June 03, 2014
Camilla Nestor, Grameen Foundation’s Senior Vice President for Global Solutions, teaches a financial inclusion course at Columbia University’s School of International and Public Affairs. As part of her course, students submitted blog posts that were evaluated by professors and Grameen Foundation’s communications staff. The first of the two winning posts is featured here.
A twenty-one year old woman, fresh out of college, goes on a bank account opening spree. She opens four accounts in six months to receive $400 in matching funds. Each bank1 gives her $100 for opening a savings/checking account and keeping $100 of her own money in the account for three months. She uses an online bank which never charges her an ATM withdrawal fee regardless of which ATM she uses, so long as she meets the minimum balance requirement. She can transfer money to her fellow bank account holders2 without service fees. On the rare occasions she forgets to pay off her credit card bill on time, she requests a “one time” courtesy interest fee waiver and the company3 always complies to keep from losing her business. She did not have to take out a loan with any of these banks to get this sort of VIP treatment.
In contrast, a 30-year old mother of four is offered a savings account only because she also has a loan with the financial institution. She does not receive any gifts or cash for opening the account. Instead, she pays a monthly fee of $0.564 just to keep the savings account open. Alternatively, she can avoid the maintenance fee but pay $0.78 or 5.2%5 of her weekly household income each time she withdraws her money. Whenever she wants to transfer money to a relative using the same provider, she has to pay a 1% service fee6. Since the bank is not afraid of losing her business, she cannot get a “one-time” courtesy waiver on her interest fee when she misses her a loan payment deadline.
That first woman was me, seven years ago in pre-financial crisis Manhattan. Even though I was a foreigner from the Philippines, had my first job for less than six months and owed Citibank $28,000 in student loans7, I had a combined credit line of $30,000 from two American express credit cards. By the way, I still have all those accounts except for Wachovia and Chase, I closed those accounts as soon as I got my free $100.
The second woman is a composite of a small saver using services in Kenya, Uganda, and the Philippines. She, like many small savers, is getting the short end of the stick.
Some people might argue that the second woman was a higher credit risk but she still has more assets than liabilities, when back then, I was technically bankrupt since my student loans exceeded all of my assets combined. Others might point out that it is because she lives in a developing country that she has to pay a pretty penny for these basic financial services, but if she opened a savings account that caters to mainstream customers8 in the same country she can avoid or drastically lower these costly fees. Lastly, others might argue that servicing small savers is very expensive so banks need to recoup the costs. The jury is still out on that one. Studies reveal conflicting data on just how profitable or unprofitable small savers can be. In CGAP’s 2010 study: Is There a Business Case for Small Savers? revenues from small savers reached over 1000% of deposit balances at ADOPEM in the Dominican Republic. ADOPEM does not charge fees on savings accounts and generates all profits from small savers from their loans and life insurance sales.
There is a consequence to charging small savers higher fees for the services they need the most. High services fees are deterring small savers from either using their account more frequently or opening them at all.
In the 2013 study: The Cost of Convenience? Transaction Costs, Bargaining Power, and Savings Account Use in Kenya by Simone Schaner of Dartmouth College, lowering the cost of withdrawal fees from $0.78 per transaction to $0.38 per transaction through an ATM card resulted in increased savings rates (by 8 percentage points) and average daily balances (by 74 percent) in bank accounts owned by men and accounts jointly owned by men and women. It also increased the long-run use of accounts (by 4.1 percentage points). While the long run effects on income and assets levels are still being studied, there is convincing evidence that we need to make it less costly and more attractive for people to save. If we stop giving small savers the short end of the stick, they will use their savings accounts more frequently and hopefully save in larger volumes. In effect, by treating small savers better, we encourage them to save more and graduate on to become medium savers.
Notes:
1Wachovia, Chase, Bank of America, etc.
2Bank of America
3American Express
4Centenary Bank in Uganda
5Family Bank in Kenya
6G-Cash (Philippines)
7I did not have a savings account with Citibank.
8BPI express online