Another great chapter of POTP - I'm sad there's only one left. When's the sequel coming out?
In this chapter, the authors use the evolution of the Grameen Bank from "Grameen I" to "Grameen II" as a backdrop for the larger point of their book that financial services for the poor need to evolve to more closely match the complex financial lives of their customers.
The Grameen I model is the model that still captures the imaginations of the world. It is the group lending model. The photo of a group of women repaying their loans continues to be the most dominant image of microfinance. And, when I fellowed at Kiva a couple of years ago, this is how I was introduced to microfinance as well.
In Grameen II, the model has evolved. The model moved towards a broader set of banking services (i.e. savings) that were tailored for individuals and their multiple needs including the recognition that all of the poor are not microentrepreneurs. Specifically, Grameen II introduced flexibility in loan repayments (different terms and the ability to "top-up"). In addition, Grameen II is characterized by two new savings products. First, Grameen members are now able to open passbook savings accounts that remove withdrawal restrictions that were in place in Grameen I. In addition, Grameen II introduced a commitment savings product in the form of the Grameen Pension Savings (GPS) scheme. This scheme allows individuals to open an five- or ten- year, interest-bearing savings account that requires regular monthly deposits.
As the authors note, these two new savings products were blessings not only for the customers but also for Grameen as their customers quickly began to save through these products providing Grameen with a healthy injection of deposits. The strong take-up for these savings products is grounded in the findings of POTP. In the case of the passbook savings product, members were now able to withdraw funds when they need them, thus minimizing their volatile cash flow problems. In the case of the GPS, members finally had a secure savings device that would allow them to begin to accumulate large sums and make significant investments.
From my perspective, the discussion on the GPS is the most exciting part of this chapter. GPS is a commitment-based savings account that requires individuals to commit to monthly savings and in turn they can accumulate large sums in a medium-term horizon and invest their proceeds. This is similar to the matched savings accounts that we are profiling at SaveTogether. Our accountholders are committing to making regular monthly deposits for 18-36 months and in turn they will receive a match from our donors. They can use their savings plus the match to invest in themselves. The GPS scheme and matched savings accounts are the kind of commitment-based, incentivized, secured, and flexible accounts that meet the demands of the customer but also include the necessary nudges. And the best part about this is it works!!!
As the authors point out, once the GPS was offered, it catalyzed savings by members beyond Grameen's greatest imagination (by 2005 Grameen's savings portfolio had overtaken its loan portfolio). This reiterates the point that when the poor are offered the right kind of savings product, they will save and they will save much more than we can expect. As the leader of an organization working with low-income Americans, I am asked this question all of the time - "if the poor are making so little, how can they save?" It gives me great pleasure to be able to point these skeptics to this chapter.
It is now up to us to continue to listen and learn from our customers and design financial products and services that reflect what we have learned. The phenomenal success of Grameen II can be our inspiration.
Monday, June 7, 2010
Tuesday, May 18, 2010
Portfolios of the Poor - The Price of Money
On the heels of the recent NYTimes article about high interest rates in microfinance and with the Microfinance USA a few days away where one of the most anticipated sessions is entitled "What is a Fair Price to Pay for Good Credit," Chapter 5 was another perfectly timed chapter of Portfolios of the Poor.
Consistent with their earlier chapters, the authors introduce us to this thorny issue by allowing us to see the issue from the perspective of the client. When doing so, it turns out that pricing does not dominate the discussion like it does for microfinance practitioners. Instead, price is one factor that households consider when they access a service. Other factors that are equally important are convenience, timing, and repayment flexibility. In addition, the authors suggest that thinking of interest rates as fees also breaks the discussion away from the inevitable comparison with market interest rates.
I also appreciate how the authors introduce other dynamics into the pricing equation. When I spent time in Ghana as a Kiva Fellow, I quickly understood the reality of servicing loans to rural communities. But, this chapter deepens this analysis by also introducing other reasons for higher prices including, the short-term nature of lending, the relatively small size of the principal, the lack of compounding interest, and the flexibility of arrangements.
When I view the U.S. experience through the lens of this chapter, I'm immediately reminded of the intense advocacy for interest-rate caps for payday lenders. Interestingly, the POTP authors suggest that interest-rate caps are not effective and would put many pro-poor MFIs out of business. This would send many a well-intentioned lobbyist into fits here in the U.S. I wonder what their position would be for the U.S?
