The Value of Connected Savings

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 Switch 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?