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.