I think that would depend on whether price is the only factor at play in the U.S. In addressing the price issue, the POTP authors spend some time explaining why price is central to loans here in the U.S. With our more sophisticated financial markets and reduced transaction costs, price plays a central role and comparing interest-rates between institutions is a fair comparison (The POTP authors emphasize that making interest rate comparisons between developed markets and developing markets is not a fair comparison). If we can assume that all products are equal in terms of other factors like convenience and flexibility than perhaps we should focus efforts on making sure interest-rates are not priced to take advantage of certain customers.
However, I do believe that one of the reasons for the growth of the payday industry is their recognition that in the U.S. many customers, like the POTP households, also consider convenience and repayment schedules when they take a loan. That's why I'm especially heartened to learn more about small-dollar loans that are being introduced in banks across the U.S through the Bank On initiatives and with the help of the FDIC's Small Dollar Loan program. If regulated banks and credit unions can be as convenient, flexible, and consumer friendly as the payday lenders, then we may see competition solely on price and hopefully interest-rates will decline without needing interest-rate caps.
But, until then the debate continues and I'm looking forward to the Thursday session at Microfinance USA!
Consistent with their earlier chapters, the authors introduce us to this thorny issue by allowing us to see the issue from the perspective of the client. When doing so, it turns out that pricing does not dominate the discussion like it does for microfinance practitioners. Instead, price is one factor that households consider when they access a service. Other factors that are equally important are convenience, timing, and repayment flexibility. In addition, the authors suggest that thinking of interest rates as fees also breaks the discussion away from the inevitable comparison with market interest rates.
I also appreciate how the authors introduce other dynamics into the pricing equation. When I spent time in Ghana as a Kiva Fellow, I quickly understood the reality of servicing loans to rural communities. But, this chapter deepens this analysis by also introducing other reasons for higher prices including, the short-term nature of lending, the relatively small size of the principal, the lack of compounding interest, and the flexibility of arrangements.
When I view the U.S. experience through the lens of this chapter, I'm immediately reminded of the intense advocacy for interest-rate caps for payday lenders. Interestingly, the POTP authors suggest that interest-rate caps are not effective and would put many pro-poor MFIs out of business. This would send many a well-intentioned lobbyist into fits here in the U.S. I wonder what their position would be for the U.S?
I think that would depend on whether price is the only factor at play in the U.S. In addressing the price issue, the POTP authors spend some time explaining why price is central to loans here in the U.S. With our more sophisticated financial markets and reduced transaction costs, price plays a central role and comparing interest-rates between institutions is a fair comparison (The POTP authors emphasize that making interest rate comparisons between developed markets and developing markets is not a fair comparison). If we can assume that all products are equal in terms of other factors like convenience and flexibility than perhaps we should focus efforts on making sure interest-rates are not priced to take advantage of certain customers.
However, I do believe that one of the reasons for the growth of the payday industry is their recognition that in the U.S. many customers, like the POTP households, also consider convenience and repayment schedules when they take a loan. That's why I'm especially heartened to learn more about small-dollar loans that are being introduced in banks across the U.S through the Bank On initiatives and with the help of the FDIC's Small Dollar Loan program. If regulated banks and credit unions can be as convenient, flexible, and consumer friendly as the payday lenders, then we may see competition solely on price and hopefully interest-rates will decline without needing interest-rate caps.
But, until then the debate continues and I'm looking forward to the Thursday session at Microfinance USA!
Friday, May 7, 2010
Portfolios of the Poor - Building Blocks
This chapter of Portfolios of the Poor is the reason why I so desperately wanted to read this book and introduce it to our community. Starting with the basic premise that each of us desires to pursue our dreams, the authors look at ways their profiled families are creating usefully large sums to make those dreams a reality. As is true in the developed world and the developing world, richer families are offered a suite of products, services, and tax breaks to help them build these large sums. However, as POTP points out, many of these tools are not available to low-income families (this is true in the U.S. as well, see here).
In the absence of many formal tools, the chapter addresses the way families cobble together useful sums by accessing a diverse set of informal products and services. First, they address the common uses of these sums: life cycle uses (like weddings, funerals), emergencies, and opportunities (i.e. education, business investment). These goals are common human goals - no matter if you live in a developing nation or in the U.S.
