The Value of Connected Savings (by Daniel Radcliffe, co-authors: Ignacio Mas)

-By Development Network-

The business case for low-balance savings is tough, as the margin on float may
not amount to much. In much of South Asia, the economics of savings for the poor
has been buttressed by microcredit – the notion that the account anchors the
customer relationship and the loan gives it profitability. But financial
inclusion premised on credit is always going to leave some people behind: those
who do not feel like credit is the right financial tool for them or who simply
do not have the ability to commit to future payment streams.
A new vision is emerging around integrating the savings proposition into a
broader payments network. Offering "connected savings" accounts rather than
stand-alone accounts helps the economics of low-balance savings in three ways:
First, it adds value to the account beyond the mere store of value, hence
increasing customer use and willingness to pay. If I can use my savings to
instantaneously send money home, pay school fees or buy goods at the store, I am
more likely to shift my savings into that electronic format. And if my payments
and wages are deposited electronically into my account, I may be more tempted to
leave the money in electronic form. But if all these payments can only be made
in cash, I am more likely to remain in the cash world.
Second, by connecting banks to retail shops, electronic payment systems allow
banks to delegate "last mile" cash handling functions to retail outlets. This is
the branchless banking or Business Correspondent (BC) vision, which allows basic
deposits and withdrawals to occur at much lower unit cost for the bank and at
much more convenient locations for customers. But stores would like to serve the
cash in/cash out needs of any of their customers, not just those who are with a
particular bank or mobile operator. To do this, stores must be able to make and
receive inter-bank transfers (to offset the cash exchanged with customers)
instantaneously at low cost. This level of convenience could unleash significant
customer willingness to sign up and pay for "connected savings" accounts.
Third, the infrastructure costs of operating banking and payment platforms can
be amortized over a much larger pool of transactions that go beyond savings.
These possibilities are now moving to the center of the debate in India, with
the recent launch of the Interbank Mobile Payments Services (IMPS) by the
National Payments Corporation of India (NPCI). IMPS is a 24x7 real-time payments
switch enabling low-value transactions between any two bank accounts. Customers
can send and receive payments using their mobile phone. With IMPS, the 690
million mobile phones in India could be used as a payment instrument very much
like a debit card. That's a world first.
Indian banks now have the possibility of working together to offer their
customers a convenient, low-cost way to send money to anyone with a mobile phone
and a bank account. This should be a big hook to drive take-up and usage of
accounts. To make this possible, banks will need to agree to very low
interchange fees on IMPS transactions and provide a simple and secure mobile
interface to their customers.
Will banks seize this opportunity, or will they give the game to the mobile
operators who, sooner or later, will find a way to assemble these payment
networks among their own customer bases?

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