Banks are missing an opportunity to help people build financial resilience.
By Dr Graunt Kruger
The immediate impact of the coronavirus pandemic was counted in the number of infections and deaths. Soon, jobs began to disappear, industries came to grinding halt, and economies slowed down. Some 26 million people in the United States have filed for unemployment aid in the last five weeks, the worst string of layoffs on record. Banks around the world have announced a range of measures to help consumers and small businesses in the short term, including payment holidays on loans, rebates on insurance premiums, and other remedies to dull the immediate financial pain of the pandemic. In South Africa, as in many countries around the world, the crisis has also exposed a longstanding problem: abysmal consumer savings.
According to the World Bank, South Africa’s savings rate is 15% of its GDP—10% below the world average. China, by comparison, saves at 47%, India at 31%, and Russia at 30%.
Over the years, studies have shown that people don’t save for a number of reasons. In the context of South Africa, they include high unemployment; overindebtedness; financial strain in the form of high inflation and increased cost of living; economic uncertainty, which erodes confidence among savers; doubt that sound planning will ultimately yield positive results; the rise of consumerism; ineffective savings products; and lack of awareness about the importance of saving.
Interventions within the banking industry’s reach, such as financial education, have been ongoing under the auspices of the financial sector charter. The evidence of their efficacy is mixed and inconclusive, both when researchers run controlled experiments and even more so when looking at the ever-rising levels of household debt and decreasing levels of savings.
But behavioural economics—the study of how people make financial decisions—presents a different way to understand the barriers to savings. Fintech startups have used insights from this field to create solutions that enable consumers to easily build up personal savings.
Case in point, South African startups Fomo and AddaBit have adopted a social savings model whereby savers mobilise their social networks to contribute to a specific goal, such as school fees. Other companies, such as Acorn use automated savings. This model is built on IFTTT (if this, then that) rules. Consumers set rules for deposits into their savings accounts. These can either be by action (every time I buy a cup of coffee, then add R5 to my savings account), or every time my salary is paid, put a specific amount into my savings account. Acorn has helped 4.5 million American consumers save $1.2 billion by basically moving spare change between accounts.
Another example is prize-linked savings. The retail giant Walmart responded to a challenge issued by the US Federal Reserve to help Americans overcome the $400 problem, as research had shown that nearly 50% of Americans do not have $400 in savings for an emergency. Walmart partnered with financial wellness nonprofit Commonwealth to add a savings account to the Walmart store debit card. Each dollar saved in a cardholder’s account earns an entry into monthly draws for one of 499 prizes of $25, or one $1,000 grand prize. Walmart customers have put away $600 million over five years.
FNB tried prize-linked savings and was taken to court by the National Lotto and forced to abandon the project. While a similar scenario happened in the US, Walmart and Commonwealth continue to lobby state regulators to allow low-income consumers to participate in this savings program. South African regulators might be willing to make similar concessions to help the country solve its appalling savings rate.
As for these other savings innovations, one might theorize why banks haven’t embedded them into their mainstream product offering. Perhaps they’re waiting for the fintech startups to prove their models. Similarly, I would be hard pressed to answer why banks are not eager to increase their savings deposits by all means necessary, since savings are the cheapest form of funding available to them. These massive institutions can get stuck in their ways. Business practices that have been built over decades are hard to break. But banks have adapted and adopted the ongoing wave of digital transformation. Savings product designs should benefit from that momentum.
As the South African government scrambles for funds to distribute to the neediest, everyone can do their part by slowly building their own savings. Banks can help by embracing innovations that facilitate consumer deposits. Doing so will strengthen the country’s economic recovery in the short term, bolster economic growth in the long term, and minimize the need for drastic government intervention when the country finds itself in the midst of another crisis.