The authors categorize the tools the families are using into two groups - accelerators and accumulators. Accelerators are loans that are used to give households access to cash immediately. Interestingly, many households use loans to access lump sums even when they have savings. For these households, the pressure created by loan repayments creates a discipline that forces them to save to repay. They worry that rebuilding a savings balance is too difficult. I'm sure many behavioral economist would have much to say about this!
The accumulator analysis is particularly relevant to us. Accumulators in the case of the POTP households occur in the form of different savings groups. These include Saving-Up Clubs, ROSCAs, and ASCAs. The common trait across each of these groups is the organization of a series of small pay-ins into a single large payout facilitated by an intermediary deposit keeper. Yet, while these mechanisms work many of them can be hard to access, unreliable, too short in time, and mismatched to the cash flow of the household.
Instead, the authors outline a series of key principles that would make for a more effective solution to savings products. These key principles are:
In the absence of many formal tools, the chapter addresses the way families cobble together useful sums by accessing a diverse set of informal products and services. First, they address the common uses of these sums: life cycle uses (like weddings, funerals), emergencies, and opportunities (i.e. education, business investment). These goals are common human goals - no matter if you live in a developing nation or in the U.S.
The authors categorize the tools the families are using into two groups - accelerators and accumulators. Accelerators are loans that are used to give households access to cash immediately. Interestingly, many households use loans to access lump sums even when they have savings. For these households, the pressure created by loan repayments creates a discipline that forces them to save to repay. They worry that rebuilding a savings balance is too difficult. I'm sure many behavioral economist would have much to say about this!
The accumulator analysis is particularly relevant to us. Accumulators in the case of the POTP households occur in the form of different savings groups. These include Saving-Up Clubs, ROSCAs, and ASCAs. The common trait across each of these groups is the organization of a series of small pay-ins into a single large payout facilitated by an intermediary deposit keeper. Yet, while these mechanisms work many of them can be hard to access, unreliable, too short in time, and mismatched to the cash flow of the household.
Instead, the authors outline a series of key principles that would make for a more effective solution to savings products. These key principles are:
- Accessibility - available to urban and rural households, easy to understand
- Security - insured, trusted account in a formal institution
- Flexibility - pay-ins that match cash flow, flexibility in use of saving
- Commitments - scheduled pay-ins
- Accessibility - available at over 500 program across the U.S.
- Security - accounts are held at FDIC-insured banks or credit unions
- Flexibility - saving sums can be used for multiple asset types, emergency withdrawals allowed
- Commitments - savers must set a goal, make monthly deposits, and attend financial education classes
- Incentives - anywhere from a 1:1 match to a 3:1 match
Thursday, April 29, 2010
SaveTogether Presentation at SeaMo's Microfinance and Microbrews
Since I was unable to read the next chapter of Portfolios of the Poor this week, I wanted to post something in the spirit of continuing the conversation. Here's the presentation I gave at last night's SeaMo Microfinance and Microbrews event (and the reason for me having to skip a week of POTP). You'll notice, however, that I touched on many of the programs profiled in POTP.
In the meantime, stay tuned for Chapter 4 - Building Blocks next week.
Dylan
In the meantime, stay tuned for Chapter 4 - Building Blocks next week.
Dylan
SeaMo Microfinance and Microbrews
View more presentations from dylanhiggins.
Tuesday, April 20, 2010
Portfolios of the Poor - Dealing with Risk
In this chapter of POTP, the authors address how the world's poor manage risk through a series of both formal and informal financial instruments. They describe how emergencies can lead families to both devour assets and incur massive debt.
The majority of the chapter is spent on focusing on the high cost of funerals in South Africa. A study shows that South African households with monthly incomes in the range of $155-$300 a month typically spend around $1,500 for a funeral! To pay for these funerals, South African families purchase formal insurance products (funeral insurance) and participate in informal risk-sharing arrangements (burial societies and informal insurance-like products offered by funeral parlors). Despite these arrangements, however, families still resort to a series of informal sharing arrangements to finance their funerals including in-kind contribution and loans from family members.
The South African funeral example is used to show the way families in all of the three countries (South Africa, Bangladesh, and India) actively seek out risk-sharing arrangements and in the gaps filled by a lack of commercial products, find or create informal arrangements.
Despite the high number of informal services, some innovation is occurring. For example, the authors talk about the inventive ways insurance is being introduced into the markets through similar services. A great example is the concept of linking insurance with microcredit. Microcredit institutions are already in the community collecting periodic loan payments and thus pairing this process with a premium collection process makes sense.
