Barbara Magnoni of EA Consultants presented on small balance savings at the MicroLead Peer Learning Workshop in March. We spoke with her about her work and her findings. Why should financial institutions care about small balance deposit mobilization (SBDM)? Here is her answer:

Why should financial institutions care about small balance savings? In general terms, offering savings can represent an effort to be client centric. Often, credit-only financial service providers learn that their customers are either saving informally or saving in other institutions. If the savings is held informally, it might not be safe. And if the savings is being held in a competitor institution, there’s a concern they may lose their client. In some cases, clients themselves might approach the institution asking for savings services. Even when institutions embark on deposit taking, looking for alternative ways to fund portfolio growth, we find them asking, “how can we better engage this savings client?”

Not all financial institutions are the same. They’re not motivated by the same factors, and they don’t all benefit from the same factors. And thus, not all institutions should be mobilizing small balance savings. Mobilizing small balance deposits is a big challenge. It’s costly. Its time consuming. And it takes a while for institutions to achieve scale and see results. Financial institutions need to have patience when introducing SBDM. Smaller institutions or institutions busy with other goals and processes – such as geographic expansion – may not have that patience and should probably wait to offer SBDM.

One of the key findings of our research with MicroLead partners was that increasing savings balances can be a critical lever to improve the business case, often more so than scale. For example, financial service providers looking to fund their portfolios with savings need a large savings volume to be effective. The best way to reach that volume has been to simultaneously increase savings balances while increasing scale. To some extent, you don’t want to overdo increasing scale if your costs of servicing an account are much higher than the benefits the institution receives, because your losses will widen significantly.

This may be a little controversial, because today many providers and stakeholders in financial inclusion measure success through scale, and may be prioritizing “numbers” before sustainability. But we have to be sure that the business model is viable if it is to benefit from economies of scale, otherwise, it’s going to just increase the institution’s losses.

Our research delved into what a viable model is and what “levers” are most effective to drive viable SBDM models. We found that pulling a set of viability levers simultaneously is needed. For example, targeting higher savings balances, while also reducing the cost of delivery (i.e. of acquisition and servicing).

Viability levers include some simple accounting practices that distribute the cost of maintaining small balance savings across various cost centers. This makes sense, for example, if an MFI has a loan product, and this loan product benefits from the fact that now the MFI can withdraw loan repayments directly from a savings account. The MFI may charge some of those as maintenance fees to its loan cost centers. Alone, this strategy does not make a huge impact on viability, but as one of a number of levers, it can help a financial service provider serve small savers sustainably. Cross-selling, of course, is another viability lever, and when done responsibly, it can be powerful.

At EA Consultants, we see successful SBDM as sitting at a control panel on an old fashioned, coal-powered train. You’ve got many levers, and you have to pull a number of levers for the train to move, for deposit mobilization to be successful. Every little shift makes a difference towards sustainability, because mobilizing small balance deposits is a low-margin business. I’m also excited about another level – behavioral interventions. These have the potential to motivate people to keep money in their accounts longer, to deposit money more frequently, etc..

One of the things that differentiates EA Consultants is that we work both in research and in practice. That means we do research on financial institutions or programs related to inclusion in different ways, and that gives us a privileged perspective on trends, and what works, and what doesn’t. But at the same time, we work closely with financial institutions to help them implement programs. So we understand the pragmatic day-to-day opportunities and constraints institutions face. The work we do generally will have a strategic approach to incorporate client needs and perspectives into a financial institution’s strategies. In the case of this small balance savings study, it helped to be able to understand the way financial institutions think about all these strategic decisions and to apply that to a more systematic review of what was being done on the ground.

You can read the EA Consultants presentation, Pulling Levers Towards Sustainability: A Decision Framework for Small Balance Mobilization, and paper in French and English HERE (scroll down to Thursday March 9, 2017 presentations).

About EA Consultants

EA Consultants is a consulting firm dedicated to ensuring that financial inclusion is a shared value proposition, for all stakeholders and in particular, the customer. They have over 10 years of experience working with households worldwide and ensuring that their voices and their needs are incorporated into products, delivery, and policies. They combine research and practice to ensure that their work is informed by an analysis and understanding of markets and customer needs. Their goal is to have their work lead to new ways of thinking and new practices that are transformative to benefit all segments of society.

About MicroLead

MicroLead, a UNCDF global initiative which challenges financial service providers to develop, pilot and scale deposit services for low income, rural populations, particularly women, was initiated in 2008 with support from the Bill & Melinda Gates Foundation and expanded in 2011 with support from The MasterCard Foundation and LIFT Myanmar. It contributes to the UN’s Sustainable Development Goals, particularly SDG 1 (end poverty), SDG 2 (end hunger, achieve food security and promote sustainable agriculture) and SDG 5 (achieve gender equality and economic empowerment of women), as well as the Addis-Abeba Financing for Development Agenda (domestic resource mobilization).

MicroLead works with a variety of FSPs and Technical Service Providers (TSPs) to reach into previously untapped rural markets with demand-driven, responsibly priced products offered via alternative delivery channels such as rural agents, mobile phones, roving agents, point of sales devices and informal group linkages. The products are offered in conjunction with financial education so that customers not only have access but actually use quality services.

With a specific emphasis on savings, women, rural markets, and technology, MicroLead is a performance-based programme that supports partnerships which build the capacity of financial institutions to pilot and roll out sustainable financial services, particularly savings. As UNCDF rolls out the next phase of MicroLead, it will continue to focus on facilitating innovative partnerships that encourage FSPs to reach into rural remote populations, build on existing digital financial infrastructure and emphasize customer-centric product design.

For more information, please visit www.uncdf.org/microlead. Follow UNCDF MicroLead on Twitter at @UNCDFMicroLead.