Digitizing the Kaleidoscope of Informal Money Management Practices
Lack of traction with formal financial services is often attributed to an insufficiently granular understanding of client needs. I think the bigger failure is in not knowing how to distil the mass of research we continue to produce into compelling products.
Of course, there is always an element of conceit whenever one proposes any kind of new development intervention, even if it is something as mundane as a new financial service offering. And if the proposed service relates to microsavings, I can imagine how naive one must appear to so many doers and experts who for several decades now have focused on the credit side of things mainly because it’s so much easier to instill a habitual practice on clients.
We need to approach the topic of microsavings with an entirely pragmatic, open mind. I have a strong sense that among all financial services, savings is the one where informal solutions are generally least bad. That is the main reason why it’s hard to attract people’s sustained interest in, or generate much if any willingness to pay for, formal savings services. We can get people to open accounts, but we don’t know enough about how to get people to fill them, that is, to displace much of the informal savings behavior that people are accustomed to.
Informal solutions may not be so safe and convenient, but they work well for people because they are so intuitive. Through tradition and observation, people have come to play their informal financial mechanisms (the jars and lockboxes with cash and other valuables, the gifting and the loaning and the repaying of friends and relatives, the livestock and the bricks accumulating in the back yard) in a way that corresponds with how they think about their needs and their dreams and their fears. This thinking may be fuzzy and changing, but it’s always going on. People have a much stronger sense of control over their circumstances and their future if they are able at any point in time to project intentions on the various informal savings mechanisms they have at their disposal. A very small set of informal financial solutions turn into a kaleidoscope of financial thoughts and experiences.
In a new paper, I review several reasons why projecting these mental thoughts and sense of control in the digital domain is not at all straightforward. Digital accounts operate within a continuum of value, while informal options resolve themselves into distinct lumps which are easier to project ideas onto. Digital accounts make money more fungible and hence make any separation of money seem more artificious. Digital accounts may embody certain illiquidity features that people desire, but these are often deemed to be arbitrary and unfair when people’s circumstances or expectations change. Digital accounts imply an invariant, hierarchical relationship with the bank, as rule-setter and record-keeper, which is at odds with the variety of roles people assume in their informal financial arrangements.
In order to stand a shot at displacing informal savings options, digital savings solutions must give people much more sense of being in control over their money and their circumstances. Digital savings solutions need to make it easy for people to play out the mental processes by which they decide which financial levers to pull. The opportunity is for digital solutions to express much more visually and cogently the heuristic games people play in their mind every time they face a money decision.
Now, shouldn’t gaming be precisely a core advantage of digital? I can’t wait until smartphones become the norm and we can start seriously experimenting with colorful and tactile (and, why not, musical too) mobile user interfaces on which to render a kaleidoscope of financial experiences for everyone.
We are far from being able to build these user experiences, but let’s start by understanding the nature of the attraction of today’s informal solutions and the inherent limitations of merely digitizing stores of value. This is as much as I hoped to achieve in writing this paper.