In my own experience, I saw this firsthand. While working as a Kiva Fellow , I was lucky enough to pair up with a loan officer with Sinapi Aba Trust who recognized the natural fit between insurance provision and loan provision. He required that all of his clients also buy into the Ghanaian health insurance scheme. I blogged about the positive results here.
When I view this chapter from SaveTogether's perspective, the obvious overlap is between the state of health insurance in our country. A recent Harvard study shows that nearly 62% of bankruptcies are due to medical bills. Many families in the U.S. are one emergency away from devouring their assets, incurring massive debt, and losing income due to the lack of health insurance. With recent changes to our laws, it will be interesting to see how this number changes over time.
Another interesting point the authors make and one which I have had trouble articulating over time is the difference between microsavings/microinsurance and microcredit products. In the much more widely-recognized microcredit markets, it is the consumers who have to earn the trust of the institutions. But, this is reversed for microinsurance and microsavings where the institutions have to earn the trust in the consumers. This is obvious, but something that is often under-appreciated when questions arise about how there are so many unbanked here in the U.S. (recent studies estimate 1 in 13 Americans don't have a bank account). In many cases, there is mistrust in formal financial institutions and that only re-emphasizes the need for financial education to be paired with the matched savings accounts we profile at SaveTogether. With this in mind, we review each of our partner's financial education curriculums as part of our partner selection and due diligence process.
Dylan
The majority of the chapter is spent on focusing on the high cost of funerals in South Africa. A study shows that South African households with monthly incomes in the range of $155-$300 a month typically spend around $1,500 for a funeral! To pay for these funerals, South African families purchase formal insurance products (funeral insurance) and participate in informal risk-sharing arrangements (burial societies and informal insurance-like products offered by funeral parlors). Despite these arrangements, however, families still resort to a series of informal sharing arrangements to finance their funerals including in-kind contribution and loans from family members.
The South African funeral example is used to show the way families in all of the three countries (South Africa, Bangladesh, and India) actively seek out risk-sharing arrangements and in the gaps filled by a lack of commercial products, find or create informal arrangements.
Despite the high number of informal services, some innovation is occurring. For example, the authors talk about the inventive ways insurance is being introduced into the markets through similar services. A great example is the concept of linking insurance with microcredit. Microcredit institutions are already in the community collecting periodic loan payments and thus pairing this process with a premium collection process makes sense.
In my own experience, I saw this firsthand. While working as a Kiva Fellow , I was lucky enough to pair up with a loan officer with Sinapi Aba Trust who recognized the natural fit between insurance provision and loan provision. He required that all of his clients also buy into the Ghanaian health insurance scheme. I blogged about the positive results here.
When I view this chapter from SaveTogether's perspective, the obvious overlap is between the state of health insurance in our country. A recent Harvard study shows that nearly 62% of bankruptcies are due to medical bills. Many families in the U.S. are one emergency away from devouring their assets, incurring massive debt, and losing income due to the lack of health insurance. With recent changes to our laws, it will be interesting to see how this number changes over time.
Another interesting point the authors make and one which I have had trouble articulating over time is the difference between microsavings/microinsurance and microcredit products. In the much more widely-recognized microcredit markets, it is the consumers who have to earn the trust of the institutions. But, this is reversed for microinsurance and microsavings where the institutions have to earn the trust in the consumers. This is obvious, but something that is often under-appreciated when questions arise about how there are so many unbanked here in the U.S. (recent studies estimate 1 in 13 Americans don't have a bank account). In many cases, there is mistrust in formal financial institutions and that only re-emphasizes the need for financial education to be paired with the matched savings accounts we profile at SaveTogether. With this in mind, we review each of our partner's financial education curriculums as part of our partner selection and due diligence process.
Dylan
Tuesday, April 13, 2010
Portfolios of the Poor - The Daily Grind
"Lower incomes require more rather than less active financial management."
Chapter 2 of the Portfolios of the Poor (POTP) begins to dig deeper into a cash flow analysis of low-income families in Bangladesh, India, and South Africa. The authors correctly emphasize that we often find ourselves focusing on the balance sheet of a family or their income statement, but fail to address the cash-flow. Similar to the situation of a startup company (we're familiar with this a bit), low-income families have to deal with the uncertainty of the future and the realities of the present. To do so requires a daily focus on one's cash position. This is especially true given that income is not only small for these families, but perhaps, more tellingly, uncertain and fluctuating. In the face of uncertainty, cash flow management becomes imperative in order to maintain adequate liquidity and flexibility.
