium-size enterprises in India.
Investing in Inclusion
Yastás, YES BANK and M-Pesa are just starting to make inroads in accumulating savings. Their impact—while life changing for the local communities they are in—will not be enough to significantly impact the world’s poor.
Investors should pay attention to these developments. By researching business models of pioneering financial groups successfully capturing “brick” savings while studying the cultural setting in which they operate in different countries, investors can unearth exciting opportunities, in our view. The push for financial inclusion offers enormous potential to generate returns in a nascent industry—while helping to change the lives of millions of people along the way.