To manage cash flows, the authors outline the diverse set of formal and informal financial services that families use from microcredit loans to savings groups to credits from the local shopkeeper to interest-free loans between friends. Interestingly, it is the informal sector that is able to provide the kinds of convenient and flexible arrangement that families need. Yet, this is a double-edged sword as this informal market is most often irreliable, lacks privacy, and lacks transparency.
After reading this chapter, I dug around a bit to facilitate my comparison / contrasts with the U.S. market. The first place I needed to go was an analysis of incomes in the U.S. Consistent with POTP, I was interested in not only understanding annual income figures, but more importantly, the fluctuations of this income over a given time period. While we've heard the unfortunate news that we have just experienced the first decade long decline in median annual income, I wanted to know what was being said about income volatility in the U.S. Anecdotally, I feel I could make a case for volatile income - increases in part-time employment and hourly wage work, uncertain unemployment checks - but what would the data say? A quick Google search away and I found an interesting analysis that confirms my hunch that "income volatility" has been on the rise since the 1970's. While the authors do note that this is true across all income groups, the impact of volatile incomes on lower income families without a safety cushion leads to the same daily cash flow imperatives highlighted in POTP.
After learning this, I asked - what does the daily grind look like for low-income U.S. families? And when compared to POTP, I think we see some of the same trends arising albeit in different forms. For example, there is growing evidence that payday lenders and check-cashers are responding to market demands for convenient, easy, quick access to credit. We also know that, at least until very recently, access to credit cards was never easier. Like families in the developing countries, many low-income Americans are actively managing their everyday cashflows by accessing the products available to them - even if this means annual interest rates in excess of 391%.
Yet, in contrast to many of the families in POTP, low-income Americans do enjoy the relative stability of government support - when they qualify. POTP shows that income volatility and consequently total cash flows are relatively smaller in South Africa vs. Bangladesh and India because of the social welfare system. So, while I'm a strong advocate of asset-building as an important tool for prosperity-building, I think we should recognize that stable, government support does provide an income stabilizing effect and may lead to a reduced need for families to rely on unscrupulous financial providers.
Another fascinating finding in PTP and one that hits very close to home here at SaveTogether is the power of family and friends. In many cases, the financial provider in times of crisis is not a stranger, but a family member. This, of course, is true here in the U.S. But, what's interesting for me, is the ramifications for us in the day of digital social networks. I think this bodes very well for players like Kiva, Prosper, Lending Club who are developing ways to build a social community around lending and I hope it bodes well for us as we continue to make SaveTogether a place where strangers become friends by promoting responsible savings.
Finally, I think I would be remiss to not mention that POTP directly addresses the field that SaveTogether is working in - asset-building and matched savings. They correctly point out that for many low-income families financial choices are more fundamental than saving for large lump sums in the future. Yet, as an organization we believe that just as POTP makes the strong case that low-income families live complex financial lives, they should not be limited to one set of financial tools. The challenge for us is to make sure that we work together with our like-minded partners to creatively and effectively bring to bear the full set of portfolio managements options to our target markets. After all, in the end it's not just microcredit. But, it's also not just microsavings too. There's so much more we can do together to help improve the lives of billions. So, let's get started.
See you next week with Chapter 3 - Dealing with Risk.
Dylan
Chapter 2 of the Portfolios of the Poor (POTP) begins to dig deeper into a cash flow analysis of low-income families in Bangladesh, India, and South Africa. The authors correctly emphasize that we often find ourselves focusing on the balance sheet of a family or their income statement, but fail to address the cash-flow. Similar to the situation of a startup company (we're familiar with this a bit), low-income families have to deal with the uncertainty of the future and the realities of the present. To do so requires a daily focus on one's cash position. This is especially true given that income is not only small for these families, but perhaps, more tellingly, uncertain and fluctuating. In the face of uncertainty, cash flow management becomes imperative in order to maintain adequate liquidity and flexibility.
To manage cash flows, the authors outline the diverse set of formal and informal financial services that families use from microcredit loans to savings groups to credits from the local shopkeeper to interest-free loans between friends. Interestingly, it is the informal sector that is able to provide the kinds of convenient and flexible arrangement that families need. Yet, this is a double-edged sword as this informal market is most often irreliable, lacks privacy, and lacks transparency.
After reading this chapter, I dug around a bit to facilitate my comparison / contrasts with the U.S. market. The first place I needed to go was an analysis of incomes in the U.S. Consistent with POTP, I was interested in not only understanding annual income figures, but more importantly, the fluctuations of this income over a given time period. While we've heard the unfortunate news that we have just experienced the first decade long decline in median annual income, I wanted to know what was being said about income volatility in the U.S. Anecdotally, I feel I could make a case for volatile income - increases in part-time employment and hourly wage work, uncertain unemployment checks - but what would the data say? A quick Google search away and I found an interesting analysis that confirms my hunch that "income volatility" has been on the rise since the 1970's. While the authors do note that this is true across all income groups, the impact of volatile incomes on lower income families without a safety cushion leads to the same daily cash flow imperatives highlighted in POTP.
After learning this, I asked - what does the daily grind look like for low-income U.S. families? And when compared to POTP, I think we see some of the same trends arising albeit in different forms. For example, there is growing evidence that payday lenders and check-cashers are responding to market demands for convenient, easy, quick access to credit. We also know that, at least until very recently, access to credit cards was never easier. Like families in the developing countries, many low-income Americans are actively managing their everyday cashflows by accessing the products available to them - even if this means annual interest rates in excess of 391%.
Yet, in contrast to many of the families in POTP, low-income Americans do enjoy the relative stability of government support - when they qualify. POTP shows that income volatility and consequently total cash flows are relatively smaller in South Africa vs. Bangladesh and India because of the social welfare system. So, while I'm a strong advocate of asset-building as an important tool for prosperity-building, I think we should recognize that stable, government support does provide an income stabilizing effect and may lead to a reduced need for families to rely on unscrupulous financial providers.
Another fascinating finding in PTP and one that hits very close to home here at SaveTogether is the power of family and friends. In many cases, the financial provider in times of crisis is not a stranger, but a family member. This, of course, is true here in the U.S. But, what's interesting for me, is the ramifications for us in the day of digital social networks. I think this bodes very well for players like Kiva, Prosper, Lending Club who are developing ways to build a social community around lending and I hope it bodes well for us as we continue to make SaveTogether a place where strangers become friends by promoting responsible savings.
Finally, I think I would be remiss to not mention that POTP directly addresses the field that SaveTogether is working in - asset-building and matched savings. They correctly point out that for many low-income families financial choices are more fundamental than saving for large lump sums in the future. Yet, as an organization we believe that just as POTP makes the strong case that low-income families live complex financial lives, they should not be limited to one set of financial tools. The challenge for us is to make sure that we work together with our like-minded partners to creatively and effectively bring to bear the full set of portfolio managements options to our target markets. After all, in the end it's not just microcredit. But, it's also not just microsavings too. There's so much more we can do together to help improve the lives of billions. So, let's get started.
See you next week with Chapter 3 - Dealing with Risk.
Dylan
Monday, April 5, 2010
Portfolios of the Poor - From Our Perspective
We are excited to introduce you to a new feature of our blog. For the next two months, I'll be reviewing the much heralded book, Portfolios of the Poor - How the World's Poor Live on $2 a Day ("POTP"). Every Monday night, I'll read a new chapter and post my commentary here. Why are we doing this?
First, since we launched in October of last year in the U.S, we have kept our eyes on the international market and continue to explore what SaveTogether would look like if we expanded overseas. Secondly, as I dig deeper and deeper into the asset-building community that has been maturing in the United States over the last twenty years and gave birth to the matched savings concept, I have always found myself drawn to the contrasts and comparisons with the international microfinance movement. This is especially so with the relatively recent shift towards microsavings. Finally, I just really wanted an excuse to read this book. And since we recently reached our six month mark as a public platform, I figured it would be time to take a step back and think big picture for a bit. I love all of the day-to-day operations of SaveTogether, but I do miss looking towards a longer horizon.
So, here we go...
By the time, I finished the first chapter of POTP. I realized I wouldn't be able to take this task lightly. There was already a gold mine of fantastic material. I journeyed to the basement, navigated through the cobwebs, and pulled out a legal pad, a pen, and prepared to resharpen my note-taking skills.
In Chapter One, the authors take little time in dispelling the most common misperception about those living on $2/day - namely that they have a fixed income of $2/day. Instead, like many low-income families here in the United States, their income is marked by irregularity and unpredictability. Over time, they may earn $2/day but like a money manager each day is spent re-prioritizing against short-term and long-term horizons. And, in order to effectively manage their portfolios, these families are involved in a high degree of financial intermediation. They actively employ a wide set of tools before them to smooth consumption over time recognizing that they can't survive on current income alone. The authors note that in the 250+ families whose portfolios they analyzed, none of them used fewer than four financial instruments and all of them used savings and debt products of some sort (total cash turnover through these instruments relative to total net income ranged from 75 percent to 500 percent).
When I reflect on the author's findings for our work at SaveTogether, I'm reminded of one of the most common questions we get when we explain that our profiled savers are low-income - How can someone making so little income save anything?* The first chapter of POTP provides the first glimpse at an answer. When we think of low-income families, we commonly view them through a balance sheet perspective. We look at their incomes as snapshots in time and assume that someone making so little now, couldn't save now. But, we fail to recognize a cash flow perspective and the trade-offs that families are already making to put aside consumption now to save. We fail to see the reality that some families are embracing their future and will sacrifice now to enable it. This is a rational response to future expectations.
POTP's authors close their chapter by challenging their readers to recognize these ebbs and flows and the need for the market to develop carefully crafted tools to help families manage this ebb and flow. That is the excitement of this new perspective on our work and the excitement of moving to Chapter 2. See you next week....
Dylan
* Each of our partner programs has different income eligibility but most of the savers are below 200% Federal Poverty or $22,000 / year for a family of four.
First, since we launched in October of last year in the U.S, we have kept our eyes on the international market and continue to explore what SaveTogether would look like if we expanded overseas. Secondly, as I dig deeper and deeper into the asset-building community that has been maturing in the United States over the last twenty years and gave birth to the matched savings concept, I have always found myself drawn to the contrasts and comparisons with the international microfinance movement. This is especially so with the relatively recent shift towards microsavings. Finally, I just really wanted an excuse to read this book. And since we recently reached our six month mark as a public platform, I figured it would be time to take a step back and think big picture for a bit. I love all of the day-to-day operations of SaveTogether, but I do miss looking towards a longer horizon.
So, here we go...
By the time, I finished the first chapter of POTP. I realized I wouldn't be able to take this task lightly. There was already a gold mine of fantastic material. I journeyed to the basement, navigated through the cobwebs, and pulled out a legal pad, a pen, and prepared to resharpen my note-taking skills.
In Chapter One, the authors take little time in dispelling the most common misperception about those living on $2/day - namely that they have a fixed income of $2/day. Instead, like many low-income families here in the United States, their income is marked by irregularity and unpredictability. Over time, they may earn $2/day but like a money manager each day is spent re-prioritizing against short-term and long-term horizons. And, in order to effectively manage their portfolios, these families are involved in a high degree of financial intermediation. They actively employ a wide set of tools before them to smooth consumption over time recognizing that they can't survive on current income alone. The authors note that in the 250+ families whose portfolios they analyzed, none of them used fewer than four financial instruments and all of them used savings and debt products of some sort (total cash turnover through these instruments relative to total net income ranged from 75 percent to 500 percent).
When I reflect on the author's findings for our work at SaveTogether, I'm reminded of one of the most common questions we get when we explain that our profiled savers are low-income - How can someone making so little income save anything?* The first chapter of POTP provides the first glimpse at an answer. When we think of low-income families, we commonly view them through a balance sheet perspective. We look at their incomes as snapshots in time and assume that someone making so little now, couldn't save now. But, we fail to recognize a cash flow perspective and the trade-offs that families are already making to put aside consumption now to save. We fail to see the reality that some families are embracing their future and will sacrifice now to enable it. This is a rational response to future expectations.
POTP's authors close their chapter by challenging their readers to recognize these ebbs and flows and the need for the market to develop carefully crafted tools to help families manage this ebb and flow. That is the excitement of this new perspective on our work and the excitement of moving to Chapter 2. See you next week....
Dylan
* Each of our partner programs has different income eligibility but most of the savers are below 200% Federal Poverty or $22,000 / year for a family of four.
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